Examination the Impact of Liquidity Risk on the Performance of Banking Sector: A Case of Emerging Economy

Abstract

The idea behind conducting this research is to explore the impact of liquidity risk on Traditional and Islamic bank’s performance in Pakistan’s banking sector. These banks have been further classified by their characteristics such as scale of the bank (small and large scale) and their types (public and government). This classification is crucial to derive a holistic view to identify the impact of liquidity risk on performance of banks, to avoid any biasness with respect to their characteristics and to attain accurate findings. Target population for this research study consists of all the licensed and operating banks in Pakistan. Currently, there are 35 listed, licensed banks operating in Pakistan as per data from State Bank of Pakistan’s official website. Our sample size consists of 10 banks which have been further classified into Islamic and conventional banks. Our research has identified 6 conventional banks and 4 Islamic banks for the study. The findings suggest a major influence of CTA and NPLGA for the performance of the company in both models and a negative correlation between the LATA and the company performance. In addition, findings show that LTDR and Log_TA has positive but insignificant relation between observed variables. These results have important consequences for different banks, managers and stakeholders as they can assist them in creating and maintaining an efficient financial system and market.