Abstract:
This research paper focuses on studying the factors impacting liquidity risk in context of
Islamic and Hybrid banks, a crucial component of bank stability. Due to limitations on
interest-based transactions and a lack of investment possibilities, Islamic banks that
operate in accordance with Sharia principles confront particular difficulties when it comes
to managing liquidity. In order to better understand the determinants of liquidity risk, the
study tries to pinpoint the bank-specific elements that affect it. This study fills a research
gap in the context of Pakistan and contributes to the body of knowledge on liquidity risk
in Islamic banking. The study improves awareness of the difficulties faced by Islamic
banks by identifying the factors that determine liquidity risk and comparing them between
Islamic and hybrid banks. Objectives ofour study is to find the impact ofReturn on Assets,
Capital Adequacy Ratio, Size and Cash Ratio on the liquidity risk which is measured as
deposits to total assets ratio. To study this 5 Islamic Banks and 5 Hybrid Banks were
selected with sample from years 2007-2022. Method used were Fixed Effects Model and
Random Effects Model. Results showed that Capital Adequacy Ratio and Bank Size play
a significant role in explaining Liquidity Risk for Islamic Banks, while for Hybrid Banks
CAR and Cash were significant. It can be implied from our results, that Islamic Banks
should focus on Holding Vast Assets and keeping Higher Adequate Capital to efficiently
hedge Liquidity risk exposure. While Hybrid Banks should also manage adequate Capital,
they should further balance the amount ofCash held, since Cash is not a profitable asset,
it can increase the risk offacing liquidity, it would be more beneficial to banks to utilize
such assets by investing in profitable investments and opportunities. It also provides
helpful advice on how to deal with liquidity risk and maintain financial stability. For the
banking industry and the economy as a whole to develop sustainably, Islamic financial
institutions' risk management frameworks must be strengthened.
