Liquidity buffers determinants in GCC’s Islamic banks

The purpose of this paper is to understand determinants of liquidity buffers in the GCC’s Islamic banks. We apply the model of Bonner et al. (2005) on balanced panel data, bank specific data and annual balance sheet data for all reporting banks. The data cover a period of 8 years from 2004 until 2011 for 24 Islamic banks from GCC region that includes mainly Saudi Arabia, United Arab Emirates, Bahrain and Kuwait. Results show that liquidity buffers negatively related to the size of the bank, the capitalization is negatively related to liquidity buffers in Islamic banks in the GCC region and the ratio of deposits is negatively related to liquid assets holding in Islamic banks, but not statistically significant. In addition, we found a positive relationship between the profitability and liquidity buffers in Islamic banks of the GCC region. Finally, we found a different result when it comes to macroeconomic variables. First we noticed a negative impact of the inflation on liquidity buffers and second, a positive significant relationship between GDP real growth and liquidity buffers in Islamic banks in the GCC region. Our findings can serve as a tool for policy makers in the GCC region to adopt sounder strategies of liquidity management.