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Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments

Aggressive bank financing operations can increase a bank’s profit. However, this operational approach exposes the bank to higher operational risk. Conversely, excessive holdings on liquidity offer safety, but it will reduce funds for financing and investment operations. Consequently, there is a tr...

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Main Author: Abdul Malek, A. Tambi
Format: Article
Language:English
Published: 2018
Subjects:
HG Finance
Online Access:http://eprints.unisza.edu.my/6139/1/FH02-FESP-18-19938.pdf
http://eprints.unisza.edu.my/6139/
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spelling my-unisza-ir.61392022-03-13T03:39:44Z http://eprints.unisza.edu.my/6139/ Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments Abdul Malek, A. Tambi HG Finance Aggressive bank financing operations can increase a bank’s profit. However, this operational approach exposes the bank to higher operational risk. Conversely, excessive holdings on liquidity offer safety, but it will reduce funds for financing and investment operations. Consequently, there is a trade-off between liquidity holdings and profitability performances. The objective of this study is to assess the implications of liquidity holdings on Islamic bank's profitability. This study utilized the dynamic panel data technique with Generalized Method of Moments (GMM) model applied to the annual data of Islamic banking institutions in Malaysia from 1998-2014. The estimation of which Return on Assets (ROA) and Return on Equity (ROE) is regressed on the liquidity holdings ratio. The result shows that the relationship takes the form of quadratic function with a downward concave parabolic due to the insufficient amount of fund. It suggests that profitability is improved for banks that hold some liquidity; however, it raises the issue in which holding further liquidity diminishes a banks’ profitability. There is a trade-off relationship between liquidity holdings and profitability performance given by both ROA and ROE. This finding is consistent with the idea that funding market reward banks for holding some liquid assets, but this benefit is somehow outweighed by the opportunity cost of holding such low-yielding assets. Hence, bank portfolio management should consider and develop strategy and liquidity plans that help balance the acceptable return and risks. A banking firm must determine the appropriate level of asset versus liability management in view of liquidity risk and associate trade off in terms of bank profitability. 2018-12 Article PeerReviewed text en http://eprints.unisza.edu.my/6139/1/FH02-FESP-18-19938.pdf Abdul Malek, A. Tambi (2018) Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments. The Turkish Online Journal of Design, Art and Communication, 8 (S). pp. 1614-1623. ISSN 2146-5193
institution Universiti Sultan Zainal Abidin
building UNISZA Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Sultan Zainal Abidin
content_source UNISZA Institutional Repository
url_provider https://eprints.unisza.edu.my/
language English
topic HG Finance
spellingShingle HG Finance
Abdul Malek, A. Tambi
Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
description Aggressive bank financing operations can increase a bank’s profit. However, this operational approach exposes the bank to higher operational risk. Conversely, excessive holdings on liquidity offer safety, but it will reduce funds for financing and investment operations. Consequently, there is a trade-off between liquidity holdings and profitability performances. The objective of this study is to assess the implications of liquidity holdings on Islamic bank's profitability. This study utilized the dynamic panel data technique with Generalized Method of Moments (GMM) model applied to the annual data of Islamic banking institutions in Malaysia from 1998-2014. The estimation of which Return on Assets (ROA) and Return on Equity (ROE) is regressed on the liquidity holdings ratio. The result shows that the relationship takes the form of quadratic function with a downward concave parabolic due to the insufficient amount of fund. It suggests that profitability is improved for banks that hold some liquidity; however, it raises the issue in which holding further liquidity diminishes a banks’ profitability. There is a trade-off relationship between liquidity holdings and profitability performance given by both ROA and ROE. This finding is consistent with the idea that funding market reward banks for holding some liquid assets, but this benefit is somehow outweighed by the opportunity cost of holding such low-yielding assets. Hence, bank portfolio management should consider and develop strategy and liquidity plans that help balance the acceptable return and risks. A banking firm must determine the appropriate level of asset versus liability management in view of liquidity risk and associate trade off in terms of bank profitability.
format Article
author Abdul Malek, A. Tambi
author_facet Abdul Malek, A. Tambi
author_sort Abdul Malek, A. Tambi
title Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
title_short Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
title_full Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
title_fullStr Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
title_full_unstemmed Bank’s Liquidity Holding And Profitability: Evidence From Generalized Method Of Moments
title_sort bank’s liquidity holding and profitability: evidence from generalized method of moments
publishDate 2018
url http://eprints.unisza.edu.my/6139/1/FH02-FESP-18-19938.pdf
http://eprints.unisza.edu.my/6139/
_version_ 1728056325769789440
score 13.211869

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