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Wednesday, January 9, 2013

THE INFLUENCE OF FUNDAMENTAL FACTORS TO LIQUIDITY RISK ON BANKING INDUSTRY: Comparative Study between Islamic Bank and Conventional Bank In Indonesia



Harjum Muharam and Hasna Penta Kurnia

(hardjum@gmail.com)

Management Department, Faculty of Economics and Business, Diponegoro University
Jl. Prof. Soedharto SH Tembalang, Semarang 50239, Phone: +622476486851
 
ABSTRACT
Bank and risk are two things that cannot be separated from each other. Both conventional and Islamic banks are more or less similar in risk summary. One of the critical risk is liquidity risk that caused by bank disabilities on meeting their maturity dates of depositors. Therefore it needs further observations to control their liquidity risk. This study investigates the influence of CAR, profitability ratios, NIM, liquidity gaps, and RLA belongs to liquidity risk on banking industry. The population of this study consists of conventional and Islamic banks. The selection of samples uses purposive sampling method. The samples are divided into 3 conventional banks and 3 Islamic banks. The study is based on secondary data in a period of five years, i.e. 2007-2011. The statistical analysis of secondary data has been divided into three, which are descriptive, regression and hypothesis testing. The study finds negative and significant influence of CAR and ROE to liquidity risk on conventional banks, while ROA and RLA have positive and insignificant effect. In Islamic banks, the research finds positive and significant impact of NIM and ROE to dependent variable, whereas liquidity gaps and RLA have insignificant affect. Liquidity gaps have positive and significant effect to liquidity risk in conventional banks, while ROA has positive direction in Islamic banks. In addition, NIM in first model and CAR in second model is found to be negative and insignificant at 5% significance level.


Keywords: conventional banks, Islamic banks, liquidity risk, fundamental factors


INTRODUCTION
In daily business transactions, bank has some risk as consequences caused by their activities. There will be no bank if there is no braveness to take risk. There are several risks that must be considered by banks, for example: market risk, operational risk, legal risk, compliance risk, credit risk, and liquidity risk. One of crucial risk is liquidity risk that comes from the mismatch timing between cashinflow and cashoutflow. This lack outcome from cash that hopefully to be invested in credit loans or outcome from deficit cash that needed to meet their short-term obligations[1]. Conventional banks adopt interest system which it can be used to fulfill the cash needed, on the other hand this system is forbidden in Islamic banks so they can not spend the profit of loans to cover their maturitity dates.
            Banks are considered in liquid circumstances when they go through some requirements; bank has some liquid instruments and these are equal with the amount of liquidity needs. Bank has the ability to obtain liquidity by creating or converting cash, and bank has less liquidity than needed. When bank meets the standard, this regulated entities has less troubled condition. It can be assumed the liquidity risk can be pushed.
            Nowadays, many countries adopt two systems banking which are conventional and Islamic or sharia banking system. Similar in Indonesia, many banks already have these kind of systems. The first established Islamic bank is Muammalat Indonesia Bank that has started their operation in 1992 and it was followed by other banks. Today, sharia bank is an alternative for customers especially moeslems who disagree with interest system that forbbiden in Islam.
            This study aims to analyze the influence of CAR, ROA, ROE, NIM, liquidity gaps, and RLA to liquidity risk between conventional and Islamic banks in Indonesia.



CONCLUSION

            Nowadays, due to global economic system, both conventional and Islamic banks should be aware of the potential of liquidity risk. Its study examines liquidity risk through a comparative study between conventional and Islamic banks in Indonesia from the period 2007-2011.  The above results show the fitness of both models 1 and 2 at F-statistic of 4,209 and 5,684 at 5% significance level. Its point out that both models are good fit. Based on the result of hypothesis testing, independent variables that have negative and significant effects are CAR and ROE in conventional banks. Whereas in Islamic banks, ratio that has same effect is ROA. It means conventional banks have good ability to control their capital and generate earnings by their equity that can be used to meet their short term obligations. In contrary, Islamic banks have good ability to generate earnings by their assets. The result of Chow-test shows there is a difference influence of independent variables to liquidity risk between both models.
            The strength of this study compared from previous study is the data used which are more longer and up-to date (2007-2011). The influence of CAR, ROA, ROE, NIM, LG, and RLA to liquidity risk make some differences between conventional and Islamic banks. The writer mention the function of its research to the bank management to well control their liquidity risk, by learning the pattern of the risk and economic circumtances. It is expected they will know the risk faced by them, and the possibility in trouble can be pushed. Banks expected to estimate accurately the short-term demand of liquidity especially for undpredictable demand one. ALCO on these bank should make strategies to submit the liquidity principles in cooperation.
            The limitation of this study are the number of banks samples which are few number so there are still companies outside of the object research. Based on adjusted R2 value, there are still other variables that can explain but  they are not included in this study. The future studies might increase the number of companies samples as the research objects and should add variables that may effect the liquidity risk. As a matter of fact, further research should not be limited on banking industry only but should also be extended on others indutries.




[1] Anas & Mounira(2008), “Managing Risk and Liquidity in an Interest Free Banking Framework: The Case of the Islamic Banks”. International Journal of Business and Management.

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