Liquidity Management and The Islamic Bank Financing Constraints

Abstract

The major source of income for a bank comes from the financing operations. Insufficient amount of fund resources a bank have, consequently, a negative relationship between liquid assets holding, reserve, capital requirement, and provision for bad and doubtful financing with financing operations is expected. Thus, the study aim to examine the degree of constraint the liquidity management has on the Islamic bank financing activities. To realise the objectives of the study, this study utilised the dynamic panel data, Generalized Method of Moments (GMM) estimator applied to Malaysia Islamic banks annual data for the period of 1998 to 2014. The finding shows a negative relationship between liquidity and financing, which means an insufficient fund, is a constraint to the Islamic bank's financing operations. Thus, the liquid assets holding and securities holdings have a negative impact on Islamic bank financing activities, hence, excessive holding of liquidity consequently will reduce bank’s financing volumes.