THE EFFECTS OF LIQUIDITY RISK ON BANK STABILITY EVIDENCE FROM PAKISTAN

Abstract

Purpose: The study has aimed to examine the effect of liquidity risk on bank stability in the Islamic banks of Pakistan using secondary data from financial statements and annual reports. Methodology: The study has considered Islamic banks ofPakistan as study population and data was gathered from financial statements and audited reports ofselected Islamic banks. In addition, the study has considered sample period from 2013 to 2017 using annual panel data and employed panel regression analysis, panel co-integration and panel Granger causality using EViews 9. Findings: The results have shown that net interest margin has negatively significant impact on bank stability by reducing the vulnerability and volatility (ZScore) and similarly, liquidity ratio, inflation rate and economic growth found negatively and significantly related to Bank ZScore. However, bank size and bank efficiency were found statistically insignificant. Implications: Managers have to work on generating positive net interest margins in the banks. This can be done by charging higher rate of interest from the provided loans that is somehow not possible in the current competitive market. The second option is to provide higher number of loans so that a great amount ofinterest would be generated and thus the net interest margin would turn positive.