The objective of this study is to examine the determinants of liquidity in Islamic banks in Malaysia and the Gulf Corporation Council (GCC) countries. The study also aims at examining the dynamic nature of the liquidity position of the selected banks. We have used panel data fixed effect models to test the determinants of liquidity risk for 39 Islamic Banks in Malaysia and GCC countries, excluding Oman, over a six-year period from 2009 to 2014. The study employed ‘cash-to-asset’ and ‘total investment to total assets ratio’ as the two proxies for the liquidity position of the Islamic banks against several macro-economic and bank-specific independent variables. The macroeconomics independent variables include inflation rate, growth rate of gross domestic product and the growth rate of broad money. The bank specific independent variables include bank size, loan loss provision ratio and return on asset. These are the most robust set of determinants with respect to the most recent array of literature. The findings reveal that liquidity risk management in Islamic banks is primarily contingent upon three bank specific variables – past liquidity condition, size of the bank and loan loss provision, and two industry specific variables – growth of broad money and growth of GDP. In the presence of auto-regressive terms in investment-to-asset model, almost all the independent variables turnout to be important determinants of liquidity, lending some leads on the dynamic effect of these variables on liquidity risk of the Islamic banks. The results indicate that there must be an integration between the role played by the bank management and the policymakers to reduce the liquidity risk. The study has considered the starting time range for the sample to be from 2008 to limit the effect of global financial crisis, which has reduced the sample frame. Since the study provides insights on the key determinants of liquidity risk in Islamic banks, the results may be useful in improvement of overall enterprise risk management of the Islamic banks. We have redrawn the contingency theory framework in the context of risk management in Islamic banks. Keywords: Contingency theory; Liquidity risk; Islamic banks; Malaysia; GCC.

The objective of this study is to examine the determinants of liquidity in Islamic banks in Malaysia and the Gulf Corporation Council (GCC) countries. The study also aims at examining the dynamic nature of the liquidity position of the selected banks. We have used panel data fixed effect models to t...