Impact of Liquidity Risk on the Profitability of Jordanian Islamic Banks

Abstract

The study aimed to identify the ratio of liquidity on the return on assets and the return on equity, and to identify the impact of the liquidity ratio to total deposits, the legal liquidity ratio to the return on assets on one hand and the return on equity of the Jordanian Islamic banks on the other hand depending on the bank's size and the rate of indebtedness. The two researchers used the descriptive analytical approach relying on quantitative data extracted from the annual reports and final accounting statements of two Jordanian Islamic banks namely Jordan Islamic Bank and the Islamic International Arab Bank during the period (2008 – 2014). The researchers produced several results, most importantly: There is statistically significant impact of liquidity risk (liquidity ratio, liquid assets to total deposits ratio, legal liquidity ratio) on the return on assets (ROA) and the return on equity (ROE) on one hand and in the Jordanian Islamic banks on the other hand. There is statistically significant impact of the liquidity risks jointly (liquidity ratio, liquid assets to total deposits ratio, legal liquidity ratio) on one hand on ROA and ROE of the Jordanian Islamic banks depending on the bank's size on the other hand. The study recommends the following: The Jordanian Islamic banks should not over preserve liquidity and should look for tools to employ the excess liquidity keeping a suitable and balanced combination of assets and obligations in addition to a clear and flexible plan to be able to deal with any urgent liquidity crisis, depending on diverse sources and employment of funds in terms of different sectors and terms, and depending on short – term employment. The bank should also put acceptable limits to liquidity risks according to its acceptable total risk volume.