Liquidity Transformation Factors of Islamic Banks: An Empirical Analysis

Islamic banks face restrictions in refinancing due to the guidelines of the Shari ́ah prohibiting financial contracts and transactions based on interest, gambling and speculation as same as due to the lack of liquidity sources such as an interbank market, a lender of last resort or an asset market. This is the first study with empirical cross-country results focusing on liquidity transformation of Islamic banks. Over the period from 2000 to 2007, we analyze the influence of specific financial system and institutional characteristics of Islamic banks on liquidity transformation. We include bank data from Gulf Cooperation Countries (GCC), Southeast Asia and further Brunei, Egypt and Turkey. Our results reveal that the liquidity transformation of Islamic banks is highly negatively determined by especially bank risk-taking and interbank demand compared with a control group of (interest-based) banks which conduct their business according to Western industrial countries.