Liquidity Risk Management: A Study in Islamic Bank of Indonesian
Lia Puspa Anggita, Yessi Sasmita Anggun, Amir Machmud and Ikaputera Waspada
Universitas Pendidikan Indonesia, Jalan Setiabudi No.229, Bandung, Indonesia
Keywords: Liquidity Risk, Islamic Banking of Indonesian, Capital Asset Ratio, Return on Assets, Return on Equity, Size
of Firm.
Abstract: This study aims to analyze the factors affecting liquidity risk of Islamic banks in Indonesia. The factors are
suspected to affect liquidity risk are Capital Asset Ratio, Return on Assets, Return on Equity and Size of Firm.
The research method used is explanatory survey and quantitative methods. Time series data from the period
2008-2016. The data source used is secondary data from the statistic reports on Islamic Banking statistics is
taken from the Indonesian Financial Services Authority. Data is then analyzed using multiple regression
analysis. The result shows that ROE and Size of Firm has a significant positive impact on liquidity risk while
CAR and ROA has a positive but insignificant impact on liquidity risk.
1 INTRODUCTION
The progress of a country can be seen from the
economic development, one of them from the
financial sector. The financial sector can show how
far a country is progressing and can influence
stakeholder decisions. Financial institutions have an
important role in a country’s economy (Machmud,
2009). Banking as an industry has grown to be one of
the main factors behind a country’s economic
development. The banking sector is seen as an
important source of funding for many businesses and
as such cannot be separated from risk (Bayyoud &
Sayyad, 2015). Risk is the potential for variability in
future cash flow (Keown, 2014) what is important in
establishing and controlling portfolio risk is the
ability to measure as much of these risks as possible
in the company (Frank J, 2016).
In a company there is a risk that must occur, the
risk is a consequences that must be borne by the
company in running its business. Risks can be
minimized if the company's management is done
well. One of the many risks in the banking industry is
the risk associated with liquidity (Ippolito, Peydró,
Polo, & Sette, 2016). Liquidity risk is the inability of
the company to meet its short term obligations and
effect the activities of the company making it not
operate properly. In banking liquidity is the ability of
financial institutions to fulfill their obligations.
(Singh, Shahid, Manager, & Bank, 2016). Risk
management is a series of processes used as a strategy
by the company in carrying out operational activities
(Spira, 2003). Effective risk management is vital in
sustaining business growth and bank profitability,
including in Islamic banks (Megeid, 2017).
In theory, Islamic finance differs significantly
from conventional finance. Islamic banks
philosophically are banks whose activities leave out
the practice of usury; therefore the mechanism of
Islamic banks is interest free (Machmud & Rukmana,
2010). In particular, Islamic-based finance makes it
impossible to pay interest (usury) because only goods
and services are allowed to be given prices and the
financing of forbidden activities is prohibited (Beck,
Demirgüç-kunt, & Merrouche, 2013).
Prohibiting the acceptance and payment of
interest is at the core of Islamic banking, supported
by other principles of Islamic doctrine such as: risk
sharing advocacy, entrepreneurship promotion,
financial transactions that do not lead to the
exploitation of any party, property preservation and
transparency (Sol, 2007). Islamic banks should
strengthen risk management practices such as
improving secondary markets by requiring price and
liquidity transparency (Mounira, 2008). The
performance of Islamic banks can offer high liquidity
(Ghannadian, 2004).
To estimate the level of loss and quality of the
portfolio, a simple statistical tool was developed by
means of a risk index for risk measurement (Smith,
Anggita, L., Anggun, Y., Machmud, A. and Waspada, I.
Liquidity Risk Management: A Study in Islamic Bank of Indonesian.
In Proceedings of the 2nd International Conference on Economic Education and Entrepreneurship (ICEEE 2017), pages 389-392
ISBN: 978-989-758-308-7
Copyright © 2017 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
389

1964). Two measures of risk are represented by
relative size, symbolized by beta and the total risk
size, denoted by the standard deviation (Modigliani,
Pogue, Financial, Journal, & Jun, 2014). The risk
estimation method has very important conclusions for
bankers and business relationships and is highlighted
on investments in both time and resources through
the risk assessment process (Deakins & Hussain,
2010). Liquidity risk can be measured using size of
the bank, return on equity, return on asset, networking
capital and capital adequacy ratio (Akhtar, Ali, &
Sadaqat, 2011).
The result of a study conducted in Islamic banks
in Pakistan shows a statistically significant positive
relationship between size of firm and liquidity risk
(Ahmed & Ahmed, 2011) (Zafar & Banker, 2014).
Islamic banks in Bangladesh showed that ROE and
size of firm can predict liquidity risk lev (Rahman &
Banna, 2015). There is a significant positive
correlation between liquidity risk management and
Capital Adequacy Ratio (CAR), Return on Asset
(ROA), Return on Equity (ROE) and size of the bank
or bank size in both Islamic and conventional banking
system (Iqbal, 2012) (Bureau, 2012) (Akhtar et al.,
2011) (Ariffin, 2012). The structure of Islamic
banking in Indonesia in practice skews towards an
oligopoly which can lead to market domination
(Machmud, 2014).
The development of Islamic banks in Indonesia
can be seen from the increase of total assets from
2012 until 2016. The increasing development of
Islamic banks in Indonesia will increase the
possibility of risk. The Islamic banking industry in
Indonesia shows a fairly rapid development seen in
the aftermath of the issuance of Islamic banking law
the industry shows a declining trend, this means that
Islamic banking law is able to push for sharia business
units to become commercial sharia banks (Machmud,
2014).
The NPL ratio has a negative impact on liquidity
risk (Akhtar et al., 2011), ROA, ROE and CAR show
no significant relationship with liquidity risk (Zafar &
Banker, 2014). CAR and ROA have a negative
impact on liquidity risk while ROE and size of firm
have a positive impact on liquidity risk in Islamic
banks in Bangladesh (Bureau, 2012).
Based on the above phenomenon, the purpose of
this study is to know and analyze liquidity risk in
Islamic banks in Indonesia by developing
measurement model (Akhtar et al., 2011). This study
aims to analyze the factors affecting liquidity risk of
Islamic Banks in Indonesia.
2 METHODS
This study used explanatory survey and quantitative
methods. There are four dependent variables: CAR,
ROA, ROE, size of firm and one independent
variable: liquidity risk. The data used was time series
data from 2008 to 2016. The data source used is
secondary data from the statistic reports on Islamic
banking from the Indonesia Financial Services
Authority. The total population of 13 Sharia
Commercial Banks listed on the Indonesia Stock
Exchange. We use total sampling method to
determine sample for this research because the
population is less than 30, so the population and
sample are the same. The technique of analysis in this
study using multiple regression.
Variables that are suspected to have an effect on
liquidity risk refer to research (Bureau, 2012) (Zafar
& Banker, 2014) (Ariffin, 2012) (Iqbal, 2012)
(Rahman & Banna, 2015) (Ahmed & Ahmed, 2011)
that is CAR (capital divided fixed assets by risk),
ROA (profit divided by average total assets), ROE
(earning after tax divided equity) and size of the firm
(log total asset). The hypothesis of this research is:
 CAR are positively related to liquidity risk.
 ROA are positively related to liquidity risk.
 ROE are positively related to liquidity risk.
 Size of Firm are positively related to liquidity
risk.
3 RESULTS AND DISCUSSION
Table 1 shows the descriptive statistics of the
dependent and independent variables of this study,
the statistical results show that the average liquidity
risk in Islamic banks in Indonesia is 51.27556. CAR
shows that capital in Islamic banks is smaller than
fixed assets according to the average risk of 0.14333
or 4.333%. The variable return on asset shows that
profit in Islamic bank is less than the average total
assets with the average amount of 0.1583 or 1.583%.
The return on equity variable shows the earnings after
tax slightly divided by the average own equity of
0.20778 or 20.778% and the variable of firm size
shows an average of 152.222.
ICEEE 2017 - 2nd International Conference on Economic Education and Entrepreneurship
390

The regression results where there are four
dependent variables: CAR, ROA, ROE, firm size and
one independent variable: liquidity risk show the
Table 2. The analysis shows that only 33.1% (R
Square = 0.331) of CAR, ROA, ROE and firm size
affect the liquidity risk of Islamic banks in Indonesia.
The results of the analysis of empirical data in the
regression equation as follows:
Liquidity Risk = -1927.875 + 1019.374 CAR +
140.200 ROA + 1215.944 ROE + 10.364 SIZE
FIRM.
This model shows at table 2, when the value of
liquidity risk of -1927,875 when CAR, ROA, ROE
and Size Firm are 0. The relationship of CAR, ROA,
ROE and Size Firm to Liquidity Risk is positive but
less than 0.05.
Table 2: Results of multiple linear regressions.
Dependent
Variable
Independent
Variable
Coefficient
t Test
F test
t value
Sig
results
F
value
sig
results
Liquidity
Risk
Constant
-
1927.875
-3.695
0.001
3.842
0.012
b
Sig
CAR
1019.374
0.712
0.482
Not sig
ROA
140.200
0.044
0.965
Not sig
ROE
1215.944
3.234
0.003
Sig
SIZE OF
FIRM
10.368
3.422
0.002
Sig
R = 0.576
R
2
= 0.331
Significant = 0.05
The impact of CAR and ROA is insignificant due
to sig. values that are higher than 0.05. We can see
that Islamic bank in Indonesia have relatively smaller
capital and profit compared to fixed assets according
to average total assets. The results for F test which is
3,842 and its significance is less than 0.05. It can be
said that CAR, ROA, ROE and Size of Firm have a
significant, positive impact on liquidity risk.
This study has a similar result with previous
research on Islamic banks in Pakistan showing a
statistically significant relationship between firm size
and liquidity risk (Ahmed & Ahmed, 2011). Research
on Sharia Bank shows a positive relationship between
sizes of firm (Akhtar et al., 2011). Islamic banks in
Bangladesh shows that ROE and size of firm can
predict liquidity risk level (Rahman & Banna, 2015).
In Islamic banks in Pakistan ROA and CAR have
positive but insignificant impact on liquidity risk
therefore it can be assumed that the strong base assets
of Islamic banks contribute to further strengthening
of liquidity control (Zafar & Banker, 2014). CAR and
ROA have a negative influence on liquidity risk while
ROE and size of firm have a positive correlation with
liquidity risk in Islamic banks in Bangladesh (Bureau,
2012).
4 CONCLUSIONS
Impact for Islamic Banks of Indonesia with CAR,
ROA, ROE and Size of Firm including the assets.
Therefore, it can be assumed that a strong asset base
strengthens liquidity control. The result of the study
has implications on the development of Islamic
banking policy especially concerning risk
management and can be a consideration for corporate
managers in making decisions, and can pay attention
to the company's assets to minimize the risks.
The limitation of this study compared to previous
research is to only study the Islamic banks and to not
compare it with Commercial Banks in Indonesia. So
the results of this study cannot compare liquidity risk
in Islamic banks to liquidity risk in Commercial
Banks in Indonesia.
Table 1: Descriptive statistics.
Variable
Mean
Liquidity Risk
51.27556
CAR
.14333
ROA
.01583
ROE
.20778
SIZE FIRM
152.22222
Liquidity Risk Management: A Study in Islamic Bank of Indonesian
391

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