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Introduction:
Islamic Banking and finance are the banking practices that are dictated by Sharia law. It is defined as
banking in consonance with the ethos and value system of Islam and governed by Shariah principles (SBP,
n.d.). Since its inception in the late 20th century it has grown at a steady pace and has been successful in
becoming an alternative to conventional banking in various Islamic and non-Islamic countries.
Although conventional baking is a risky business and the whole banking industry around the globe is porn
to various major risks i.e. credit risk, liquidity risk, and operational risk. Islamic banks are porn to additional
risk factors as they have to strictly comply with Sharia law. Islamic banks are part of a less-advanced
industry and face many challenges when handling risk. In theory, Islamic banks are confronted with two
categories of risk: common risks, which are similar to the risks faced by conventional banks and risks
specific to Islamic banks, due to their specificities and methods of operation (Rhanoui, 28 May 2019). The
biggest of problem that is faced by an Islamic bank when compared to a conventional bank is that Islamic
Banks lack a way to capitalize on the funds parked in the bank for short term, resulting in over liquidity of
the banks most of the time as interest based lending is not compliant with Sharia law.
Problem Statement:
Liquidity management is one the biggest problems that is believed to influence the financial performance
of the Islamic Banks. Banks and other financial institutions must keep a balanced liquidity. Conventional
banks use interbank lending market to capitalize and balance their liquidity whereas Islamic banks can’t
do interest based lending hence the problem of over liquidity arises. The aim of this research is to explore
how much does actually the problem of over liquidity impacts the financial performance. So to highlight,
this study will attempt to answer the following questions.
Thesis Title: Does excess liquidity in Islamic banks impact their financial performance.
NOTE: This will be an empirical research based on the Islamic Banking sector of Pakistan. In this research
I will use different financial ratios and try to make qualitative deductions based on the raised questions in
the problem statement.
References
Rhanoui, S. (28 May 2019). Risks Faced by Islamic Banks: A Study on the Compliance Between Theory
and. International Journal of Financial Research.