The Determinants Influencing Liquidity of Pakistan's Commercial and Islamic Banks

THE DETERMINANTS INFLUENCING LIQUIDITY OF
PAKISTAN'S COMMERCIAL AND ISLAMIC BANKS
SUBMITTED BY
SYED ALI ABBAS

REG NO. NIK2-F13-MBA-009
In partial fulfillment of the requirements for the degree of
Master of Business Administration - Finance
SUPERVISED BY
DR. MUMTAZ ALI
Department of Business Administration,
NEWPORTS INSTITUTE OF COMMUNICATION & ECONOMICS, KARACHI
September, 2019
i
In the Name of Allah, the Most Beneficent, the Most Merciful
Allah Says
Recite in the name of your Lord who created.
He created man from a clot.
Read, and your Lord is the most Honorable,
Who taught (to write) with the pen?
Taught man that which he knew not.
(AL-Quran, AL-Alaq, 1: 5)
ii
Approval
THE DETERMINANTS INFLUENCING LIQUIDITY OF PAKISTAN'S

COMMERCIAL AND ISLAMIC BANKS
BY
SYED ALI ABBAS

REG NO.
NIK2-F13-MBA-009
________________ ________________
Dr. Mumtaz Ali Date
Thesis Supervisor
iii
Acknowledgment
I owe my warm gratitude and sincerest appreciation to all those people who helped me
during my research project. I would never have been able to finish without the guidance,
advice, and support. Their kindness is much indeed appreciated
I would like to Show my gratitude to my supervisor, Sir. Mumtaz Ali the valuable
assistance and advice. His excellent patience and guidance have provided a unique
environment for doing my project
I also gratefully acknowledge Sir Islam, for his valuable advice and recommendations in
banking discussion
Last but not least, I would like to extend my thanks to my family for their supports and
everybody essential to make successful realization to my this project
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TABLE OF CONTENT
Title Page........................................................................................... I
Verse................................................................................................. II
Approval........................................................................................... III
Acknowledgment.............................................................................. IV
Table of Content............................................................................... V - IX
Declaration....................................................................................... X
Abstract............................................................................................. XI
List of Abbreviation......................................................................... XII
CHAPTER ONE INTRODUCTION AND BACKGROUND OF THE RESEARCH

1.1 Introduction...................................................................................... 1 – 2
1.2 Banking Sector of Pakistan – Overview.......................................... 3 – 4
1.3 Statement of the Problem................................................................. 4 – 5
1.4 Research Questions........................................................................... 6
1.5 Objectives of the Study..................................................................... 6
1.6 Significance of the Study.................................................................. 6
1.7 Limitations and Delimitations.......................................................... 7
CHAPTER TWO LITERATURE REVIEW

2.1 Introduction...................................................................................... 8
2.2 Literature Review on Bank Liquidity.............................................. 8 – 11
2.3 Measuring Liquidity...........................................................................11 – 13
2.4 Macroeconomic Determinants of Liquidity....................................... 13
2.4.1 Gross Domestic Product Growth Rate................................. 13 – 15
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2.4.2 Inflation.................................................................................. 15 – 17
2.4.3 Unemployment...................................................................... 17
2.5 Bank-Specific Determinants of Liquidity......................................... 18
2.5.1 Capital Adequacy................................................................... 18 – 19
2.5.2 Net Interest Margin................................................................ 19 – 21
2.5.3 Return on Equity.................................................................... 21 – 23
2.5.4 Loan Loss Provision.............................................................. 23 – 24
2.5.5 Cost to Income....................................................................... 24 – 26
2.6 Related Studies in Pakistan................................................................ 26
CHAPTER THREE RESEARCH METHODOLOGY

3.1 Introduction....................................................................................... 27
3.2 Dependent and Independent Variable Description........................... 27
3.3 Dependent Variable........................................................................... 27
3.3.1 Advances to Total Aggregate Assets..................................... 27
3.3.2 Liquid Assets to Total Deposit.............................................. 28
3.4 Independent Variable........................................................................ 28
3.4.1 Capital Adequacy................................................................... 28
3.4.2 Net Interest Margin................................................................ 28
3.4.3 Return on Equity.................................................................... 29
3.4.4 Provision to Loan................................................................... 29
3.4.5 Cost to Income....................................................................... 29 – 30
3.4.6 GDP Growth Rate.................................................................. 30
3.4.7 Inflation.................................................................................. 30
3.4.8 Unemployment....................................................................... 31
3.5 Hypotheses of the Study.................................................................... 31 – 36
3.6 Nature of Research............................................................................ 37
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3.7 Research Approach........................................................................... 37
3.8 Targeted Population.......................................................................... 38
3.9 Sampling Technique......................................................................... 38
3.10 Sample Size...................................................................................... 38
3.11 Research Model................................................................................ 38 – 39
3.12 Data Integration................................................................................ 39
Chapter Four DISCUSSION OF EXPERIMENTAL RESULTS

4.1 Introduction................................................................................................... 40
4.2 Descriptive Statistics......................................................................................40
4.3 Impact of Bank-Specific Factors on Liquidity i e Advances to
Total Assets of Conventional FI.........................;......................................... 45
4.3.1 Panel Regression Model 1................................................................. 41 – 42
4.3.2 Panel Regression Model 1 - Multi-collinearity Test.......................... 42 – 43
4.3.3 Panel Regression Model 1 - Heteroscedasticity Test......................... 43 – 44
4.3.4 Panel Regression Model 1 - Auto Correlation Test........................... 44
4.4 Impact of Bank-Specific Factors on Liquidity i.e., Liquid Assets to Total
Deposits of Conventional Banks....................................................................44
4.4.1 Panel Regression Model 2................................................................. 44 – 45
4.4.2 Panel Regression Model 2 - Multi-collinearity Test.......................... 46
4.4.3 Panel Regression Model 2 - Heteroscedasticity Test......................... 47
4.4.4 Panel Regression Model 2 - Auto Correlation Test........................... 47 – 48
4.5 Impact of Bank-Specific Factors on Liquidity i e Advances to
Total Assets of Islamic Banks........................................................................48
4.5.1 Panel Regression Model 3................................................................. 48
4.5.3 Panel Regression Model 3 - Heteroscedasticity Test......................... 50
4.5.4 Panel Regression Model 3 - Auto Correlation Test........................... 50 – 51
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4.6 Impact of Banking Factors on Liquidity i e Liquid Assets to Total
Deposits of Islamic Banks............................................................................ 51
4.6.1 Panel Regression Model 4................................................................. 51
4.6.3 Panel Regression Model 4 - Heteroscedasticity Test........................ 53
4.6.4 Panel Regression Model 4 - Auto Correlation Test........................... 53
4.7 Impact of Macroeconomic Specific Factors on Liquidity i e Advances
to Total Assets of Conventional Banks.......................................................... 54
4.7.1 Regression Model 5........................................................................... 54
4.7.2 Regression Model 5 - Multi-collinearity Test.................................... 55
4.7.3 Regression Model 5 - Heteroscedasticity Test...................................55 – 56
4.7.4 Regression Model 5 - Auto Correlation Test..................................... 56
4.8 Impact of Macroeconomic Specific Factors on Liquidity i e Liquid Assets
to Total Deposit of Conventional Banks........................................................ 57
4.8.3 Regression Model 6 - Heteroscedasticity Test...................................58 – 59
4.9 Impact of Macroeconomic Specific Factors on Liquidity i e Advances to
Total Assets of Islamic Banks....................................................................... 62
4.9.3 Regression Model 7 - Heteroscedasticity Test...................................61
4.10 Impact of Macroeconomic Specific Factors on Liquidity i e Liquid Assets
to Total Deposit of Islamic Banks................................................................. 62
4.10.1 Regression Model 8........................................................................... 62 – 63
4.10.3 Regression Model 8 - Heteroscedasticity Test...................................64
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4.11 Hypothesis Summary..................................................................................... 65 – 67
Chapter Five DISCUSSION, CONCLUSION & RECOMMENDATION

5.1 Discussion...................................................................................................... 68
5.1.1 Regression Model 1 & 3 – Impact of Banking Factors on Advances
to Total Assets....................................................................................68 – 71
5.1.2 Regression Model 2 & 4 - Impact of Banking Factors on Liquid
Assets to Total Deposits.....................................................................71 – 73
5.1.3 Regression Model 5 & 7 - Impact of Macro Economic Factors on
Advances to Total Assets................................................................... 74 – 75
5.1.4 Regression Model 6 & 8 - Impact of Macro Economic Factors on
Liquid Assets to Total Deposits......................................................... 75 – 76
5.2 Conclusion......................................................................................................76 – 77
5.3 Recommendation........................................................................................... 77
Reference....................................................................................................... 78 – 81
Appendices.................................................................................................... 82 – 102
ix
DECLARATION
I, at this moment, declare that:
This research project for the partial fulfillment of the requirements for the degree of
Master of Business Administration - Finance is the result of my work and that due
Acknowledgment has given in the references to ALL sources of information be they
printed, electronic, or personal
NO portion of this research project has submitted in support of any application for any
other degree or qualification of this or any other university, or other institutes of learning
x
Abstract
The purpose of this research project is to examine the factors that impact in and their significance to
Pakistan commercial and Islamic banks liquidity This Project has characterized the independent factors
into bank-specific factors and macroeconomic factors The bank-specific factors include Capital
Adequacy , Return on Equity and Net Interest Margin , Provision to Loan and Cost to Income while the
macroeconomic factors include Gross Domestic Product Growth Rate, Inflation (CPI), and
Unemployment This study obtained secondary data from Pakistan 5 commercial and 4 full-fledged
Islamic banks from the year 2009 to 2018 This study concludes the results based on panel data, using
annual data and panel regression, multi collinearity, hetroscadscity and auto correlation statistical
techniques were used The findings state that all the factors are significant.
The bank-specific factors that have positive impact on conventional banks’ liquidity with advance to
total asset liquidity ratio are NIM, CIR, PTL and with liquid asset to total deposit ratio are NIM CIR
ROE and on Islamic bank’s liquidity with both advance to total asset and liquid asset to total deposit
ratio are CAR, CIR, and ROE. The bank-specific factors that have negative impact on conventional
banks’ liquidity with advance to total asset liquidity ratio are CAR and ROE and liquid asset to total
deposit ratio is CAR and PTL, and on Islamic bank’s liquidity with both advance to total asset and liquid
asset to total deposit ratio are NIM and PTL.
On the other hand, Macroeconomics factors that have positive impact on conventional bank’s liquidity
with both advance to total asset ratio and with liquid asset to total asset ratio is ICPI and on Islamic bank
liquidity with advance to total assets is GGR and liquid asset to total asset ratio are ICPI, and UEP.
Macroeconomics factors that have negative impact on conventional banks with both advance to total
asset ratio and liquid asset to total deposit are GGR, and UEP and on Islamic bank liquidity with
advance to total assets are ICPI, and UEP and liquid asset to total asset ratio are GGR.
Keywords:
Liquidity, Liquidity risk, Profitability, Asset Quality, Efficiency, Macroeconomics, SBP
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LIST OF ABBREVIATION
ATTA = Advances to Total Assets

LATTD = Liquid Assets to Total Deposits
CTI = Cost to Income
CAR = Capital Adequacy Ratio
NIM = Net Income Margin
ROE = Return on Equity
PTLR = Provision to Loan Ratio
GGR = GDP Growth Rate
ICPI = Inflation CPI
UR = Unemployment Rate
CPI = Consumer Price Index
ROA= Return on Asset
NPL = Non-performing Loan
GDP = Gross Domestic Product
BIS = Bank for International Settlement
SBP = State Bank of Pakistan
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CHAPTER ONE
INTRODUCTION AND BACKGROUND OF THE RESEARCH
1.1 INTRODUCTION
There are many risks to consider in the financial world before we take any action; risks are usually
defined as having the adverse effect on profitability of several distinct sources of uncertainty. While the
types and degree of risk an organization may have to depend on a numbers of factors such as size,
activity, volume, and complexity of business. It is consider that banks are usually dealt with several
risks such as reputation, regulatory, legal, compliance, market, operational, credit and liquidity.
However, liquidity risk special attention in the financial world. Liquidity risk is the risk of not buying
or selling an investment quickly enough to prevent or minimize loss.
There are two kinds of liquidity risk, one is funding liquidity risk, and the other is market liquidity risk,
funding liquidity risk includes just one easy issue, which is that banks can pay their commitments.
There is a risk that sufficient funds will not be available to create payments on time, this risk can play a
significant role in the operation of the bank., suppose banks having the individual that deposit money
into the bank and then bank reinvest this money by giving the loans to individuals or corporations who
need cash at the time of their personal and production needs respectively. The bank may receive interest
payments from its borrowers and must also pay some interest to the depositors, so that the bank must
anticipate the outflow of periodic withdrawals and interest payments to depositors in order to match the
income and interest receipts from deposits and customer loans, banks need to have money reserves in
the event of a crisis, individuals lose confidence in the bank during the political and financial crisis and
withdrawals at the same time, causing the bank to have a liquidity issue which leads to inadequate
funds to make the payment., and eventually this could end up in bankruptcy, henceforth ignoring
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funding liquidity risk can lead to a devastating outcome; therefore, it has to be carefully monitored and
well managed. The threat of market liquidity is an illiquidity of assets or an inability to rapidly exit a
situation. An asset market liquidity defines the capacity of investments to sell rapidly without
significantly reducing their price, It also defines how much trade-off is between the velocity of the
prominent price for which it can be sold in a liquid market, the trade-off is gentle selling rapidly will
not decrease the price much in a comparatively illiquid market, selling it rapidly will involve a
reduction of its cost by a certain amount because it can be sold for products and services without any
loss of value immediately.
Liquidity represents the availability of cash or assets that can be sold quickly to pay for obligation due
to the risk of non-settlement of liabilities due to insufficient funds or liquid assets on hand, although a
bank may remain susceptible to liquidity risk despite a well-capitalized economic situation, As such a
extensive explanation of liquidity risk involves banks being unable to sustainably finance their balance
sheets at the fundamental stage, bank liquidity is a function of the bank's net cash flows, cash flows are
estimated using models and the assumption that cash flows are imperfect may vary owing to market or
bank changes in specific despite the bank's efforts to match assets and liabilities cash flow uncertainties
inevitably lead to cash inflow and outflow gaps.
“The entire banking system is mainly depending on the satisfactory degree of liquidity because if a
single bank faces the liquidity crisis, it will affect the whole financial institutions' framework through
the transmission effect due to dependencies of bank with each other and may ultimately raise the level
of systemic risk” (Malik and Rafique, 2013). “Commercial Banks play a vital role in the financial
sector; this fact is proved by the financial crises in 2007-08. The commercial banks take the surplus
funds from develop industries and give that funds to needy sectors and create a balance between surplus
and deficit units of economic and business and strengthen the overall financial condition of a country”
(Ahmed and Rasool, 2017).
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1.2 BANKING SECTOR OF PAKISTAN OVERVIEW
In a country's economic and financial growth, the function of the banking sector is very crucial as this
industry is one of the essential industries of the economy of a nation. Over the 70 years era, In
Pakistan's banking sector, including privatization and nationalization, the numbers of commercial banks
with more branches solidness and rapid technological change and increased competition have added
stress to banks. After independence, the central bank of the country, SBP, was established on July 1,
1948, which assumed supervisory and monetary policy powers of the Reserve Bank of India. Changes
were produced later to enhance the control and operate of the SBP. In 1974 government announced
nationalization banking industry to giving banking service and loans to underprivileged population and
performance of banks was considered good on that period by offering financial service to large,
medium and small enterprises at a reasonable interest rate and both banking industry and economy have
experienced expansion and growth. Due to political influence that leads to over employed and non-
performing loan performance of the banking sector was underway to decline, to ensure growth and
sustain standard early 1990's government announced decentralization of banks. In the post privatization
period, the banking sector experienced massive development. Banking reforms attracted private and
foreign banks to enhance the quality of banking products and services, caused professionalism and the
role of IT to function effectively and enhance banks ' overall profitability. Banks in Pakistan are
supervised under prudential regulation (excluding development finance institutions and non-bank
financial companies) by Pakistan's state bank.
According to the bi-annual statistics of the State Bank of Pakistan in 2018, five public sector
commercial banks, four public sector specialized banks, twenty domestic private banks, four foreign
banks with a total share of approximately 86 percent in the banking sector and five full Islamic banks
have a total share of approximately 14 percent in the banking sector of Pakistan.
3
In Pakistan's financial institution sector, critical deviations (i.e. rising bank branches, technological
innovation changes, and extended rivalry) have emerged for the development and growth of the
economy over the past years, this progressiveness of the financial institution sector requires improved
performance to maintain and contend in the business. On the other hand, Pakistan's banking sector also
has an essential portion of market capitalization value in the Pakistan Stock Exchange’s 100 index,
which contains the country's top 100 companies. So the banking sector also operates as Pakistan's stock
exchange's market movers, if it faces crisis it will impact the entire capital market,, banks must obtain
appropriate liquidities when required instantly at a sensible cost. However, maintaining the ideal level
of liquidity is the efficiency of a bank's management
1.3 STATEMENT OF THE PROBLEM
Following the global financial crisis of 2007-2008, the importance of liquidity renewed, before this
crisis in the banking literature, the majority of experts considered liquidity risk as a secondary risk in
order to comply with the risk management rules published by the Pakistan State Bank, the bank has
created a distinct risk management division, including a middle office, which tracks and analyzes the
hazards inherent in treasury activities separately. According to literature, “problems occur when banks
invest short term liquid assets into long term liquid assets, generating a bank liquidity shortfall and vice
versa” (Shah.et. al., 2018). “Banks increase their loan portfolio as compared to capital investment,
which is likely to increase non-performing of loan, and this lead to a liquidity problem and ultimately
cause of bankruptcy” (Ahmed & Rasool, 2017). Banks in Pakistan are also a victim of insufficient
liquidity due to credit demand by corporations and the general public as well as massive borrowing of
the government of Pakistan.
Three distinct variables affect commercial bank liquidity, bank-specific, macroeconomic, and
regulatory variables in banking literature. This research concentrated on certain bank-specific and
4
macroeconomic variables that affect the liquidity situation of banks. The bank specific factors affecting
banks liquidity examined by this study were capital adequacy, net interest margin, return on equity, and
the cost to income and provision to loan. The macroeconomic variables were GDP growth rate,
inflation rate (CPI), and unemployment. This study aims to explain the impact of internal and external
factors on the liquidity of Pakistan's banking sector by considering five commercial and four full-
fledged Islamic banks functioning in Pakistan.
Theoretical Framework of Study
5
1.4 RESEARCH QUESTIONS
Question 1. What are the ѕignificant determinants of commercial and Islamic banks liquidity in
Pakistan?
Question 2. What is the іmpact of bank ѕpecific (internal) and macroeconomic (external) factors on the
liquidity of commercial and Islamic banks in Pakistan?
1.5 OBJECTIVES OF THE STUDY
The aim of this research is to examine how inner banks particular variables such as capital ratio, net
interest margin, and return on equity, loan losses provision and cost to income ratio affect the
commercial and Islamic banks' liquidity. Alongside, the aim of this paper is also to examine how
macroeconomic external factors such as GDP growth rate, inflation CPI, and unemployment affect the
liquidity of commercial and Islamic banks.
1.6 SIGNIFICANCE OF THE STUDY
In this study, the researcher examines variables by introducing internal bank specific and external
macroeconomic factors that may significantly affect the commercial and Islamic banks' liquidity. This
study can be used as a reference and guidance for banks to focus and control over the variables that
bring adverse effects to its liquidity. The research makes a significant contribution to current
knowledge in the field of variables determining the liquidity of commercial banks, banks management,
regulatory bodies and education institute of the country may be the beneficiary of this study.
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1.7 LIMITATIONS AND DEMILITATIONS
This study has several limitations. In this study eight independent variables, five from bank specific and
three from macroeconomic were used, the result of which may not include other variables, failed to
cover a comprehensive view and further exploration of more impacts of liquidity on selected
commercial and Islamic banks of Pakistan. In this study five commercial banks and four full-fledged
Islamic banks have used as a sample of the targeted population, others medium and small size
commercial banks and Islamic banking division of commercial bank did not include, the result of which
may have been impacted vary from the current study. Secondary data has been used in this study to
pursue, and secondary data requires in depth analysis since the source of the data might be doubtful.
Besides, every country has a different attribute, political background, law and regulation, and culture,
because this study based on Pakistan's commercial and Islamic bank conclusion and recommendation
are only relevant for said banks in Pakistan and regulator. Other countries' researcher can only use this
study as a reference but may not be able to use this study in their country environment.
The delimitation of the study was to selected the variables capital adequacy, cost to income, provision
to loan, return on equity net interest margin, GDP growth rate, inflation rate, unemployment rate as an
independent variables, advances to total asset and liquid assets to deposit as a dependent variables, to
examine the impact of these selected variables on five commercial and four Islamic banks liquidity
affecting liquidity from selected period 2009 to 2018.
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CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
This research is intended to discuss the factors that affect the liquidity of big conventional and Islamic
banks in Pakistan's and their soundness and security. We addressed the results of previous studies on
internal and external variables influencing the liquidity in Pakistan and other countries of conventional
and Islamic banks. The researchers examine the factors influencing the liquidity of banks and design a
conceptual framework with the help of the theoretical framework. A hypothesis is determined
constructed on the theoretical framework established based on the analysis.
The chapter has five sections. Section 2.2 discusses the literature review of banks liquidity; Section 2.3
extensively explains measuring liquidity. Then, section 2.4 asses related empirical studies of
macroeconomics factors of banks' liquidity. Section 2.5 review the literature regarding banks specific
factors of banks liquidity. Finally, section 2.6 give summaries to relevant studies that have been done in
Pakistan.
2.2 LITERATURE REVIEW ON BANK LIQUIDITY
There are many risks to consider in the financial world before we take any action; the adverse effect on
the profitability of several different sources of insecurity is frequently described in financial risk. While
the types and degree of hazards, an organization may be unprotected to rely on multiple factors such as
8
its size, complexity of its business, and volume. Banks are supposed to face credit, market, liquidity,
operational, compliance, legal, regulatory, and reputational hazards in general.
“Liquidity risk special attention in the financial world, the liquidity risk is the risk of the absence of
marketability of an investment that cannot be bought or sold quickly enough to avert or minimize a
loss, There are two types of liquidity risk, first is funding liquidity risk and second is market liquidity
risk, funding liquidity risk involves in only one simple question which is can we pay our obligations so
what is funding liquidity risk it is the risk of not having access to sufficient fund to make payment on
time, market liquidity risk it is an asset illiquidity or an inability to quickly exit a position” (Drehmann
& Nikolaou, 2010).
Banks are insurers of liquidity and are susceptible to the danger of a deposit run. In general, for banks,
greater development of liquidity to the outside public leads to greater danger of losses due to the need
to dispose of illiquid assets to satisfy customers ' liquidity requirements.
“It is generally found in the banking literature that an asset is liquid if it contains low risk (such as
government debt) and if it has a short maturity (a short maturity indicates that the asset's price is less
sensitive to interest rate movements, Less probable making significant capital losses) The typical bank
assets which are liquid include cash, reserves representing an excess of statutory reserve (detained in
the account at the central bank), securities (e.g., government debt, commercial paper), and interbank
loans with short maturity (one to three days)” (Tesfaye, 2012)
Asset Side Liability side
Demands for Loan Huge volume of deposit withdrawals
Expiry of financial instrument sold (Bonds) Huge number of depositor withdrawals
Off Balance Sheet Activities (L/C, L/G) Repayment of bonds sold
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According to Anthony & Marcia, (2008), “there are two reasons for liquidity risk arising: First is a
liability side reason, and second is an asset side reason. The liability side reason arises when a Bank
liability holder, such as depositors seeks to cash in their financial claims immediately. When liability
holders want to withdraw their deposits, the Banks need to borrow extra funds or sell assets to
encounter the withdrawal. The most liquid asset is cash; Banks use this asset to pay claim holders who
seek to withdraw their funds. However, Banks are practiced to keep minimum cash reserves as an asset
because these assets are not generating any interest income. The second reason for liquidity risk is asset
side liquidity risk, such as the ability to fund the exercise of giving loan commitments. A loan
commitment allows a customer to borrow funds from banks on demand. When a borrower demand for
a loan, the banks must fund the loan immediately, this creates a demand for liquidity. Banks can
encounter such a liquidity need by running down its cash assets, selling off other liquid assets, or
borrowing extra funds”.
“Liquidity risk is the risk that a bank or DFI may not be able to meet its financial commitments to
customers (depositors) and market (interbank market). Liquidity risk may emerge as a result of the
mismatch of assets and liabilities or structured products. Another facet of liquidity risk is contingency
liquidity risk, i.e., risk of not being able to meet contractual obligations due to insufficient funds”
(Lending: Products, Operations and Risk Management, IBP).
According to (Anthony & Marcia, 2008) and (Aspachs et al, 2005) Banks manage their liquidity risk
through Two approaches
(i) “On the asset side of the balance sheet, banks hold the cushion of liquid assets, the liquid
asset can be converted into cash quickly and at a low cost with little or no loss in principal value. It
trades in an active market; therefore, very little chance in large transactions fluctuate its price.
10
Examples of liquid assets, cash, balance in the central reserve bank, T bills, notes, bonds, or reverse
repurchase agreement”
(ii) “On the liability side of the balance sheet, on the occasion of shortage of liquidity demand,
i.e., withdrawals, demand of loan, interest and non-interest expense, banks borrow funds from other
banks and also rely on the central bank in case of emergency liquidity assistance and central bank acts
as a last resort lender on the occasion of liquidity shortage. However, mitigating liability side risk often
comes at a cost because liability sources are often more costly for the banks to utilize”
Based on the above definitions, it is built that a bank must have adequate liquid resources to fulfill its
customers ' requirements and must choose from other sources to satisfy customers ' liquid demands.
Some major sources include borrowings from inter-bank or central banks to meet client requirements in
moments of trouble. Banks may also choose Repo transactions for their liquidity requirements (buying
a short-term safety). It is vital that banks measure bank liquidity correctly because financial institutions
that are unable to satisfy the requirements of clients face illiquidity that can lead to deteriorated stability
of the financial system. We therefore examined previous studies and literature on the measurement of
bank liquidity creation.
2.3 MEASURING LIQUIDITY
In studies the two approaches to measure liquidity risk of banks are used widely by the bank, first is
liquidity gap approach and second is liquidity ratio approach. “The liquidity gap approach deal with the
measurement of mismatch between assets and liabilities, or cash inflows and cash outflows, banks that
wants to lessen the gap between its assets (loans to customers) and liabilities (deposits of customers)
will cluster the financial assets and liabilities into maturity buckets constructed on their frequency of
11
repricing or rate resetting” (Horcher, 2005). “A positive liquidity gap means for the shortfall, requiring
for liabilities to be increased” (Bessis, 2009). The liquidity gap extravagances liquid reserves as a
reservoir; the bank calculates the required liquidity by comparing inflows and outflows during a
specified period.
On the other hand, liquidity ratios used to identify liquidity tendency. Banks' liquidity exposure is also
to compare specific key ratios and balance sheet features of the banks. Various authors like Anthony &
Marcia. (2008), Doris (2017), Vodva (2013), Sheefeni & Nyambe (2016), Ferrouhi & Lehadiri (2013)
have provided considerations with “liquidity ratios such as liquid assets to total assets, liquid assets to
deposits and short term financing, loans to total assets and loans to deposits and short term borrowings,
deposit to total assets”.
“Liquid Assets to Total Assets (LATA) ratio tells us the bank's capability to absorb liquidity shock, the
higher the ratio, the higher the ability to absorb liquidity shock” (Doris, 2017). Liquid asset belongs to
cash, balances with reserve banks and other banks, the bond issued by governments and similar
securities or reverse repurchase agreement trades.
Liquid Assets to Deposit (LAD) and Liquid Asset to Deposit plus Short Term Borrowing (LADSTB)
are two ratios which are bit similar with each other, LADSTB ratio is more focused on the bank's
sensitivity of funding, it includes banks, financial institution, deposits of households, enterprises'
deposits and funds from debt securities issued by the bank. However, LAD includes an only deposit of
households and enterprises and this ratio (LAD) “measure the liquidity of a bank assuming that the
bank cannot borrow from other banks in case of liquidity need” (Vodva, 2013). This ratio also tells the
value of liquid assets that are easily converted to cash to short term funding plus total deposits. “Liquid
assets include cash and reserve banks, securities, fair value through income, loans, and advances to
banks, reverse repos, and cash collaterals. Deposits and short term funding includes total customers'
current, savings and term deposits and short term borrowing (money market instruments, CDs and other
12
deposits). The higher is the value of the ratio; the higher is the capacity to absorb liquidity shock”.
(theglobaleconomy.com)
“Loan to Total Asset (LTA) ratio measures the share of loans in total assets. It indicates what
percentage of the assets of the bank occupied in illiquid loans. Therefore the higher ratio, the less
liquidity the bank has” (Sheefeni & Nyambe, 2016).
Loan To Deposit (LD) and Loan to deposit plus short term financing (LDSTF) are two ratios which
also are bit similar with each other, LDSTF ratio calculate the relationship of illiquid asset(bank's
loans) funded through with liquid liability(deposits) and it includes banks, financial institution and
deposit of household and enterprises, “while LD includes only household and enterprises' deposits,
when this ratio is high, it means that the bank is less liquid” (Doris, 2017 and Ferrouhi & Lehadiri.
2013).
In brief, the liquidity ratio differs in balance sheet ratios to determine the need for liquidity.
2.4 MACROECONOMIC DETERMINANTS OF LIQUIDITY
2.4.1 Gross Domestic Product Growth Rate
“The GDP growth rate measures how fast the economy is growing. It is calculated by comparing one
period of the country's gross domestic product to the previous period. GDP measures the economic
output of a nation” (Amadeo, thebalance.com, 2018).
“The positive coefficient of GDP growth rate signals an inverse relation between liquidity and business
cycles. This conclusion is described by the fact that many borrowers be likely to ask more loans to
finance their projects during growth. On the other side, banks want to satisfy the increasing loan
demand, thus facing less liquidity. The GDP growth rate during these years has dropped, and the
13
investors try not borrowing during depression periods. Banks try to be more prudent and to preserve
their liquidity” (Doris, 2017; Volva, 2013). During the economic downturn, banks hoard more liquidity
due to a lack of lending opportunity at such time. This means that as GDP growth increases, the
liquidity of banks decreases, and as GDP growth falls, the liquidity of the bank increases. An increasing
GDP rate leads to a rise in economic activity circles but also increase credit default activity, resulted
which cause an adverse effect in bank liquidity. Higher liquidity holdings in a period of economic
downturn, when holding is motivated by the principle of precaution from banks, but also by less
demand for loans from clients.
“The gross domestic products (GDP) significantly impact on bank liquidity of Pakistan. The State Bank
of Pakistan developed a strategy about the discount rate, reserve requirement, and open market
operation based on forecasted gross domestic product. Some studies in literature established a negative
relationship exists between gross domestic product and bank liquidity, but some studies established
positive relationship because during economic boom companies and household prefer less rely on
external debt and raise fund on internal sources of finance, while in recession, they prefer loan from
financial institutions” (Ahmed & Rasool, 2017).
During the expansion period in an economy, the demand for differentiated financial products is high
and may bank are capable of increasing rate in its loan and securities portfolios. Similarly, economic
downturns period banks reduce the credit supply. According to these opinions, we can assume that
banks to increase their transformation activities and their illiquidity during economic booms.
“GDP is a macroeconomic factor that affects bank liquidity, and it is because that period of significant
recession or crises in business operations decreases borrowers' ability to pay borrowed amount which
increases banks' NPLs and eventually banks insolvency, banks liquidity affection is low in the course of
economic expansion period and banks assertively expect to make profit by expanding loan
14
commitments to sustain economic boom, while restricting loanable funds in order to avoid an increase
in the number of loan default during economic downturn to prioritize” (Choon et al., 2013).
2.4.2 Inflation
“In an economy, inflation is a numerical degree of the rate at which the average level of price of
selected goods and services' basket increases over a period of time. It is the continuous increase in the
general level of prices resulted in a unit of currency purchases less than it did in previous periods”
(Chen, 2019, Inflation, Investopedia.com). “An increase in inflation drops the purchasing power, so
people need more money to purchase the same products; this may increase bank lending and thus lower
liquidity” (Trenca et al., 2015). “Increase in inflation decreases bank liquidity Inflation rate decreases
currency value and increases the susceptibility of banks which affects loans provided to customers”
(Singh & Sharma, 2016).
“Inflation is important to factor for banks because usually, banks deal in nominal financial instrument,
that is instruments denominated in fixed dollar amounts, For instance when a bank gives a loan, it
accepts nominal financial instruments (notes, mortgages, commercial paper, and other securities) as
evidence of the borrower's obligation to the bank and same goes to creditor, when bank borrows it
issues nominal financial instruments to creditors( bond and debenture, deposit liabilities ) as evidence
of its obligation” (Santoni, 1986).
“Inflation increase in a country which tends to reduction the returns of all business units. In such a
specific situation, the banks make fewer loans, resource allocation is less efficient, as well as reduces
the midway activities of banks. Hence, an increase in inflation in a country will increase bank liquidity”
(Ahmed & Rasool, 2017).
“An increase in expected inflation raises the nominal interest rate. This increases the number of dollars
that creditor and debtor who are transacting in nominal financial instruments expected to receive or pay
15
when loan mature if these expectations are realized all nominal values will be higher at maturity. If the
realized rate of inflation exceeds the anticipated rate, the price level has risen unexpectedly. The
unanticipated increase in the price level causes a comparative reduction in the exchange value of both
nominal financial assets and liabilities in term of real goods. Because banks are typically net creditors
in nominal instruments, bank owners lose wealth (bank's capital decline) when there is unanticipated
inflation” (Santoni, 1986).
Developing hypothetical literature defines mechanisms by which even expected inflation rises restrict
the financial sector's ability to effectively allocate resources. More specifically, latest theories
emphasize the significance of information asymmetries in financial markets and validate how rising
inflation rates adversely impact financial market frictions with adverse effects on financial industry
performance (both banks and equity markets) and thus actual long-term activity. The distinctive feature
of these theories is that the strictness of which is endogenous is informational friction. A rise in the rate
of inflation, given this function, drives down the true rate of return not only on cash, but on assets in
particular. The implied decrease in actual yields exacerbates the friction of the financial market. While
these market frictions lead to credit rationing, when inflation rises, credit rationing becomes more
serious. As a consequence, less loans are made by the banking industry, less effective resource
allocation, and reduced transitional activity with adverse effects on capital / long-term investment. The
quantity of liquid or short-term assets retained by financial institutions, including banks, will rise with
the increase in inflation.
2.4.3 Unemployment Rate
“Unemployment occurs when people of working age do not have a job, have actively wanted to be full
time employment in the past four weeks, and are presently available for work. Also, Temporary lay off
16
people who are waiting to rejoin his company are included in the unemployment” (Amadeo, 2019,
Thebalance.com). “Estimated factors on the macroeconomic control variables like unemployment are
generally in line with the existing literature. The level of unemployment, through a higher chance of
default on loans, has a negative effect” (Bordeleau & Graham, 2010)
“An increase in the unemployment rate can be translated into an increase of non-performing loans and
thus depressing bank liquidity” (Trenca et al., 2015).
“Unemployment has a significantly negative impact on liquidity. Higher unemployment condensed
capital and hindered liquidity creation. Findings in this accord with the fact that banks hurt from
reduction insolvency and create lower liquidity in distressed economic periods. That increased
unemployment rate of the economy results increased bank liquidity” (Singh & Sharma, 2016).
“The impact of unemployment on the liquidity of banks demonstrate there is a negative impact, which
means that a high rate of unemployment affects the liquidity of the banks. It is shown that the loan
demand by customers declines with the increasing rate of unemployment, thereby impacting the overall
bank portfolio” (Shah et al., 2018).
2.5 BANK SPECIFIC DETERMINANTS OF LIQUIDITY
2.5.1 Capital Adequacy (CAR)
“Capital Adequacy is a measurement of a financial institution to determine if solvency can be preserved
due to risks that have been sustained as a course of business. The primary measurement of CAD ratio is
equity capital to average assets. Capital permits a financial institution to grow, create and sustain both
public and regulatory confidence, and provide a reserve to be capable of absorbing substantial loan
17
losses above and outside identified problems. A financial institution must be able to create capital
internally, through profit retaining, as a test of capital strength” (credfinrisk.com, 2015).
If the bank manages capital adequacy and liquidity effectively, it tends to build a strong foundation for
a successful bank, and it can improve the attractiveness of the bank, reducing its financial costs and
improving the worth. The global financial crisis has highlighted the need for improved liquidity risk
management and capital adequacy, further governance, and increased transparency of financial
institutions activities. While facing a range of operational hazards, the capital of a bank is mainly used
to compensate for the losses that may arise. Therefore, special attention must be paid to managing
banks ' capital adequacy risk. “Accordingly, the accrued reserves cushion of liquid assets must be
sufficient to absorb the adverse liquidity shocks, and banks may reduce the risks to compliance with the
capital adequacy and liquidity requirements, perform more safely, and strengthens confidence in banks
and the entire financial system” (Zuk Butkuviene et al., 2014).
Capital adequacy is the measurement of the minimum capital amount required to fulfill a specified
economic capital constraint. It is generally expressed as a capital adequacy ratio (CAR) of equity that
must be retained as a percentage of risk weighted assets. Capital requirements administrate the ratio of
equity to debt, recorded on the assets side of a bank's balance sheet. It should not be tangled with
reserve requirements, which administrate the liabilities side of a bank's balance sheet in particular.
Banks capital generates liquidity for the bank since deposits are most vulnerable to liquidity risk and
prone to bank runs. Larger bank capital reduces the chance of financial distress. Adequacy of the
capital of the financial institution is calculated by the capital adequacy ratio (CAR). “CAR ratio tells
the internal strength of the bank to tolerate losses during the liquidity crisis. Capital adequacy is seen as
a tool that restrictive excessive risk taking of bank shareholders with limited liability and, thus,
promoting optimal risk sharing between bank owners and investors. On the other hand, in insolvency
18
crises, capital adequacy regulation is viewed as a buffer against, limiting the costs of financial distress
by reducing the probability of insolvency” (Nyaundi, 2015)
In the meantime, liquidity is a major risk factor in banks, and it seems logical that banks should set
aside capital resources to mitigate this risk. There is proof that this is already being done by banks. If
banks indigenize the capital decision, they will always hold capital reserves above those needed by the
minimum quantity of regulatory capital to cushion against liquidity shocks. However, the fact that
banks set aside liquidity reserves reflects the challenges of adopting a prevalent legislative strategy to
handling their liquidity risk.
2.5.2 Net interest margin
“The net interest margin (NIM) is used as a performance metric for financial institutions. Theoretically,
This is a ratio that every bank uses because banks are engaged in the business of taking deposits from
investors and then using the same deposit (money) to earn interests in other investments, Higher net
interest margin denotes more profitable the bank” (Vaidya, wallstreetmojo.com).
“Net interest margin denotes the net interest income (difference between the interest income earned and
the interest paid) by a bank or financial institution relative to its interest earning assets like cash and
reserve balances with central reserve bank, due from banks, trading and available for sale securities also
include non-liquid assets (mainly other financial assets designated at fair value, held to maturity
investments and gross loans) and the interest earning mechanisms of other assets” (Retrieved from
economictimes.indiatimes.com)
“The statistical results showed that there is a negative and statistically significant effect of the clients'
deposits (liquidity) on the NIM. This shows that the banks raise the interest rates on deposits in case
these declined. Consequently, the NIM declines. To compensate for the increase in the interest rate on
19
deposits, the banks raise the interest rates on loans. This raising of the interest rates increases the NIM
more the higher loans to deposits ratio, the increase in the interest rates on loans may exceed the
increase in the interest rates on paid on deposits; therefore the NIM may increase” (Obeid & Adeinat,
2017).
“If the banks have a high amount of liquidity ratio, this means that the bank does not utilize this amount
as a loan. That is to say; this bank does not get interest income from these liquid assets. Due to this
state, there should be a negative relationship between liquidity ratio and net interest margin” (Yuksel &
Zengin, 2017).
“Banks with more significant financing gap, absence stability and cheap funding, and they rely on
liquid assets and outside funding to meet their obligations. Conversely, there was a positive relationship
between liquidity risk and Net Interest Margin, which in opposing indicated that banks with high levels
of illiquid assets, may receive higher income through interest than more liquid banks” (Kalanidis,
2016).
“The amount of liquid assets increases, a bank's liquidity risks decreases, leading to a lesser liquidity
premium component of the net interest margin (NIM). This indicates that liquidity and liquidity
premium component of the interest rate margin goes in the opposite direction” (Tesfaye, 2012).
Conventional banks earned interest from the borrowers and provide interest to the lenders. The change
among the interest income and interest expenses constitutes net interest income, and the net interest
income is divided by the total asset to calculate net interest margin. In the study, there was an effort to
regulate the effect of liquidity risk ratios to NIM of the conventional banks. After analyzing the
financial data of the banks, it was found that there was a significant influence of liquidity risk on the
NIM of the selected banks. “NIM had a positive relationship with the loan to deposit, Cash to Asset,
and Loan to Asset, where the most significant relationship existed between Loan to Deposit and Net
20
Interest Margin. It indicated that the more loan and advances provided compared to collect the deposit
from customers the higher the Net Interest Margin of the banks” (Chowdhury et al., 2016)
2.5.3 Return on Equity
“Return on equity (ROE) is a crucial measure of financial performance calculated by dividing net
income (the amount of income that is net of expenses and taxes that a company makes for a given
period) by shareholders' equity (Total average common stock equity for a given period). Because
shareholders' equity is equal to a company's assets minus its liabilities” (Hargrave, 2019, ROE.
Investopedia.com). “This ratio is affected by the level of capitalization of the financial institution and
measures the capability to expand capital internally (increase net worth) and pay a dividend”
(credfinrisk.com, 2015).
Liquidity restricts a bank from investing all its cash though profitability comes from either investing it
or bank loaning activities. Since banks need to be profitable by shareholders demands and liquid by
legal regulations, there are fundamental battles between the profitability and liquidity and the need to
balance both. Therefore, banks should always act a stability between liquidity and profitability to fulfill
shareholders' wealth as well as the regulator. There is a trade-off between profitability and liquidity in
that increase in either one would decrease the other, which mean more liquidity implies less
profitability, profitability will be enhanced for banks that hold some liquid assets, but not so much to
hold that liquid assets reduce a banks' profitability. That is consistent with standard finance theory,
which underlines the adverse relation of liquidity and profitability. “It is constructed after study when a
bank desires to sacrifice liquidity to achieve higher profitability, which in turn increases the liquidity
risk and liquidity ratio. Liquidity need is a constraint for a bank from investing all its cash as profit
comes from either bank loaning activities or by investing it” (Choon et al., 2013)
21
Kalanidis (2016) studied on European banks liquidity impact on profitability found that “liquidity
metrics cash and due from Banks and total customer deposits, were found to have a negative
relationship on return on equity, providing support that the opportunity cost of holding low yield assets
and on the other hand holding deposits which cannot be invested appropriately, comes to dominate the
increased resilience of the banks due to increased liquidity”
The fact that an excessive bank's asset liquidity keeps safe it from illiquidity, but likely it can reduce
the bank's profit because of the lesser amount available for the offering the financial services. It is
constructed after the result that, the estimation in which the return on assets and return on equity is
regressed on the liquidity holdings ratio, the finding shows that the relationship takes the form of a
quadratic function with a downward concave parabolic due to the insufficient amount of fund. This
result is reliable with the idea that is funding market reward banks for holding some liquid assets, but at
some point, this benefit is outweighed by the opportunity cost of holding such low yielding cash and
cash equivalent assets. “Eventually, unnecessary liquidity asset holdings do offer safety to the bank, but
it will give lower returns. Excessive holding on liquidity lessens excess fund for financing and
consequently will catch up the bank from getting any profit. Hence, bank portfolio management should
consider and develop a strategy and liquidity plan that able to balance the acceptable profit and risks”
(Abu Bakar et al., 2018)
Contrary to most of the studies, chowdary & Zaman (2018) studied on Bangladeshi Islamic bank found
impact to Return on Equity of loan to deposit ratio and risky liquid asset to total asset are positively
related with return on equity that indicates liquidity indicators loan to deposit ratio, risky liquid asset to
total asset have no relation with Bank performance (ROA and ROE).
22
2.5.4 Loan Loss provision
Bank lending to borrowers rises to credit default risk if debtors are unable to repay the principal or
interest on the loan facility due to adverse economic conditions. To alleviate credit risk, banks will set
separately a specific amount as a reserve to absorb expected loss on banks' loan portfolio, and this
amount is referred to as loan loss provisions (PTLRs).
“A loan loss provision is an expense set aside doubtful uncollected loans and loan payments. This loan
loss provision is used to cover several factors related with potential loan losses, including bad loans,
customer defaults, and renegotiated terms of a loan that incur lower than previously estimated
payments” (Kagan, 2019, Inflation,Investopedia.com).
There is a significant relationship between bank performance and asset quality. Loans and advances,
loan loss provisions and non-performing loans are significant variables in determining asset quality of
a bank and banks are more worried because “loans are generally among the riskiest of all assets and
can, therefore, be endangered their liquidity position and lead to distress” (Abata, 2014)
Roman and sargu (2014) studied in Romanian and Bulgarian banks revealed that impaired loans play a
vital role in the manner banks manage their liquidity, and there is a significant connection exist
between liquidity indicator and impaired loan to gross loan ratio, in order to reduce to liquidity risk
banks must avoid an increase of the impaired loan.
The quality of assets related to provision to loan represents the potential credit risk connected with the
loan. It is considered one of the most critical variables that determine the bank's general situation. It is
considered one of the most critical variables that determine the bank's general situation. “Based on the
outcomes between bank loans and liquidity, banks should balance the principle of keeping an adequate
amount of liquidity in the bank and funding and investment activities” (Sayedahmed, 2018).
Loan loss provision is the provision set aside for doubtful loans. The ratio is calculated as the provision
expense over the gross amount of investment loss provision as a proxy for credit risk (Rashid et al.,
23
2017), in their study found that there is existence of a negative relationship between the loan loss
provision and two ratios of liquidity; cash to assets and investment to assets and the larger banks carry
smaller cash liquidity while their long term liquidity is also affected adversely as they invest a lot in
loans. Larger amount of loan loss provisions reduces both short and long term liquidity. Thus, larger
amount of loan losses negatively affects the profitability of the banks and trenca et. al (2015) in their
study used provision to loan proxy impact on liquidity and found that provision for loan loss has
eventually become non-performing loan due to an increase in unemployment, and this can be
translated to lowering bank liquidity.
Superior asset quality is crucial for building up liquidity; it is measured by the ratio of the provision of
a loan to total loan. “Asset quality has a positive effect on the liquidity of banks, i.e., the greater asset
quality ratio is, the higher liquidity ratio is, or the worse asset quality of a bank is, the more liquid the
bank will be. However, there is a negative relationship between asset quality and liquidity. This means
the growth of non-performing loan reduces the level of liquid assets of banks” (Assfaw, 2019).
2.5.5 Cost to Income
“Cost to income ratio is an efficiency indicator; it is measured by operating expense as a percentage of
operating income, is used to gauge efficiency and productivity for banks. Lower ratios generally
indicate the best performance and higher efficiency of banks because the lower ratio shows that it
requires less cost to produce every dollar of revenue. Theoretically, an optimum efficiency ratio is 50
percent, but banks often end up with higher figures. At 50 percent, $1 of expenses results in $2 of
revenue” (Pritchard, 2019. thebalance.com).
Bank requires to improve its attempts to balance risk & efficiency and satisfy both shareholders and
depositors by maximizing profit and ensuring investment return at any moment operational efficiency
is the ability to produce services and products with cost effectively without sacrificing quality,
24
operational efficiency occurs when the right combination of people, process, and technology come
together to improve the productivity and value of any business operation while driving down the cost to
a minimum level.
Akhtar (2018) studied on Bangladeshi banks found that negative relationship between liquidity ratio
and operating efficiency which explains that bank has less liquidity risk as high loan to asset ratio
causes liquidity risk for banks and loan to deposit ratio as a proxy of liquidity found positive
relationship with operating efficiency that means providing loan to customers from deposits increase
banks operational efficiency and liquid assets to total deposits shows negative relation with operational
efficiency, implies that bank's income generating capacity decreases with increase in the liquid assets.
Many studies have discovered that inefficiency is a cause of bank risk, as a proxy for efficiency cost to
income ratio have used in various studies, “high cost to income ratio means low cost efficiency which
is positively associated with an increase in non-performing loan, poor leadership, poor loan scoring
and tracking abilities” (Khoury, 2018).
Management efficiency is helpful for bank results. Above all, it is a qualitative factor that applies to
organizations separately or can be used collectively as an indicator of management. “The expense ratio,
earnings per employee, loan size, and cost of unit per lent money is used as an alternate of the
management efficiency. More indicators should be used to evaluate the efficiency of management like
operating expenses as a percentage of assets, the personal expense to average assets, and cost to income
ratio” (Ishaq et al., 2016).
Management efficiency is helpful for bank results. Above all, it is a qualitative factor that applies to
organizations separately or can be used collectively as an indicator of management. “The expense ratio,
earnings per employee, loan size, and cost of unit per lent money is used as an alternate of the
management efficiency. More indicators should be used to evaluate the efficiency of management like
25
operating expenses as a percentage of assets, the personal expense to average assets, and cost to income
ratio” (Ishaq et al., 2016).
2.6 RELATED STUDIES IN PAKISTAN
Different researchers in Pakistan accompanied some researches. Akhtar, Ali & Sadaqat (2011) studied
the comparative study of liquidity risk management between conventional and Islamic banks of
Pakistan. Malik & Rafique (2013) studied of bank specific and macroeconomic factors on 26
commercial banks liquidity in Pakistan. Ahmed & Rasool (2017) studied on determinants of liquidity
of 37 commercial banks of Pakistan. Quaid, Imran, Sadaqat & Tahir (2018) studied on 34 banks to
check the factors affecting the liquidity of the banking sector of Pakistan.
26
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
In this part discussion is done on nature and type of research study along with an introduction to
targeted population, sampling technique and sample size. Furthermore, this study also processes with
construction of research model, hypotheses and data integration technique.
3.2 DEPENDENT AND INDEPENDENT VARIABLE DESCRIPTION
This research work has attempted to examine the connection between dependent and independent
variables by testing the hypotheses of the connection between bank liquidity and bank-specific and
macroeconomic factors that affect it.
3.3 DEPENDENT VARIABLE
3.3.1 ATAA. Advances to Total Aggregate Assets:
This ratio is an illustration of the amount of aggregate assets in illiquid operations such as loans that
the bank has linked up. The greater the value of the ratio, the greater the bank's illiquidity, this ratio
shows the aggressiveness of a bank's loan, which ultimately leads to good profitability.
ATAA = Advances / total Assets
27
3.3.2 LATTD. Liquid Assets to Total Deposits
The ratio is more attentive to the bank's sensitivity to selected funding kinds, including
household and corporate deposits, as well as banks and other economic and debt resources. It shows the
bank's weakness in comparison to these funding sources. The higher the value of the ratio and the
higher the capacity to absorb the liquidity shock.
LATD = Liquid Assets / Total Deposit
3.4 INDEPENDENT VARIABLE
3.4.1 Capital Adequacy Ratio
The Capital Adequacy Ratio (CAR) is the ratio of the key capital of a bank to the assets and off-balance
liabilities weighted by the risk, the risk-based capital of the bank calculates it by the complete risk
weighted assets of the bank, then multiplies it by 100. According to the Pakistan Regulation, the
minimum amount of key capital compared to the risk weighted assets that banks should retain is 10%
CAR = Risk Based Capital / Risked Weighted Assets
3.4.2 Net Interest Margin
Net interest margin (NIM) is calculated as a proportion of average earning assets by net interest income
(investment revenue minus interest cost). It shows how the earning asset base was used by good
management (the denominator focuses exclusively on income-generating resources).
This performance metric shows how effective a bank manages its investment decision (primarily with
respect to its credit portfolio) compared with its debt commitments. The lower the NIM denotes a bank
with a large volume of non earning or low yielding assets and, negative NIM means the bank is giving
more interest payment to its liabilities holder than its generating from its investments. High NIM refers
28
to a favorable low interest rate environment or is the result of the bank moving from safe but low yield,
low yield securities to higher risk, higher yield and lower liquid loans or investment securities.
NIM = (Investment returns – interest expenses) / Average earning on assets
3.4.3 Return on Equity
Net income is calculated above the average equity of the shareholders. The average price of the equity
of the shareholders implies that it is used to capture any variations in the equity value during fiscal
years, this ratio demonstrates the profitability of a financial institution by showing the proportion of
profit produced by the shareholder's contribution relative to the invested cash
ROE = Net operating income after taxes / Total (average) equity (common stock) for a given fiscal
year
3.4.4 Provision to Loan
The provision for the loss of payments is the provision for doubtful loans. Loss allowance is a reserve
account set separately by management to cover the loan portfolio's estimate of losses (charge offs). The
loan loss account has an opening balance at the beginning of the year, and it receives additional
provisions based on actual losses and anticipated losses for the coming year.
PTLR = Loan Losses Provisions / Total Loans
3.4.5 Cost to Income
Cost to revenue ratio is described as operating expenses (non-interest costs, which are administrative
and fixed costs) divided by operating revenue (net interest revenue and non-interest earnings). The ratio
29
does not include credit loss provision costs because these costs represent the quality of prior decision
and not the bank's present results.
CTI = Operating cost / Operating income
3.4.6 GDP Growth Rate
The growth rate of GDP measures the rapid development of the economy. As a macroeconomic factor,
it also impacts bank liquidity. The theory of bank liquidity stated that banks became optimistic when
the economy boomed and increased their long-term investment and decreased holding of liquid assets
while the opposite during the era of recession.
GGR = (GDP in current period - GDP in the previous period) / GDP in the previous period *
100
3.4.7 Inflation
Inflation is the rate at which the overall price level of products and services increases, resulting in
currency purchasing power falling. The repayment of loans is impacted due to the growing inflation
debts, and savings are discouraged as cash is worth more today than in subsequent periods, affecting
bank liquidity. The consumer price index is a consumer inflation metric that utilizes an index number
and tracks price modifications in a representative commodity and service basket.
ICPI = Consumer price index = Price of a basket of goods and services in the current period / Price
of the basket in the base period * 100
30
3.4.8 Unemployment
Unemployment occurs when, while actively searching for it, a person cannot find job. Often,
unemployment is used as a measure of the economy's health. An increase in the unemployment rate can
be converted into an rise in unsuccessful loans, thus decreasing bank liquidity.
UR = Unemployed / Labor Force
3.5 HYPOTHESES OF THE STUDY
The primary research hypothesis of this study is aimed at examining the significance and relationship
of bank specific and macroeconomic variables in explaining the liquidity of selected banks of Pakistan.
Bank specific factor includes the cost to income ratio, capital adequacy ratio, net interest margin, return
on equity, and provision to loan ratio. Macroeconomic factors include GDP growth rate, Inflation
consumer price index, and unemployment rate.
Capital adequacy ratio and bank liquidity
Author Year Proxies Effect

Malik & Rafique 2011 CAR = “Share of own capital on total Negative
assets of the bank”
L1 = “Cash and cash equivalents to total
assets”, L2 = “Advances net of provisions
to total assets”
Ahmed & Rasool 2017 CAR = “Shareholder’s equity to total Positive
assets”
L1 = “Liquid assets to total assets”
Akhtar, Ali & Sadaqat 2011 CAR = “Tier 1 Capital + Tier 2 Capital / Positive
Risk Weighted Assets“
L1 = “Cash to total asset“
31
Shah et al 2018 CAR = “Tier 1 capital“ Positive,
L1 = “Liquid asset to total asset“, L2 = Negative
“total loan to total deposit“
Singh & Sharma 2015 CAR = “capital adequacy ratio Tier I“ Positive
L1 = “Liquid asset to total asset“
H1= Capital adequacy has negative and significant impact on banks liquidity
Net interest margin and bank liquidity

Ghenimi & Omri 2015 NIM = “interest income to earning assets“ Positive
L1 = “liquid asset to total asset“
Obeid & Adeinat 2017 L1 = “Loan to total asset“ Positive
NIM = “difference between credit interest
rates (on loans) and debit interest rates
(on deposits) divided by total asset“.
Yuksel & Zengin 2017 NIM = “net interest income to total assets“ Positive
L1 = “Total loans to total assets“, L2 =
“Cash to total asset“
Chowdhury et al 2016 NIM = “Net interest income is divided by Positive

total asset“, L1 = “cash to total asset“, L2
= “loan to total asset“, L3 = “loan to
deposit“
Kalanidis 2016 NIM = “interest income to earning assets“, Positive
L1 = “Cash to total assets“, L2 = “net loan
to total assets“
H2= Net interest margin has positive and significant impact on banks liquidity
Return on equity and bank liquidity

Malik & Rafique 2013 ROE = “Share of net profit on banks’ own Negative,
capital“, L1. “Liquid asset total asset“, L2. Positive
“Advances to total asset “
32
Roman & Sargu 2013 ROAE = “Net Income / Avg Negative
Stockholders' Equity“, L1 = “total loan/
total banking asset“
Abdullah & Khan 2012 L1 = “Capital to total assets“, ROE = Negative
“Earnings available to common
stockholder to total equity“
Vodova 2011 ROE = “Share of net profit on banks´ Positive
equity“, L1 = “Loan to total asset“, L2 =
“Liquid assets to deposit“,
Kalanidis 2016 ROAE = “Net Income / Avg Stockholders' Negative,
Equity“, L1 = “Cash to total assets“, L2 = Negative
“net loan to total assets“
H3= Return on equity has negative and significant impact on banks liquidity
Cost to income and bank liquidity

Nazmoon Akhter 2018 CTI = “Operating income to operating Negative,
expense“, L1 = “Loan to total asset“, L2 = Negative
“Liquid assets to total deposit“
Khoury 2018 CTI = “Operating Expenses / Interest and Negative
Non Interest Income“
L1 = “Risk Weighted Assets/Total Assets“
H4= Cost to income has negative and significant impact on banks liquidity
Provision to loan and bank liquidity

Chaarani 2018 PL = “Loan provision to total loan“, L1 = Negative,
“Total loan to total assets“ , L2 = “Total Postive
loan to total deposit“
Sayedahmed 2018 PL = “Loan Loss Provision/Gross Loans“, Postive,
L1 = “liquid asset to short term liabilities“, Negative
33
L2 = “Loan to deposit“
Assfawa 2018 PL = “Loan losses provision to total loan“, Negative
L1 = “Liquid assets to customers’ deposit“,
L2 = “loan to customers’ deposit“
H5= Provision to Loan has Positive and significant impact on banks liquidity
GDP growth rate (GGR) and bank liquidity

Ahmed & Rasool 2017 GGR = “Annual growth rate of GDP“, L1 Positive
= “Liquid assets to total assets“
Ferrouhi & Lehadiri 2013 GGR = “Annual growth rate of GDP“, L1 Negative
= “Loan to total asset“, L2 = “Liquid assets
to total deposit“
Vodova 2011 GGR = “Annual growth rate of GDP“, L1 Negative
= “Loan to total asset“, L2 =“ Liquid assets
to deposit“,
Shah et al 2018 GGR = “Annual growth rate of GDP“ , Positive,
L1 = “Liquid asset to total asset“, L2 = Negative
“total loan to total deposit“
Choon et al 2013 GGR = “Annual growth rate of GDP“ , Negative
L1 = “liquid assets to deposits“, L2 =
“loans divide by total assets“
H6= GDP Growth rate has negative and significant impact on banks liquidity
Inflation (CPI) and bank liquidity

Ahmed & Rasool 2017 ICPI = “Consumer price index“, L1 = Positive
“Liquid assets to deposit“,
Sheefeni1 & Jacob M. 2016 ICPI = “Consumer price index“, L1 = Negative
Nyambe “Loan to total assets“
Malik & Rafique 2013 ICPI = “Consumer price index“, L1 Negative
“Advances to total asset“
Audo 2014 ICPI = “Consumer price index“ L1 = Negative
34
“Liquid assets to deposit“
H7= Inflation CPI has negative and significant impact on banks liquidity
Unemployment and bank liquidity

Singh & Sharma 2016 UR = “Unemployment rate“. L1 = “liquid Positive
asset to total asset“
Doris Madhi 2017 UR = “Unemployment rate“. L1 = “Loan Negative
to Asset“
Vodova 2013 UR = “Unemployment rate“. L1 = “Liquid Negative
asset deposit“
Ferrouhi & Lehadiri 2013 UR = “Unemployment rate“, L1 = “Loan Negative
to total asset“, L2 = “Liquid assets to total
deposit“
H8= Unemployment has negative and insignificant impact on banks liquidity
35
Summary of Independent variables and their expected effect on the dependent variables
Independent variables Proxies and Definition Expected effect
Capital Adequacy Ratio Risk Based Capital / Risked Weighted Negative

Assets
Net Interest Margin Investment returns –interest expenses) / Positive
Average earning on assets
Return on Equity Net operating income after taxes / Total Negative

(average) equity (common stock) for a
given fiscal year
Provision to Loan Loan Losses Provisions / Total Loans Negative
Cost to income Operating cost / Operating income Negative
GDP Growth Rate (GDP in current period GDP in the Negative

previous period) / GDP in the previous
period * 100
Inflation CPI Price of a basket of goods and services in Negative
the current period / Price of the basket in the
base period * 100
Unemployment Unemployed / Labor Force Negative
36
3.6 NATURE OF RESEARCH
This research work is quantitative and secondary in nature because in this valuable contribution focus
on banking firms operating in Pakistan and has found with published annual reports with financial
statement. These reports have found with valuable information and numeric information to support
nature of research selected for present work. In addition, secondary data has found more reliable and
authenticated as compare to primary data as it is based on well calculated and authenticated techniques
along with valid check before publication. Furthermore, secondary data has found an easy approach to
gather and consolidated to perform study within shorter period of time as compare to primary data. At
last, the nature of present work and selection of variables is more suited toward collection of secondary
information as compare to primary data hence based on all these justification selection of secondary
data has rationalized.
3.7 RESEARCH APPROACH
This work has adopted with explanatory research approach as concern of this research work is to
determine the influence of designated self-determining variables i.e. bank specific and macroeconomic
specific variables on determining variables i.e. LATTD and ATAA for conventional and Islamic
financial institutions in Pakistan. This approach has found valuable contribution to computer fringe
influence of apiece designated self-determining variables on determining variables respectively.
Furthermore, this approach has also found mostly favorable for financial data to explain and interpret
constructed models.
37
3.8 TARGETED POPULATION
Focused population of present work is based on banking firms operating in Pakistan in both
conventional and Islamic segment. It has reported that there are around 15 private financial institutions,
6 public sector financial institutions, 13 Islamic financial institutions of which 4 have only pure Islamic
banking operations. This represents targeted population of present work.
3.9 SAMPLING TECHNIQUE
This study has adopted with random sampling technique with pre condition of conventional and Islamic
banking operations. Random sampling technique has found with no biasness and ensure authenticity of
research study without personal preference.
3.10 SAMPLE SIZE
The size of approached elements for present work is based of 5 conventional financial institutions and 4
Islamic financial institutions with collection of data for period from 2009 to 2018. In addition,
macroeconomic data has also collection for same time period.
3.11 RESEARCH MODEL
Research Model of present work are as follow:
ATAA = η0 + η1 CTI + η2 CAR + η3 NIM + η4 ROE + η5 PTLR → eq. 1
LATTD = η0 + η1 CTI + η2 CAR + η3 NIM + η4 ROE + η5 PTLR → eq. 2
ATAA = η0 + η1 GGR + η2 ICPI + η3 UR → eq. 3
LATTD = η0 + η1 GGR + η2 ICPI + η3 UR → eq. 4
Where,
38
ATAA = Advances to Total Assets
LATTD = Liquid Assets to Total Deposits
CTI = Cost to Income
CAR = Capital Adequacy Ratio
NIM = Net Income Margin
ROE = Return on Equity
PTLR = Provision to Loan Ratio
GGR = GDP Growth Rate
ICPI = Inflation CPI
UR = Unemployment Rate
3.12 DATA INTEGRATION
This study has adopted with descriptive statistics and panel regression techniques for bank specific
models as collected information has both time series and cross sectional attributes. As cross section
attribute data has more than one banking institutions while as time series data has collected for more
than one year. Furthermore, macroeconomic specific model has applied ash multivariate regression
technique as determining variables are averaged for the industry i.e. conventional banking industry and
Islamic banking industry. In addition, different statistical techniques are applied to test for assumptions
of multi collinearity, autocorrelation and heteroscedasticity.
39
CHAPTER FOUR
DISCUSSION OF EXPERIMENTAL RESULTS
4.1 INTRODUCTION
This piece of investigation process with the application of selected statistical techniques on collected
secondary data, compiled in excel file, using statistical software i.e. E Views to get results and test
hypotheses. Furthermore, results are also interpreted to determine or identify significant or in
significant variables along with their marginal impacts.
4.2. DESCRIPTIVE STATISTICS
It is obvious from numeric outcomes mentioned below that mean number of CTI is 0.602 with standard
deviation of 0.203, min number of 0.263 and extreme number of 0.946. It is also obvious from numeric
outcomes mentioned below that mean number of CAR is 0.158 with standard deviation of 0.030, min
number of 0.103 and extreme number of 0.222. Furthermore, the mean number of PTLR is 0.049 with
standard deviation of 0.051, min number of 0.000 and extreme number of 0.175. Similarly, the mean
number of NIM is 0.038 with standard deviation of 0.012, min number of 0.022 and extreme number of
0.070. In addition, the mean number of ROE is 0.189 with standard deviation of 0.105, min number of
0.319 and extreme number of 0.393. However, the mean number of LATTD is 0.148 with standard
deviation of 0.040, min number of 0.072 and extreme number of 0.227. Furthermore, the mean number
of ATAS is 0.395 with standard deviation of 0.076, min number of 0.287 and extreme number of 0.588.
In continuation, the mean number of inflation is 8.27 with standard deviation of 4.05, min number of
2.53 and extreme number of 13.88. Similarly, the mean number of GDP growth rate is 0.60 with
40
standard deviation of 1.98, min number of 0.93 and extreme number of 6.15. Finally, the mean number
of unemployment is5.91 with standard deviation of 0.20, min number of 5.50 and extreme number of
6.10.
Table 4.0
Descriptive Statistics
Conventional ROE NIM CAR PLR CTI LATTD ATA
Mean 0.19 0.04 0.16 0.05 0.60 0.15 0.40

Standard Deviation 0.10 0.01 0.03 0.05 0.20 0.04 0.08
Minimum (0.32) 0.02 0.10 0.00 0.26 0.07 0.29
Maximum 0.39 0.07 0.22 0.17 0.95 0.23 0.59
Islamic ROE NIM CAR PLR CTI LATTD ATA
Mean 0.28 0.03 0.14 0.01 0.98 0.11 0.58

Standard Deviation 0.21 0.01 0.03 0.01 0.52 0.11 0.68
Minimum (0.10) 0.01 0.10 0.00 0.33 0.01 0.26
Maximum 0.74 0.05 0.26 0.05 3.64 0.78 4.70
Unemployment
Macroeconomics % Inflation (CPI) GDP Growth Rate
Rate
Mean 8.27 3.75 5.91
Standard Deviation 4.05 1.43 0.2
Minimum 2.53 0.4 5.5
Maximum 13.88 5.4 6.1
4.3 IMPACT OF BANK SPECIFIC FACTORS ON LIQUIDITY I.E. ATAA OF
CONVENTIONAL FINANCIAL INSTITUTIONS
4.3.1. Panel Regression Model 1
As data collected for conventional bank is panel in nature having both cross sectional and time series
aspects hence applied with panel regression technique. It is obvious from regression output, as
mentioned below, that overall research construct is acceptable at 5 percentage acceptability level with
41
acceptability number of 0.000. Furthermore, the number of F-statistics is also higher than 5 i.e. 8.34
that also supports the consideration of “Simple Panel Regression that is actually depicting the impact of
CTI, CAR, NIM, ROE and PTLR on ATAA. Furthermore, investigation reveals that coefficient
numbers of CAR and NIM are only significant at 5 percentage acceptability level with acceptability
number of 0.000 and 0000 respectively while coefficient numbers of CTI, ROE and PTLR are not
significant at even 10 percent level of acceptability with coefficient numbers of 0.653, 0.750 and 0.867
respectively. This model is now applied with basic assumption test of regression model to determine
that either this model those requirements or not. Those basic econometric assumption tests include test
for multi collinearity, heteroscedasticity and auto correlation.
Table 4.1
“Simple Panel Regression Model: 1

Determining Variable: ADV_TO_AGGREGATE_ASST
Method: Panel Least Squares
Sample: 2009 2018
Periods included: 10
Cross sections included: 5
Aggregate panel (balanced) “Simple Panel Regression Model 50
Variable Coefficient Std. Error t Statistic Prob.
CAR -2.063928 0.479274 -4.306359 0.0001
CTI 0.032176 0.071077 0.452693 0.6530
NIM 4.778875 0.908846 5.258177 0.0000
PTLR 0.052507 0.312472 0.168037 0.8673
ROE -0.029250 0.091507 -0.319644 0.7508
C 0.523081 0.084596 6.183287 0.0000
R squared 0.486764 Mean determining var 0.395200

Adjusted R squared 0.428442 S.D. determining var 0.076990
S.E. of regression 0.058206 Akaike info criterion -2.737496
Sum squared resid 0.149068 Schwarz criterion -2.508054
Log likelihood 74.43741 Hannan Quinn criter. -2.650123
F-statistic 8.346113 Durbin Watson stat 0.835379
42
Prob (F-statistic) 0.000013
4.3.2. Panel Regression Model 1 Multi Collinearity Test
Correlation matrix has used to determine the factor of multi collinearity within panel regression model
1 among different determining and self-determining variables. As general criteria for testing multi
collinearity is that if the number of correlation is higher than 0.95 than it reveals presence of multi
collinearity otherwise there is no serious issue pertaining to it. It is obvious from table, mentioned
below, that there is no serious element of multi collinearity among different variables as all correlation
numbers are below 0.95 hence reject the presence of multi collinearity within mentioned model.
Table 4.2
“Simple Panel Regression Model: 1 – Multi collinearity Test
ATAA CAR CTI NIM PTLR ROE
ATAA 1 -0.391 - 0.315 0.255 0.327 -0.121
CAR -0.391 1 0.608 0.561 -0.713 0.428
CTI -0.315 0.608 1 0.169 0.793 0.151
NIM 0.255 0.561 0.169 1 0.316 0.363
PTLR 0.327 -0.713 -0.793 -0.316 1 -0.332
ROE -0.121 0.428 0.151 0.363 -0.332 1
4.3.3. Panel Regression Model 1 Heteroscedasticity Test
In this part panel regression model 1 has applied with test for heteroscedasticity i.e. Koenker Bassett
(KB) test to determine the existence or non-existence of the phenomenon. In this model error term of
43
model is extracted along with fitted number from panel regression model 1 that has than applied with as
per basic requirement of KB test. The table 4.3 is the output of KB test based regression model.
In this step, coefficient number of square of fitted number is test with Wald test to determine that either
coefficient number is acceptability or not. It has found clearly from table 4.4 that coefficient number is
not significant at event 10 percent level of acceptability with acceptability number of 0.1693 as obvious
from chi square.
4.3.4. Panel Regression Model 1 Auto Correlation Test
Durbin Watson is commonly used test for auto correlation. It has already extracted in table 4.1. the
benchmark number is 2 for the test but in results as expressed in table 4.1 that number is less than 2 i.e.
0.835 hence depicts presence of serial correlation hence necessary to be applied with remedial methods
to overcome this factors to extracted model. White cross section correction in commonly used remedial
used to perform this requirement as already applied and mentioned below in table 4.5. It is obvious
from table that overall research construct is acceptable at 5 percentage acceptability level with
acceptability number of 0.000 with F-statistics number also higher than 5 i.e. 28.32 hence support the
consideration of auto correlation corrected model. Furthermore, coefficient numbers of CAR, NIM and
ROE are significant at 5 percentage acceptability level with acceptability numbers of 0.000, 0.000 and
0.001 respectively while coefficient numbers of CTI and PTLR are not significant at even 10 percent
level of acceptability with acceptability number of 0.304 and 0.235 respectively. It is also obvious from
numeric outcomes mentioned below that CAR determines negatively and ROE determines negatively
ATAA while NIM determines positively ATAA of conventional financial institutions operating in
Pakistan. Marginal impact of NIM is relatively superior followed by CAR and ROE.
44
4.4. IMPACT OF BANKING FACTORS ON LIQUIDITY I.E. LATTD OF CONVENTIONAL
FINANCIAL INSTITUTIONS
As data collected for conventional bank is panel in nature having both cross sectional and time series
aspects hence applied with panel regression technique. It is obvious from regression output, as
acceptability number of 0.014. Furthermore, the number of F-statistics is 3.23 that also support the
consideration of “Simple Panel Regression that is actually depicting the impact of CAR, CTI, NIM,
ROE and PTLR on LATTD. Furthermore, investigation reveals that coefficient numbers of CAR are
only significant at 5 percentage acceptability level with acceptability number of 0.00 while coefficient
number of CTI, PTLR, NIM and ROE are not significant at 5 percentage acceptability level with
acceptability number of 0.164, 0.102, 0.084 and 0.396 respectively hence not found with significant
impact on liquid assets to aggregate deposit.
CAR has found with negative impact on liquid assets to aggregate deposit with coefficient numbers of
1.08. This model is now applied with basic assumption test of regression model to determine that either
this model those requirements or not. Those basic econometric assumption tests include test for multi
collinearity, heteroscedasticity and auto correlation.
Table 4.6
Determining Variable: LATTD
Sample: 2009 2018
Aggregate panel (balanced) observations”: 50
45
CAR -1.087548 0.302560 -3.594487 0.0008
CTI 0.063445 0.044870 1.413974 0.1644
PTLR -0.328836 0.197260 -1.667025 0.1026
NIM 1.013253 0.573744 1.766038 0.0843
ROE 0.049450 0.057767 0.856033 0.3966
C 0.249963 0.053404 4.680576 0.0000

4.4.2. Panel Regression Model 2 Multi collinearity Test
Table 4.7
LATTD NIM PTLR ROE CAR CTI
LATTD 1 0.067 -0.220 0.0717 -0.1013 0.2204
NIM 0.0670 1 -0.3161 0.3638 0.5612 0.1697
46
PTLR -0.220 -0.3161 1 -0.3322 -0.7136 -0.7931
ROE 0.0717 0.3638 -0.3322 1 0.4288 0.1515
CAR -0.1013 0.5612 -0.7136 0.4288 1 0.6082
CTI 0.2204 0.1697 -0.7931 0.1515 0.6082 1
from chi square therefore reject element of heteroscedasticity.
Durbin Watson is commonly used test for auto correlation. It has already extracted in table 4.6. The
benchmark number is 2 for the test but in results as expressed in table 4.6 that number is less than 2 i.e.
0.73 hence depicts presence of serial correlation hence necessary to be applied remedial methods
overcome this factors to extracted model. White cross section correction in commonly used remedial
47
from numeric outcomes mentioned below that overall research construct is acceptable at 5 percentage
acceptability level with acceptability number of 0.000 with F-statistics number also higher than 5 i.e.
5.70 hence support the consideration of auto correlation corrected model. Furthermore, coefficient
numbers of CAR, PTLR and NIM are significant at 5 percentage acceptability level with acceptability
numbers of 0.001, 0.002, 0.000 and 0.018 respectively while coefficient numbers of CTI and ROE are
not significant at 5 percentage acceptability level with acceptability number of 0.0748 and 0.333
respectively. It is also obvious from numeric outcomes mentioned below that CAR and PTLR
determines negatively liquid assets to aggregate deposit ratio with coefficient number of 0.93 and 0.34
respectively while NIM determines liquid assets to aggregate deposit ratio positively with coefficient
number of 1.13.
4.5. IMPACT OF BANKING FACTORS ON LIQUIDITY I.E. ATAA OF ISLAMIC
As data collected for Islamic bank is panel in nature having both cross sectional and time series aspects
hence applied with panel regression technique. It is obvious from regression output, as mentioned
below, that overall model is not even significant at 10 percent level of acceptability with acceptability
number of 0.893. Furthermore, the number of F-statistics is also lower than 5 i.e. 0.325 that also does
not support the consideration of “Simple Panel Regression. This model is now applied with basic
assumption test of regression model. Those basic econometric assumption tests include test for multi
Table 4.11

Determining Variable: Advances to Aggregate Assets
48
Sample: 2009 2018
CAR -0.398267 3.819515 -0.104272 0.9176

CTI -0.068373 0.334726 -0.204266 0.8394
NIM -8.541360 17.43163 -0.489992 0.6273
PTLR -10.20723 13.72852 -0.743505 0.4623
ROE 0.066312 0.625934 0.105941 0.9163
C 1.040758 0.754042 1.380239 0.1765

Adjusted R squared -0.094626 S.D. determining var 0.676490
S.E. of regression 0.707774 Akaike info criterion 2.284096
Sum squared resid 17.03208 Schwarz criterion 2.537428
Log likelihood -39.68192 Hannan Quinn criter. 2.375693
Table 4.12
Advances to CAR CTI NIM PTLR ROE

Aggregate
Deposits
49
Advances to 1 -0.087 -0.085 -0.063 -0.186 0.035
Aggregate
Deposits
CAR -0.087 1 -0.138 0.396 0.142 -0.213
CTI -0.0854 -0.1388 1 -0.535 0.583 -0.0105
NIM -0.0638 0.396 -0.535 1 -0.1688 0.2279
PTLR -0.1861 0.1424 0.5831 -0.1688 1 -0.2191
ROE 0.0355 -0.213 -0.0105 0.2279 -0.2191 1
from chi square hence reject occurrence of heterokesdascity.
benchmark number is 2 for the test but in results as expressed in table 4.11 that number is higher than 2
i.e. 2.27 hence depicts presence of serial correlation therefore necessary to be applied remedial methods
to overcome this factors on extracted model. White cross section correction in commonly used remedial
50
used to perform this requirement as already applied and mentioned in table 4.15. It is obvious from
table that overall research construct is acceptable at 5 percentage acceptability level with acceptability
number of 0.008 hence support the consideration of auto correlation corrected model. The coefficient
number of PTLR and ROE are significant at 5 percentage acceptability level with acceptability number
of 0.0049 and 0.0296 respectively while coefficient number of CAR, CTI and NIM are not significant
at 5 percentage acceptability level with acceptability number of 0.555, 0.725 and 0.147 respectively.
Marginal impact of PTLR and ROE are negative 6.75 and positive 0.19 respectively.
4.6. IMPACT OF BANKING FACTORS ON LIQUIDITY I.E. LATTD OF ISLAMIC
As data collected for Islamic bank is panel in nature having both cross sectional and time series aspects
hence applied with panel regression technique. It is obvious from regression output, as mentioned
below, that overall model is not even significant at 10 percent level of acceptability with acceptability
number of 0.395. Furthermore, the number of F-statistics is also lower than 5 i.e. 1.068 that also does
not support the consideration of “Simple Panel Regression. This model is now applied with basic
assumption test of regression model. Those basic econometric assumption tests include test for multi
Table 4.16

Determining Variable: LATTD
Sample: 2009 2018
51
NIM 1.568342 2.764649 0.567284 0.5742
PTLR -0.588933 2.177337 -0.270483 0.7884
ROE 0.136238 0.099273 1.372363 0.1789
CTI 0.016311 0.053087 0.307241 0.7605
CAR 0.702111 0.605773 1.159033 0.2545
C -0.093328 0.119591 -0.780392 0.4406

numbers are below 0.95 hence reject the presence of *multi collinearity within mentioned model.
Table 4.12
Liquid Assets NIM PTLR ROE CTI Ratio CAR
to Aggregate
Deposit
Liquid Assets 1 0.2422 -0.0600 0.2480 -0.0599 0.1962
to Aggregate
Deposit
NIM 0.2422 1 -0.1688 0.2279 -0.5352 0.3967
52
PTLR -0.0600 -0.1688 1 -0.2191 0.5831 0.1424
ROE 0.2480 0.2279 -0.2191 1 -0.0105 -0.2134
CTI Ratio -0.0599 -0.5352 0.5831 -0.0105 1 -0.1388
CAR 0.1962 0.3967 0.1424 -0.2134 -0.1388 1
significant at 5 percentage acceptability level with acceptability number of 0.0099 as obvious from chi
square hence accept occurrence of heterokesdascity.
to overcome this factors on extracted model and also heterokesdascity. White cross section correction
in commonly used remedial used to perform this requirement as already applied and mentioned below
53
in table 4.20. It is obvious from table that overall model is not significant at 5 percentage acceptability
level with acceptability number of 0.44 hence does not support evidences in favor of the model.
4.7. IMPACT OF MACROECONOMIC SPECIFIC FACTORS ON LIQUIDITY I.E. ATAA OF
CONVENTIONAL FINANCIAL INSTITUTIONS
4.7.1. Regression Model 5
Industry average has taken for ATAA for conventional financial institutions and treated with
macroeconomic variables within the regression model. It is obvious from table, mentioned below, that
overall research construct is acceptable at 5 percentage acceptability level with acceptability number of
0.000 and also the number of F-statistics is also higher than 5 i.e. 303 that also support the
consideration of the model. Furthermore, inflation, GDP growth rate and unemployment rate are
significant at 5 percentage acceptability level with acceptability number of 0.000, 0.0058 and 0.000
respectively. GDP growth rate and unemployment have found negative impact on ATAA while
inflation has found positive impact on ATAA. The marginal impact of unemployment is relatively
higher than as compare to other macroeconomic indicator with coefficient number of 0.79.
Table 4.21
“Simple Regression Model 5 – Autocorrelation Corrected Model

Determining Variable: ATAA
Method: Least Squares
Sample: 2009 2018
included observations”: 10
GDP Growth -0.025320 0.006049 -4.185699 0.0058

Rate
Inflation CPI 0.054730 0.003382 16.18221 0.0000
Unemployment -0.794154 0.069779 -11.38104 0.0000
Rate
54
C 6.232209 0.428652 14.53908 0.0000

4.7.2. Regression Model 5 Multi Collinearity Test
Correlation matrix has used to determine the factor of multi collinearity on regression model 5 among
different determining and self-determining variables. As general criteria for testing multi collinearity is
that if the number of correlation is higher than 0.95 than it reveals presence of multi collinearity
otherwise there is no serious issue pertaining to it. It is obvious from table, mentioned below, that there
is no serious element of multi collinearity among different variables as all correlation numbers are
below 0.95 hence reject the presence of multi collinearity within mentioned model.
Table 4.22
Simple Regression Model 5 – Multi collinearity Test
ATAA GDP Growth Rate Inflation CPI Unemployment Rate
ATAA 1 0.3298 0.9214 -0.8407
GDP Growth Rate 0.3298 1 0.4111 -0.4152
Inflation CPI 0.9214 0.4111 1 -0.6072
Unemployment Rate -0.8407 -0.4152 -0.6072 1
4.7.3. Regression Model 5 Heteroscedasticity Test
In this part regression model 5 has applied with test for heteroscedasticity i.e. Koenker Bassett (KB)
test to determine the existence or non-existence of the phenomenon. In this model error term of model
55
is extracted along with fitted number from regression model 5 that has than applied with as per basic
requirement of KB test. The table 4.23 is the output of KB test based regression model.
coefficient number is acceptability or not. It has found clearly from table 4 that coefficient number is
not significant at 5 percentage acceptability level with acceptability number of 0.6579 as obvious from
chi square hence reject occurrence of heterokesdascity.
4.7.4. Regression Model 5 Auto Correlation Test
benchmark number is 2 for the test but in results as expressed in table 4.21 that number is lower than 2
to overcome this factors on extracted model and also heterokesdascity. White cross section correction
in commonly used remedial used to perform this requirement as already applied and mentioned below
in table 4.25. It is obvious from table that overall research construct is acceptable at 5 percentage
acceptability level with acceptability number of 0.000 hence support the consideration of auto
correlation corrected model. Furthermore, coefficient numbers of GDP growth rate, inflation and
unemployment are significant at 5 percentage acceptability level with acceptability number of 0.000,
0.000 and 0.000 respectively. Furthermore, coefficient numbers of GDP growth rate, inflation and
unemployment are 0.025, 0.05 and 0.79 respectively that means GDP growth rate and unemployment
determine ATAA negatively while inflation rate determines ATAA positively. Marginal impact of
unemployment is higher as compare to other variables.
56
4.8. IMPACT OF MACROECONOMIC SPECIFIC FACTORS ON LIQUIDITY I.E. LIQUID
ASSETS TO AGGREGATE DEPOSIT OF CONVENTIONAL FINANCIAL INSTITUTIONS
Industry average has taken for liquid assets to aggregate assets for conventional financial institutions
and treated with macroeconomic variables within the regression model. It is obvious from table,
acceptability number of 0.02 and also the number of F-statistics is also higher than 5 i.e. 6.64 that also
support the consideration of the model. Furthermore, inflation has only significant impact on liquid
assets to aggregate deposit at 5 percentage acceptability level with acceptability number of 0.01 and
coefficient number of 0.02. In contrast, unemployment and GDP growth rate have not found significant
impact on LATTD at even 10 percent level of acceptability. This has applied with further applied with
econometric assumption tests.
Table 4.26
“Simple Regression Model 6

Determining Variable: Liquid Asset to Aggregate Deposit
Sample: 2009 2018
included observations”: 10
GDP Growth -0.005599 0.010773 -0.519702 0.6219

Rate
Inflation CPI 0.021193 0.006023 3.518474 0.0125
Unemployment -0.021256 0.124272 -0.171041 0.8698
Rate
C 0.695645 0.763407 0.911237 0.3973

57
Table 4.27
Simple Regression Model 6 – Multi collinearity Test
LATTD GDP Growth Rate Inflation CPI Unemployment Rate
LATTD 1 0.3075 0.6931 -0.6126
GDP Growth Rate 0.3075 1 0.4111 -0.4152
Inflation CPI 0.6931 0.4111 1 -0.6072
Unemployment Rate -0.6126 -0.4152 -0.6072 1
4.8.3. Regression Model 6 Heteroscedasticity Test
requirement of KB test. The numeric outcomes mentioned below is the output of KB test based
regression model.
58
benchmark number is 2 for the test but in results as expressed in table 4.26 that number is lower than 2
table that overall research construct is acceptable at 5 percentage acceptability level with acceptability
number of 0.02 hence support the consideration of auto correlation corrected model. Furthermore,
coefficient numbers of GDP growth rate and inflation are significant at 5 percentage acceptability level
with acceptability number of 0.02 and 0.002 respectively. In contrast the number of coefficient
unemployment is not significant at even 10 percent level of acceptability with acceptability number of
0.75. Furthermore, coefficient numbers of GDP growth rate, and inflation are 0.0209 and 0.0028
respectively. Marginal impact of inflation has found higher than GDP growth rate.
59
4.9. IMPACT OF MACROECONOMIC SPECIFIC FACTORS ON LIQUIDITY I.E. ATAA OF
ISLAMIC FINANCIAL INSTITUTIONS
overall model is not significant at 5 percentage acceptability level with acceptability number of 0.601
and the number of F-statistics is also lower than 5 i.e. 0.668 that also support the consideration of the
model. This model has further applied with econometric test to determine presence or absence of
assumption based errors.
Table 4.31

Determining Variable: ATAA
Sample: 2009 2018
Included observations”: 10
GDP Growth 0.047047 0.285305 0.164901 0.8744

Rate
Inflation CPI -0.200723 0.159517 -1.258323 0.2550
Unemployment -0.685398 3.291121 -0.208257 0.8419
Rate
C 7.986127 20.21744 0.395012 0.7065

Log likelihood -15.71542 Hannan Quinn criter. 3.810310
60
Table 4.32
Regression Model 7 – Multi collinearity Test
ATAA GDP Growth Rate Inflation CPI Unemployment Rate
ATAA 1 -0.1307 -0.4890 0.2260
GDP Growth Rate -0.1307 1 0.4111 -0.4152
Inflation CPI -0.4890 0.4111 1 -0.6072
Unemployment Rate 0.2260 -0.4152 -0.6072 1
4.9.3 Regression Model 7 Heteroscedasticity Test
61
4.9.4 Regression Model 7 Auto Correlation Test
from table that overall is even not significant at even 10 percent level of acceptability.
4.10 IMPACT OF MACROECONOMIC SPECIFIC FACTORS ON LIQUIDITY I.E.
LIQUID ASSETS TO AGGREGATE DEPOSIT OF ISLAMIC FINANCIAL INSTITUTIONS
4.10.1 Regression Model 8
overall model is not significant at 5 percentage acceptability level with acceptability number of 0.92
and the number of F-statistics is also lower than 5 i.e. 0.14 that also support the consideration of the
model. This model has further applied with econometric test to determine presence or absence of
assumption based errors.
Table 4.36

Determining Variable: Liquid Asset to Aggregate Deposit
Sample: 2009 2018
Included observations”: 10
62
GDP Growth -0.015429 0.041202 -0.374467 0.7209
Rate
Inflation CPI 0.013212 0.023036 0.573529 0.5871
Unemployment 0.184762 0.475283 0.388740 0.7109
Rate
C -0.757604 2.919674 -0.259482 0.8039

4.10.2 Regression Model 8 Multi Collinearity Test
Table 4.37
Regression Model 8 – Multi collinearity Test
Liquid Asset To Aggregate GDP Growth Inflation Unemployment

Deposit Rate CPI Rate
Liquid Asset To Aggregate 1 -0.12855 0.10291 0.0899

Deposit
GDP Growth Rate -0.12855 1 0.41116 -0.41522
Inflation CPI 0.10291 0.41116 1 -0.6072
Unemployment Rate 0.08997 -0.41522 -0.60726 1
63
4.10.3 Regression Model 8 Heteroscedasticity Test
table that overall is even not significant at even 10 percent level of acceptability.
64
4.11. HYPOTHESIS SUMMARY
The summary of Hypotheses is as follow:
Sr. Description Sig. Comments

# Number
1 “There is a ѕignificant impаct CAR on ATAA for conventional 0.000 Hypotheses
financial institutions in Pakistan”. (-ve) Accepted
2 “There is a inѕignificant impаct CTI on ATAA for conventional 0.3040 Hypotheses
financial institutions in Pakistan”. (+ve) Rejected
3 “There is a ѕignificant impаct NIM on ATAA for conventional 0.000 Hypotheses
financial institutions in Pakistan”. (+ve) Accepted
4 “There is a inѕignificant impаct PTLR on ATAA for conventional 0.2358 Hypotheses
5 “There is a ѕignificant impаct ROE on ATAA for conventional 0.0000 Hypotheses
6 “There is a ѕignificant impаct CAR on LATTD for conventional 0.0010 Hypotheses
7 “There is a inѕignificant impаct CTI on LATTD for conventional 0.0748 Hypotheses
8 “There is a ѕignificant impаct PTLR on LATTD for conventional 0.0211 Hypotheses
9 “There is a ѕignificant impаct NIM on LATTD for conventional 0.0185 Hypotheses
10 “There is a inѕignificant impаct ROE on LATTD for conventional 0.3330 Hypotheses
11 “There is a inѕignificant impаct CAR on ATAA for Islamic financial 0.5556 Hypotheses
institutions in Pakistan”. (-ve) Rejected
12 “There is a inѕignificant impаct CTI on ATAA for Islamic financial 0.7250 Hypotheses
13 “There is a inѕignificant impаct NIM on ATAA for Islamic financial 0.1472 Hypotheses
65
14 “There is a ѕignificant impаct PTLR on ATAA for Islamic financial 0.0049 Hypotheses
institutions in Pakistan”. (-ve) Accepted
15 “There is a ѕignificant impаct ROE on ATAA for Islamic financial 0.0296 Hypotheses
institutions in Pakistan”. (+ve) Accepted
16 “There is a insignificant impаct CAR on LATTD for Islamic financial 0.5853 Hypotheses
institutions in Pakistan”. (+ve) Rejected
17 “There is a ѕignificant impаct CTI on LATTD for Islamic financial 0.0471 Hypotheses
institutions in Pakistan”. (+ve) Accepted
18 “There is a insignificant impаct PTLR on LATTD for Islamic 0.9598 Hypotheses
financial institutions in Pakistan”. (-ve) Rejected
19 “There is a insignificant impаct NIM on LATTD for Islamic financial 0.7418 Hypotheses
20 “There is a inѕignificant impаct ROE on LATTD for Islamic financial 0.7181 Hypotheses
21 “There is a ѕignificant impаct GDP growth rate on ATAA for 0.0000 Hypotheses
conventional financial institutions in Pakistan”. (-ve) Accepted
22 “There is a ѕignificant impаct CPI on ATAA for conventional 0.0000 Hypotheses
23 “There is a ѕignificant impаct unemployment rate on ATAA for 0.000 Hypotheses
24 “There is a ѕignificant impаct GDP growth rate on LATTD for 0.0209 Hypotheses
25 “There is a ѕignificant impаct CPI on LATTD for conventional 0.0028 Hypotheses
26 “There is a insignificant impаct unemployment rate on LATTD for 0.7593 Hypotheses
Conventional financial institutions in Pakistan”. (-ve) Rejected
27 “There is a insignificant impаct GDP growth rate on ATAA for 0.1598 Hypotheses
Islamic financial institutions in Pakistan”. (+ve) Rejected
28 “There is a inѕignificant impаct CPI on ATAA for Islamic financial 0.0867 Hypotheses
66
29 “There is a insignificant impаct unemployment rate on ATAA for 0.1442 Hypotheses
Islamic financial institutions in Pakistan”. (-ve) Rejected
30 “There is a insignificant impаct GDP growth rate on LATTD for 0.0744 Hypotheses
Islamic financial institutions in Pakistan”. (-ve) Rejected
31 “There is a insignificant impаct CPI on LATTD for Islamic financial 0.4500 Hypotheses
32 “There is a insignificant impаct unemployment rate on LATTD for 0.648 Hypotheses
Islamic financial institutions in Pakistan”. (+ve) Rejected
67
CHAPTER FIVE
DISCUSSION, CONCLUSION & RECOMMENDATION
This chapter of research study discuss findings of current study in light of previously conducted studies
to justify findings and summarize results that are used to design recommendation based on findings.
5.1. DISCUSSION
5.1.1 Regression Model 1 & 3 – Impact of Banking Factors on Advances to Total Assets
It is evident from current study that there is significant role of capital adequacy ratio, net interest
margin and return on equity in determination of advances to total assets of listed conventional banking
firms in Pakistan while in case of Islamic it has found with no impact hence reveals deviation in
structural constructs as per regression model three. It has also found from first model that there is a
negative impact of capital adequacy ratio in determination of conventional banking firm’s liquidity in
term of advances to total assets an increase in capital adequacy ratio results in betterment in financial
condition of the conventional banking firm therefore increase stakeholder’s confidence on performance
of the conventional banking firm. Hence report with an increase in level of advances to total assets that
is supportive to banking firm’s business capability. Zuk-Butkuviene et al (2014) revealed through a
study that there is a significant correlation between liquidity management practices and capital
adequacy ratio for banking firms in a country that ensure sound foundation for the banking firms along
with betterment in level of competitiveness. It also results in decline in financial cost and improvement
in level of growth of the firm.
Capital adequacy ratio has determined as a cushion toward possible risks to the firm hence an increase
in risk to bank’s operation results in regulatory call to raise CAR therefore reduce possibilities for the
firm to increase in advances of the bank with respect to total assets. Hence a decline in CAR is an
68
indication of betterment in financial position of banking firm therefore reports with an increase in level
of idle funds. This raise the option for the bank to increase the volume of advances and absorb excess
liquidity (Nyaundi, 2015). Another study also revealed that there is an inverse correlation between
CAR and bank liquidity position therefore bank is requiring with quality lending practices to ensure to
confront with low level of CAR that increases the options for the bank to raise level of advances to
increase the business. A decline CAR observed with stability and betterment in financial status of the
banking industry with an increase in level of confidence of stakeholders on bank’s overall performance.
It has considered as positive sign for long term growth of the banking institution (Shah Et. Al, 2018).
Similarly, net interest margin reflects conventional banking firm’s earning capacity and determines
positively conventional banking firm’s advances to total assets while in case of Islamic banks has found
with no impact du rot structural differences as per regression model three. Hence an increase in
conventional banking firm’s earning capacity reveals with an increase in net interest margin. It reports
with an increase in advances therefore results in an increase in advances to total assets. It shows an
improvement in conventional banking firm’s performance. Net interest margin has also found as an
essential variable to determine the performance of banking firms in a country. It actually shows earning
capacity of the firm, interest earning minus interest expenses, with its business returns. An increase in
level of net interest margin observe with increase in level of profitability to the firm hence result in its
positive impact on banking firm’s with a positive sign of better market conditions. This observe with a
raise in advances to total assets for banking institutions (Obeid & Adeinat, 2017).
Net interest margin shows bank’s net income level in comparison to its assets holding in the form of
cash and other reserves. It is also in comparison to trading in securities. It has also found through study
that bank usually compensate their funding cost with alternative less risky investment opportunities
hence an increase or improvement in business opportunities for banking firms observed with betterment
69
in bank’s business level therefore observer with an increase in advances level relative to total assets
holdings (Yuksel & Zengin, 2017). Furthermore, another study revealed that there is significant role of
improvement in net interest margin of the firm with its operational efficiency therefore observe with an
increase in level of operational efficiency in the form of betterment in net interest margin report with
increase in advances to total assets of the firm to contribute in its earning capacity (Kalanidis, 2016).
Furthermore, an increase in firm’s return on equity reports with decrease in firm’s advances to total
assets i.e. negative association in case of conventional banks and Islamic bank. An increase in
conventional banking firm’s return on equity is an evidence of an increase in earnings of the
bank with respect to equity invested but due to market condition it raise a concern with respect to
economic condition of the country toward probable return on funded hence report with relatively lower
level of growth in advances but reports with an increase in alternative channels of investment
specifically T-bills and other short term instrument to diversify earning possibility for the bank. It has
also found through conducted research studies that return on equity is a key measure to determine level
of performance of the firm hence betterment in return on equity of financial institution is in an
indication of better allocation of fund but in developing countries due to unstable financial market and
varying day to day condition an increase in return on equity also determined as possible level of excess
lending and adverse practice therefore observe with reduction in level of advance and selection of
alternative investment options hence report with decline in level of advances to total assets to diversify
portfolio (Hargrave, 2019).
Return on equity also found as a regulatory variable to determine rational level of performance hence it
has sometime used to determine investment composition for banking firms hence an indication of raise
in advances with an increase in return on equity therefore banking firms usually opt with alternative
investment options to diversify portfolio (Choon et al, 2013). Furthermore, another study revealed that
70
stable banking operations observe with diversified investment hence an increase in return on equity is
usually optimized with investment on safe venture specifically government instrument to ensure
optimum level of returns to the banking firms (Kalanidis, 2016).
It has observed in case of Islamic banks that there is significant and negative correlation of provision to
loan ratio to advances to totals assets as per regression model three while in case of conventional banks
has found with no significant evidence as per regression model 1. Provision to loan ratio has also found
with increase in liquidity position as funds are allocated to ensure deficiency of funds in case of bad
loans. It has observed that an increase in funds level usually observed with an increase in liquidity
position with raise in advancing along with allocation of funds for probable bad loans in the form of
provisioning. It has also revealed through a stud that there is a positive correlation of provision to loan
ratio to banking firm’s liquidity position. Firm usually in case of availability of deposit funds and in
response of suitable response level of the market extend with lending that is than used to increase
earning opportunities. It has supported with regulatory allocation of provisioning for advances hence
observe with an increase in level of provision to loan ratio (Pritchard, 2019). Another study also
revealed that an increase in level of advance observe with an increase in probability of non-performing
loan therefore observe with an increase in level of provision to loan ratio this results in an increase in
efforts to raise deposits hence evident with an increase in position of liquidity of the bank to overcome
probable unexpected event (Khoury, 2018).
5.1.2 Regression Model 2 & 4 - Impact of Banking Factors on Liquid Assets to Total Deposits
Capital adequacy ratio has found negative correlation to liquid assets to total deposits of conventional
banking firms in Pakistan as per regression model 2. It reveals that an increase in CAR observed with
decline in retention of liquid assets to apply with an increase in advances relatively to compensate
71
earning capacity of conventional banking firms while in case of Islamic banks there is no such
correlation as per model 4. It has revealed through previously conducted study that sound capital
adequacy management observed with better and efficient liquidity management practices results in
competitiveness of firm which results improved lending hence less required with management of liquid
assets. It may enhance the bank’s competitiveness, decreasing its financial costs and increasing the
worth. Global financial crisis has exposed the necessity to further improve liquidity risk management
and capital adequacy, governance and to enhance the transparency of the operations of financial
institutions (Butkuviene et. Al, 2014). Furthermore, another study also revealed that banks are also
subjected to variety of risk factors Hence banking firm’s capital is used primarily for compensation the
losses that may incur, therefore the management of capital adequacy risk of banks must be given
particular attention and alternative to liquid assets management. Accordingly, the accrued reserves
cushion of liquid assets must be sufficient to absorb the adverse liquidity shocks, banks may reduce the
risks to compliance with the capital adequacy and liquidity requirements, perform in a safer manner,
and strengthens confidence in banks and the entire financial system (Hargrave, 2019).
Furthermore, provision to loan ratio has also found with negative impact on liquid assets to total
deposits for conventional banks as per regression model 2 while in case of Islamic banks has not
observed with significant impact due to difference in structure as per regression model 4. An increase in
provision to loan ratio observed with lesser availability of funds and negative impact on firm’s
performance hence found with lesser availability of liquid fund. It results in decline in liquid assets to
total deposits. It has also revealed through previously conducted studies that a loan loss provision is an
expense set aside doubtful uncollected loans and loan payments. Loans and advances, loan loss
provisions and non-performing loans are major variables in determining asset quality of a bank and
banks are more worried because loans are generally among the riskiest of all assets and can therefore be
72
endangered their liquidity position and lead to distress (Abata, 2014). Roman and Sargu (2014) studied
in Romanian and Bulgarian banks revealed that impaired loans play a key role in the manner banks
manage their liquidity and there is a significant connection exist between liquidity indicator and
impaired loan to gross loan ratio, in order to reduce to liquidity risk banks must avoid an increase of the
impaired loan.
Net interest margin has observed with positive correlation to liquid assets to total deposits for
conventional banks while in case of Islamic banks has not observed with no such relationship as
Islamic banks are based on profit loss sharing model therefore not subject to it. It has revealed through
study that there is a positive relationship between liquidity risk and Net Interest Margin, which in
contrary indicated that banks with high levels of illiquid assets, may receive higher income through
interest than more liquid banks (Kalanidis, 2016).
Cost to income has found positive correlation with liquid assets to total deposit. An increase in cost to
income of the banking reflects increase in operational level therefore shows increase in funds utilization
hence observed with increase in level of liquid assets to total deposits. Furthermore, raise in cost to
income is an indication of raise in cost of deposit mobilization hence observed with decline in liquid
assets to total deposits. It has also revealed through studies that an increase in operational expense is an
indication of raise in cost structure of the firm therefore observed with an increase in cost to income
ratio of the firm. In contrast, a decline in cost to income ratio is an indication of improvement in
performance level along with betterment in efficiency. This shows increase in availability of funds with
raise in liquidity position (Chowdhury et. Al, 2016)
73
5.1.3 Regression Model 5 & 7 - Impact of Macro Economic Factors on Advances to Total Assets
GDP growth rate has found with negative correlation to conventional banking firm’s liquidity position
as observed with advances to total assets as per regression model 5 while in case of Islamic banks no
such relationship found significant as per regression model 7 because majorly financial sector of the
economy is dominated by conventional banking structure. An improvement in GDP growth rate of the
country observe with positive condition and environment for financing hence results in increase in both
private and public sector financing hence observed with an increase in secured financing i.e. public
sector financing therefore results in decline in advances to total assets. It has revealed through a study
that GDP growth has significant role in determination banking firm’s performance with availability of
funds to the industry hence an improvement in bank’s overall health with betterment in its financial
status result in improvement in level of financing with alternative options to diversify risk (Choon et al,
2013)
It has also observed through regression model 5 that there is a positive correlation of CPI to advances to
total assets for conventional banks because an increase in inflation observed with higher financing need
due to lower purchasing power of currency while in case of Islamic banks it has not observed during to
lower percentage share of the Islamic banking firms within financial sector in Pakistan. Inflation is a
critical to an economy and an increase in level of inflation observe with an increase in cost of financing
that observe with a required level of increase in liquidity risk to overcome the probable risk of any
possible impact of bad loans It has observed through previously conducted studies that there is a
negative correlation of inflation level of a country to its financial sector performance. Usually banks
with decline in economic conditions and increase in inflation level therefore observed with a raise in
liquidity position of the bank hence in case of developing countries it has observed that there is a
sensitive association of Inflation with liquidity of banking institutions (Chen, 2019).
74
Unemployment has found with negative correlation of bank’s liquidity position as per regression model
5 because an increase in unemployment observe with decline in business activities and cash holdings at
banks therefore observed with relative increase in ratio due to nature of advances and withdrawal of
deposit to meet their short term need from their deposits. While in case of Islamic banks it has not
observed during to lower percentage share of the Islamic banking firms within financial sector in
Pakistan. It has found that an increase in level of unemployment observer with a decline in liquidity
position due to utilization of available level of funds hence banking institution are observed with an
improvement in business level with a decline in level of unemployment that results in increase in better
allocation of found with lesser requirement of excess for unexpected events. Trenca et. al (2015)
revealed through a study that there is a negative correlation of unemployment level to firm’s level of
liquidity position hence banking institution are found with increased level of lending with a better
condition of economic setup of developing countries. Singh & Sharma (2016) also revealed through
study that there is negative correlation of unemployment level in a country to liquidity practices of
banking firms in developing countries.
5.1.4 Regression Model 6 & 8 - Impact of Macro Economic Factors on Liquid Assets to Total
Deposits
It is clearly evident from regression model 6 that there is a significant and positive impact of GDP
growth rate on liquid assets to total deposits of conventional banking firms while in case of Islamic
banks it has not observed during to lower percentage share of the Islamic banking firms within financial
sector in Pakistan as per regression model 8. It has observed that an increase in GDP growth rate results
with increase in business activities and circulation of money hence observed with an increase in lending
activities of banks therefore required with management of liquid assets to meet short term obligations.
75
Furthermore, it has also found form regression model 6 there is negative and significant impact of
inflation on liquidity management practices of conventional banks in Pakistan while in case of Islamic
banks it has not observed during to lower percentage share of the Islamic banking firms within financial
sector in Pakistan. It has found that an increase in inflation observe with decline in purchasing value of
money hence results in decrease in savings of household sector. It results in decline in cash holding
therefore observed with reduction in liquid assets to total deposits.
5.2. CONCLUSION
This study has conducted with an objective to determine the impact of bank specific factors and
macroeconomic factor on banking industry operating in Pakistan. In this study explanatory research
approach has adopted using quantitative approach with utilization of secondary data collected from
annual reports of listed firms in banking industry including both Islamic and conventional banks in
Pakistan. Data is collected for 10 years from 2009 to 2018 and constructed model are applied with
panel regression techniques using Eviews.
It has overall found from this study there is different behavior of both conventional banks and Islamic
banks in response of banking and macroeconomic factor due to uneven market share. It has evident
from this study that there is significant impact of CAR, net interest margin and return on equity on
advances to total assets of conventional banks in Pakistan. Similarly, there is also significant impact of
CAR, provision to loan ratio and net interest margin on liquid assets to total deposit for conventional
banks in Pakistan. In addition, for Islamic banks there is significant impact of provision to loan and
return on equity on advances to total assets of commercial banks while there is significant impact of
cost to income on liquid assets to total deposit for Islamic banks in Pakistan. Furthermore, there is a
significant impact of GDP growth rate, CPI and unemployment rate on advances to total assets for
76
conventional banks. Similarly, there is also significant impact of GDP growth rate and CPI on liquid
assets to total deposits also for conventional banks in Pakistan while in case of Islamic banks there is no
such impact.
5.3. RECOMMENDATIONS
The list of recommendations designed based on current study are as follow:
• It is required to both conventional and Islamic banks ensure quality lending practices to
optimize return on advances with its lesser impact on liquidity of banking institution. It can be
done through proper risk assessment and employment of standard procedures as per defined by
banking firms at filed level.
• It is also required to banks to make sure dynamic utilization of deposits with maximum
utilization of depositor’s funds with diversified investment structure and its positive impact on
profitability and liquidity of banking firm.
• It is also needed to diversify product structure with attraction of untouched segments to increase
return and interest income to bank with its positive impact on profitability or income level of the
bank.
77
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System Liquidity. Procedia Economic and Finance. 32, 1170-1177.
43. Vaidya, wallstreetmojo.com, https://www.wallstreetmojo.com/net-interest-margin-formula-

nim/
44. Vodova, (2011), Determinants of Commercial Banks' Liquidity in the Czech Republic,
Journal of Mathematical Models and Methods in Applied Sciences, 5, 1060-1067.
45. Vodova, (2013) Determinants of Commercial Bank Liquidity in Hungary. Financial

Internet Quarterly “e-Finance”, 9, 64-71.
46. Yuksel and Zengin, (2017), Influencing factors of net interest margin in Turkish banking
sector, international journal of economics and financial issues, 7(1), 178-191.
47. Žuk-Butkuvienė, Vaitulevičienė and Staroselskaja, (2014) Capital adequacy (solvency) and
liquidity risk management: analysis, evaluation, and possibilities for improvement,
Ekonomika vol. 93(2) Pg.
81
Appendices
Model 1: Impact of Bank Specific Factors on Liquidity i.e. ATAA of Conventional Financial Institutions
• 4.3 : Heteroscedasticity Test

• 4.4 : Wald Test
• 4.5 : Auto Correlation Test
Model 2: Impact of Banking Factors on Liquidity i.e. LATTD of Conventional Financial Institutions

• 4.9 : Wald Test
Model 3: Impact of Banking Factors on Liquidity i.e. ATAA of Islamic Financial institutions

• 4.14 : Wald Test
Model 4: Impact of Banking Factors on Liquidity i.e. LATTD of Islamic Financial institutions

Model 5: Impact of Macroeconomic Specific Factors on Liquidity i.e. ATAA of Conventional

Model 6: Impact of Macroeconomic Specific Factors on Liquidity I.e. LATTD Conventional Financial
institutions

Model 7: Impact of Macroeconomic Specific Factors on Liquidity i.e. ATAA of Islamic Financial institutions

Model 8: Impact of Macroeconomic Specific Factors on Liquidity I.e. LATTD of Islamic Financial institutions

82
Banking Data
Macroeconomic Data
83
Table 4.3
Simple-Panel-Regression-Model: 1 – Heteroscedasticity Test

Dependent Variable: Square of Residual of Model 1
Sample: 2009 2018
Periods-included: 10
Cross-sections-included: 5
Total panel (balanced) observations: 50
Variable Coefficient Std. Error t-Statistic Prob.
Fitted Value of Advances to Total

Assets -0.023288 0.016687 -1.395611 0.1693
C 0.006684 0.002750 2.430419 0.0189
Mean dependent
R-squared 0.038995 Var. 0.002981
S.D. dependent
Adjusted-R-squared 0.018974 Var. 0.005167
Akaike-info-
S.E.-of-regression 0.005118 criterion -7.672882
Sum-squared-resid 0.001257 Schwarz-criterion -7.596401
Hannan-Quinn
Log-likelihood 193.8220 criter -7.643757
F-statistic 1.947730 Durbin-Watson-stat 1.353020
Prob-(F-statistic) 0.169255
Table 4.4
Simple-Panel-Regression-Model: 1 – Wald Test

Wald Test:
Equation: EQ02_ATTA
Test Value df Probability

Statistic
t-statistic -1.395611 48 0.1693
F-statistic 1.947730 (1, 48) 0.1693
Chi-square 1.947730 1 0.1628
Null Hypothesis: C(1)=0

Null Hypothesis Summary:
Normalized
Restriction (= 0) Value Std. Err.
84
C(1)
-0.023288 0.016687
Restrictions are linear in coefficients.
Table 4.5
Simple-Panel-Regression-Model: 1 – Autocorrelation Corrected Model

Dependent Variable: Advances to Total Assets
Method: Panel EGLS (Cross-section SUR)
Sample: 2009 2018
linear estimation after one-step weighting matrix
White cross-section standard errors & covariance (no d.f. correction)

Capital Adequacy
Ratio -2.051088 0.097901 -20.95061 0.0000
Cost to Income 0.013804 0.013274 1.039983 0.3040
Net Interest
Margin 5.052030 0.699950 7.217696 0.0000
Provision to Loan
Ratio 0.092115 0.076631 1.202065 0.2358
Return on Equity -0.054458 0.015665 -3.476342 0.0012
C 0.523376 0.014807 35.34571 0.0000
Weighted Statistics
R-squared 0.762953 Mean dependent var 6.637437

Adjusted-R-squared 0.736016 S.D. dependent var 5.308838
S.E.-of-regression 1.031637 Sum-squared-resid 46.82808
Unweighted Statistics

Sum-squared-resid. 0.150943 Durbin-Watson-stat 0.846040
Table 4.8

85
Sample: 2009 2018
Fitted Value of Square of Liquid

Assets to Total Deposits -0.014913 0.034909 -0.427211 0.6711
C 0.001523 0.000814 1.870512 0.0675
Mean dependent
R-squared 0.003788 var 0.001188
Adjusted-R-squared -0.016967 S.D. dependent var 0.001541
Akaike-info-
Hannan-Quinn-
Log-likelihood 253.4142 criter. -10.02744
Table 4.9

Wald Test:
Equation: Untitled

Statistic
t-statistic -0.427211 48 0.6711
F-statistic 0.182509 (1, 48) 0.6711
Chi-square 0.182509 1 0.6692

Normalized
C(1) -0.014913 0.034909
Table 4.10

Dependent Variable: Liquid Assets to Total Deposits
Method: Panel EGLS (Cross-section weights)
Sample: 2009 2018
86
White diagonal standard errors & covariance (no d.f. correction)

Capital Adequacy
Ratio -0.936760 0.264588 -3.540452 0.0010
Cost to Income 0.056030 0.030703 1.824888 0.0748
Provision to Loan
Ratio -0.348440 0.145676 -2.391882 0.0211
Net Interest
Margin 1.138268 0.465500 2.445257 0.0185
Return on Equity 0.032577 0.033281 0.978853 0.3330
C 0.231965 0.045660 5.080267 0.0000
Weighted Statistics


Table 4.13

Sample: 2009 2018

Fitted Value of Advances to Total
Deposit 3.173786 2.713988 1.169418 0.2495
C -0.693745 1.035143 -0.670192 0.5068
87
Mean dependent
R-squared 0.034738 var 0.425802
Akaike-info-
S.E.-of-regression 2.489932 criterion 4.711095
Sum-squared-resid 235.5910 Schwarz-criterion 4.795539
Hannan-Quinn-
Log-likelihood -92.22190 criter. 4.741627
Table 4.14

Wald Test:
Equation: EQ02_ATTD

Statistic
t-statistic 1.169418 38 0.2495
F-statistic 1.367538 (1, 38) 0.2495
Chi-square 1.367538 1 0.2422

Normalized
C(1) 3.173786 2.713988
Table 4.15

Dependent Variable: Advances to Total Deposits
Method: Panel EGLS (Cross-section SUR)
Sample: 2009 2018

Capital Adequacy -0.345223 0.579940 -0.595274 0.5556
88
Ratio
Cost to Income -0.011188 0.031537 -0.354768 0.7250
Net Interest
Margin -1.761959 1.187764 -1.483426 0.1472
Provision to Loan
Ratio -6.754756 2.243663 -3.010593 0.0049
Return on Equity 0.194617 0.085673 2.271634 0.0296
C 0.622534 0.093750 6.640399 0.0000
Weighted Statistics


Table 4.18

Dependent Variable: Square of Residual of Liquid Assets to Total Deposits
Sample: 2009 2018

Fitted Value Square of Liquid
Assets to Total Deposits 2.114420 0.778910 2.714589 0.0099
C -0.017738 0.013160 -1.347893 0.1857
Mean dependent
R-squared 0.162424 var 0.010711
Akaike-info-
Hannan-Quinn-
Log-likelihood 63.82725 criter. -3.060830
89
Table 4.19

Wald Test:
Equation: Untitled

Statistic
t-statistic 2.714589 38 0.0099
F-statistic 7.368991 (1, 38) 0.0099
Chi-square 7.368991 1 0.0066

Normalized
C(1) 2.114420 0.778910
Table 4.20

Dependent Variable: Liquid Assets to Total Deposits
Method: Panel EGLS (Cross-section weights)
Sample: 2009 2018

Net Interest
Margin -0.232663 0.699746 -0.332496 0.7418
Provision to 0.016538 0.325449 0.050815 0.9598
90
Loans Ratio
Return on Equity -0.025850 0.070963 -0.364274 0.7181
Cost to Income
Ratio -0.021719 0.010505 -2.067550 0.0471
Capital Adequacy
Ratio 0.099270 0.180040 0.551380 0.5853
C 0.130069 0.047661 2.729037 0.0104
Effects Specification
Cross-section fixed (dummy variables)
Weighted Statistics


Table 4.23

Dependent Variable: Residual Square of Advances to Total Assets
Sample: 2009 2018
Included observations: 10

Fitted Value Square of Advances -0.000149 0.000337 -0.442856 0.6696
to Total Assets
C 0.001207 0.001417 0.851602 0.4192
0.023929 Mean dependent 0.000610
R-squared var
0.001382 Akaike-info- -10.15369
S.E.-of-regression criterion
Sum-squared-resid 1.53E-05 Schwarz-criterion -10.09317
Log-likelihood 52.76844 Hannan-Quinn- -10.22007
91
criter.
Table 4.24

Wald Test:
Equation: Untitled

Statistic
t-statistic -0.442856 8 0.6696
F-statistic 0.196121 (1, 8) 0.6696
Chi-square 0.196121 1 0.6579

Normalized
C(1) -0.000149 0.000337
Table 4.25

Sample: 2009 2018
HAC standard errors & covariance (Bartlett kernel, Newey-West fixed
bandwidth = 3.0000)

GDP Growth Rate -0.025320 0.001760 -14.38931 0.0000
Inflation CPI 0.054730 0.003274 16.71665 0.0000
Unemployment -0.794154 0.088096 -9.014632 0.0001
Rate
92
C 6.232209 0.536132 11.62440 0.0000

S.E.-of-regression 0.031884 Akaike-info-criterion -3.764226
Log-likelihood 22.82113 Hannan-Quinn-criter. -3.897000
Prob-(F-statistic) 0.000001 Wald F-statistic 10041.10
Prob(Wald F-statistic) 0.000000 Mean dependent var 1.975880
Table 4.28

Dependent Variable: Square of Residual of liquid Assets to Total Assets
Sample: 2009 2018

Fitted Value Square of Liquid -0.006500 0.010602 -0.613127 0.5568
Assets to Total Deposits
C 0.005554 0.006037 0.919922 0.3845
Mean dependent 0.001935
R-squared 0.044882 var
0.004009 Akaike-info- -8.023771
S.E.-of-regression criterion
Hannan-Quinn- -8.090158
Log-likelihood 42.11886 criter.
Table 4.29

Wald Test:
Equation: Untitled

Statistic
t-statistic -0.613127 8 0.5568
F-statistic 0.375925 (1, 8) 0.5568
Chi-square 0.375925 1 0.5398
93
Normalized
C(1) -0.006500 0.010602
Table 4.30

Dependent Variable: Liquid Asset to Total Deposit
Sample: 2009 2018
HAC standard errors & covariance (Bartlett kernel, Newey-West fixed
bandwidth = 3.0000)

GDP Growth Rate -0.005599 0.001802 -3.106938 0.0209
Inflation CPI 0.021193 0.004353 4.868841 0.0028
Unemployment -0.021256 0.066282 -0.320684 0.7593
Rate
C 0.695645 0.413695 1.681541 0.1437

S.E.-of-regression 0.056784 Akaike-info-criterion -2.609934
Log-likelihood 17.04967 Hannan-Quinn-criter. -2.742708
Prob(Wald F-statistic) 0.000151 Mean dependent var 0.741823
Table 4.33
Regression Model 7 – Heteroscedasticity Test

Dependent Variable: Residual of Square of Advances to Total Assets
Sample: 2009 2018

Fitted Value Square of Liquid 0.497024 0.259451 1.915675 0.0917
C -1.508487 1.718452 -0.877817 0.4056
94
R-squared 0.314471 Mean dependent 1.356906
var
S.E.-of-regression 2.675398 Akaike-info- 4.982930
criterion
Log-likelihood -22.91465 Hannan-Quinn- 4.916543
criter.
Table 4.34

Wald Test:
Equation: Untitled

Statistic
t-statistic 1.915675 8 0.0917
F-statistic 3.669812 (1, 8) 0.0917
Chi-square 3.669812 1 0.0554

Normalized
C(1) 0.497024 0.259451
Table 4.35
Regression Model 7 – Autocorrelation Corrected Model

Method: Generalized Linear Model (Newton-Raphson / Marquardt steps)
Sample: 2009 2018
Family: Normal
Link: Log
Dispersion computed using Pearson Chi-Square
Convergence achieved after 11 iterations
Coefficient covariance computed using the Newey-West HAC method with
Observed Hessian (Bartlett kernel, Newey-West fixed bandwidth = 3.0000)

GDP Growth Rate 0.630034 0.448146 1.405866 0.1598
Inflation CPI -0.205793 0.120136 -1.712998 0.0867
95
Unemployment 6.538101 4.477509 1.460209 0.1442
Rate
C -37.11488 26.24242 -1.414309 0.1573
Mean dependent var 2.304679 S.D. dependent var 1.418317
Sum-squared-resid 11.72336 Log-likelihood -15.53851
Akaike-info-criterion 3.907701 Schwarz-criterion 4.028735
Hannan-Quinn-criter. 3.774927 Deviance 11.72336
Deviance statistic 1.953894 Restr. deviance 18.10462
LR statistic 3.265919 Prob(LR statistic) 0.352414
Pearson SSR 11.72336 Pearson statistic 1.953894
Dispersion 1.953894 S.D. dependent var 1.418317
Table 4.38
Regression Model 8 – Heteroscedasticity Test
Dependent Variable: Square of Residual of Liquid Assets to Total Deposits
Sample: 2009 2018

Fitted Value Square of Liquid 0.636688 0.517723 1.229785 0.2537
C -0.093103 0.100802 -0.923623 0.3827
R-squared 0.158990 Mean dependent 0.028299
var
S.E.-of-regression 0.064486 Akaike-info- -2.467895
criterion
Log-likelihood 14.33947 Hannan-Quinn- -2.534282
criter.
Table 4.39

Wald Test:
Equation: Untitled

Statistic
t-statistic 1.229785 8 0.2537
F-statistic 1.512371 (1, 8) 0.2537
Chi-square 1.512371 1 0.2188
96
Normalized
C(1) 0.636688 0.517723
Table 4.40
Regression Model 8 – Autocorrelation Corrected Model

Dependent Variable: LOG (Liquid Asset To Total Deposit)
Sample: 2009 2018
HAC standard errors & covariance (Bartlett kernel, Newey-West fixed bandwidth = 3.0000)

GDP Growth Rate -0.029957 0.013890 -2.156689 0.0744
Inflation CPI 0.018526 0.022931 0.807904 0.4500
Unemployment 0.175416 0.365796 0.479546 0.6485
Rate
C -2.059838 2.279838 -0.903502 0.4011
R-squared 0.053354 Mean dependent var -0.888038

S.E.-of-regression 0.373437 Akaike-info-criterion 1.157039
Log-likelihood -1.785193 Hannan-Quinn-criter. 1.024265
Prob(Wald F-statistic) 0.100640 Mean dependent var -0.888038
97
Bank-Specific Data
Liquid
Return Capital Provision Asset to Advances
on Adequacy to Loan Cost to Total to Total
Year Nature Banks Equity NIM Ratio Ratio income Deposit Assets
2018 Conventional HBL 7.10% 0.027 16.20% 0.0046 0.88 0.17 0.36
2018 Conventional NBP 21.78% 0.022 16.35% 0.0122 0.79 0.18 0.33
2009 Conventional NBP 37.23% 0.040 17.24% 0.0235 0.61
98
0.23 0.50
2018 Conventional UBL 11.60% 0.029 17.70% 0.0777 0.69 0.18 0.40
2018 Conventional MCB 15.48% 0.031 17.02% 0.0035 0.89 0.11 0.34
2018 Conventional Askari 14.98% 0.026 12.51% 0.0762 0.32 0.09 0.49
99
2015 Conventional Askari -31.94% 0.022 10.39% 0.1749 0.30 0.11 0.41
2018 Islamic Meezan 23.77% 0.030 14.55% 0.0023 0.73 0.08 0.55
2017 Islamic Meezan 19.26% 0.026 12.89% 0.0031 0.78 0.10 0.53
2016 Islamic Meezan 19.58% 0.027 12.91% 0.0001 0.78 0.10 4.70
2015 Islamic Meezan 20.00% 0.033 10.98% 0.0026 0.77 0.09 0.39
2014 Islamic Meezan 21.35% 0.029 11.88% 0.0027 0.74 0.08 0.40
2013 Islamic Meezan 22.31% 0.031 12.48% 0.0007 0.71 0.10 0.38
2012 Islamic Meezan 24.34% 0.038 14.08% 0.0045 0.72 0.08 0.32
2011 Islamic Meezan 28.18% 0.047 14.89% 0.0176 0.68 0.10 0.35
2010 Islamic Meezan 16.64% 0.038 12.41% 0.0241 0.75 0.10 0.39
2009 Islamic Meezan 13.29% 0.041 12.77% 0.0307 0.80 0.08 0.38
Bank
2018 Islamic Islami 1.69% 0.028 15.10% 0.0003 0.97 0.08 0.55
Bank
2017 Islamic Islami 13.46% 0.023 14.68% 0.0033 1.34 0.07 0.55
Bank
2016 Islamic Islami 4.27% 0.024 13.43% 0.0261 1.73 0.06 0.43
Bank
2015 Islamic Islami -2.37% 0.021 12.34% 0.0070 1.31 0.06 0.39
Bank
2014 Islamic Islami 5.35% 0.033 16.70% 0.0010 0.92 0.07 0.40
Bank
2013 Islamic Islami 3.38% 0.029 15.37% 0.0033 0.82 0.06 0.44
2012 Islamic Bank 7.68% 0.033 15.25% 0.0033 0.33
100
Islami 0.08 0.37
Bank
2011 Islamic Islami 8.29% 0.045 17.18% 0.0034 0.50 0.09 0.42
Bank
2010 Islamic Islami 0.99% 0.039 19.50% 0.0002 0.50 0.08 0.43
Bank
2009 Islamic Islami -9.93% 0.028 18.24% 0.0102 0.45 0.15 0.32
Dubai
2018 Islamic Bank 61.92% 0.035 14.00% 0.0014 0.74 0.10 0.66
Dubai
2017 Islamic Bank 57.02% 0.035 13.39% 0.0015 0.79 0.07 0.65
Dubai
2016 Islamic Bank 55.99% 0.034 11.22% 0.0012 0.93 0.11 0.62
Dubai
2015 Islamic Bank 74.09% 0.029 11.13% 0.0018 1.04 0.10 0.67
Dubai
2014 Islamic Bank 66.07% 0.040 10.00% 0.0050 0.94 0.12 0.58
Dubai
2013 Islamic Bank 48.84% 0.039 10.00% 0.0129 1.09 0.08 0.44
Dubai
2012 Islamic Bank 51.98% 0.045 19.06% 0.0073 0.90 0.78 0.41
Dubai
2011 Islamic Bank 45.77% 0.046 20.85% 0.0007 0.93 0.09 0.50
Dubai
2010 Islamic Bank 35.17% 0.049 20.87% 0.0079 1.08 0.10 0.58
Dubai
2009 Islamic Bank 34.62% 0.052 20.05% 0.0056 0.95 0.10 0.58
Al
2018 Islamic Baraka 49.64% 0.033 11.77% 0.0103 1.05 0.15 0.58
Al
2017 Islamic Baraka 42.81% 0.030 10.17% 0.0026 1.15 0.09 0.58
Al
2016 Islamic Baraka 29.87% 0.018 10.26% 0.0025 1.09 0.18 0.52
Al
2015 Islamic Baraka 51.97% 0.029 14.54% 0.0022 1.33 0.15 0.55
Al
2014 Islamic Baraka 47.63% 0.023 14.24% 0.0004 0.96 0.08 0.50
Al
2013 Islamic Baraka 37.85% 0.020 11.97% 0.0018 1.05 0.08 0.42
Al
2012 Islamic Baraka 19.09% 0.021 11.18% 0.0261 1.75 0.01 0.39
Al
2011 Islamic Baraka 36.89% 0.023 15.29% 0.0079 0.92 0.06 0.40
Al
2010 Islamic Baraka 12.86% 0.009 15.88% 0.0486 3.64 0.09 0.26
Al
2009 Islamic Baraka 28.09% 0.034 25.53% 0.0328 0.56 0.09 0.48
101
Macroeconomic Data
GDP Growth Rate% Inflation (CPI)% Unemployment%

2018 5.20 8.27 6.10
2017 5.40 4.09 6.00
2016 4.60 3.77 6.00
2015 4.10 2.53 5.90
2014 4.10 7.19 6.00
2013 3.70 7.69 6.00
2012 3.80 9.68 6.00
2011 3.60 11.92 6.00
2010 2.60 13.88 5.60
2009 0.40 13.65 5.50
102

The Determinants Influencing Liquidity of Pakistan's Commercial and Islamic Banks

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The Determinants Influencing Liquidity of Pakistan's Commercial and Islamic Banks

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THE DETERMINANTS INFLUENCING LIQUIDITY OF

PAKISTAN'S COMMERCIAL AND ISLAMIC BANKS

SYED ALI ABBAS

In partial fulfillment of the requirements for the degree of

Master of Business Administration - Finance

DR. MUMTAZ ALI

Department of Business Administration,

NEWPORTS INSTITUTE OF COMMUNICATION & ECONOMICS, KARACHI

Recite in the name of your Lord who created.

He created man from a clot.

Read, and your Lord is the most Honorable,

Who taught (to write) with the pen?

Taught man that which he knew not.

THE DETERMINANTS INFLUENCING LIQUIDITY OF PAKISTAN'S

SYED ALI ABBAS

Dr. Mumtaz Ali Date

advice, and support. Their kindness is much indeed appreciated

environment for doing my project

everybody essential to make successful realization to my this project

CHAPTER ONE INTRODUCTION AND BACKGROUND OF THE RESEARCH

CHAPTER TWO LITERATURE REVIEW

CHAPTER THREE RESEARCH METHODOLOGY

Chapter Four DISCUSSION OF EXPERIMENTAL RESULTS

Chapter Five DISCUSSION, CONCLUSION & RECOMMENDATION

I, at this moment, declare that:

Acknowledgment has given in the references to ALL sources of information be they

printed, electronic, or personal

ATTA = Advances to Total Assets

INTRODUCTION AND BACKGROUND OF THE RESEARCH

or selling an investment quickly enough to prevent or minimize loss.

loss of value immediately.

inevitably lead to cash inflow and outflow gaps.

(Ahmed and Rasool, 2017).

financial companies) by Pakistan's state bank.

have a total share of approximately 14 percent in the banking sector of Pakistan.

of liquidity is the efficiency of a bank's management

1.3 STATEMENT OF THE PROBLEM

the government of Pakistan.

fledged Islamic banks functioning in Pakistan.

Theoretical Framework of Study

liquidity of commercial and Islamic banks in Pakistan?

1.5 OBJECTIVES OF THE STUDY

liquidity of commercial and Islamic banks.

1.6 SIGNIFICANCE OF THE STUDY

affecting liquidity from selected period 2009 to 2018.

constructed on the theoretical framework established based on the analysis.

2.2 LITERATURE REVIEW ON BANK LIQUIDITY

operational, compliance, legal, regulatory, and reputational hazards in general.

& Nikolaou, 2010).

to dispose of illiquid assets to satisfy customers ' liquidity requirements.

loans with short maturity (one to three days)” (Tesfaye, 2012)

Asset Side Liability side

Demands for Loan Huge volume of deposit withdrawals

Expiry of financial instrument sold (Bonds) Huge number of depositor withdrawals

Off Balance Sheet Activities (L/C, L/G) Repayment of bonds sold

borrowing extra funds”.

(Lending: Products, Operations and Risk Management, IBP).

through Two approaches

bank liquidity creation.

2.3 MEASURING LIQUIDITY

deposit to total assets”.

securities or reverse repurchase agreement trades.

sensitivity of funding, it includes banks, financial institution, deposits of households, enterprises'