An Examination of Factors Affecting Excess Liquidity, Evidence from Islamic Banks in Malaysia

Abstract

The excess liquidity exacerbated by the absence of Shariah-compliant products as well as the modus operandi in the Islamic banks has been an issue. Excess liquidity is costly since it creates bank challenges like poor asset utilization and low competitiveness as well as causes anomalies in the effective monetary policy transmission and the development of the financial market. The aim of our research is to evaluate the determining factors of the excess liquidity in the Islamic banks of Malaysia by applying fixed effect and random effect model. Findings underline that the availability of short-term Sukuk has a statistically significant negative impact on the excess liquidity. Therefore, the presence of Sukuk in the market could eradicate the inefficiency of low asset utilization for the Islamic banks.