DOES FINANCIAL DEVELOPMENT MATTER FOR ISLAMIC BANK LIQUIDITY? EVIDENCE FROM BANGLADESH

Abstract

This study used panel data from Bangladesh, using a sample of Islamic banks, covering the time span of 2009 to 2023, to investigate the impact of financial development on bank liquidity. The study used the System Generalized Method of Moments (GMM) to examine the relationship between Islamic bank liquidity, which is proxied by liquid assets to total assets (LATA), and financial development, which is measured by domestic credit to the private sector by banks (% of GDP. Full-sample analysis, as well as sub-sample analysis on the basis of bank size (large, medium, and small), is included in the study. It is found that financial development has a statistically significant and positive impact on Islamic bank liquidity, especially for large Islamic banks, suggesting implications for policymakers seeking to reinforce the financial system while assuring liquidity resilience in Islamic banks. The findings add to the body of knowledge on Islamic banking and financial intermediation.