1.0 Overview of Study
This study is examines the empirical relationship and effect between liquidity risk and profitability performance in Malaysia banking industry. Liquidity risk is an important aspect of the banking risks. This riskiness of its portfolio and operations usually will straightforwardly vary a bank’s profitability. According to Matthews and Thompson (2008), liquidity risk refers to the likelihood inability of a bank to convene its liquid liabilities due to unpredicted extraction of deposits. The bank is incapable to meet its liability requirements but also unable financed its illiquid assets is the example of an unexpected liquidity shortage.
Koch and Macdonald (2003) further explain that liquidity risk can be categorized into two types. The first type is funding liquidity risk which refers to incapability of discharge the assets or attains sufficient funding from borrowing whereas the second type is market liquidity risk where a bank faced difficulty of unwind or offset explicit disclosures without substantial losses from insufficient market depth or market disturbances. Once a bank is unable to expect new loan demand or deposit withdraws, and cannot access to new sources of cash at that time, a bank may has the greatest liquidity risk.
In Malaysia, liquidity risk is highly concentrated in the banking sectors as it measures show both the bank’s capacity to reasonably and easily borrow funds and the quantity of liquid assets near maturity or available-for-sale at rational prices. Besides that, the bank’s equity base and borrowing capacity in the money markets is illustrated by its equity-to-asset ratio and volatile (net non-core) liability-to-asset ratio.
According to the licensed banking institution listed by Bank Negara, there are 27 commercial banks, 16 islamic banks and 15 investment banks in Malaysia. The top largest banks in Malaysia are Maybank, followed by CIMB bank, and Public bank. Most of the banks in Malaysia are concern about their bank liquidity risk. Hence, most of bank use liquidity risk management to control their bank liquidity at minimum level.
1.1 Background of Study
In 1913, Malaysia incorporated the first local bank but a wide-ranging financial sector appeared only after the formation of the Central Bank of Malaysia in 1959. There are major modifications take place in the Malaysia banking system over the thirty years. The Malaysia financial system can generally distributed into the banking system and the non-bank financial intermediaries. For the banking system, there has commercial bank, Islamic bank, international Islamic bank, and investment bank. All of them carry out different functions and activities due to their own bank’s role.
Liquidity problem is a popular issue that exists commonly in a bank as liquidity risk is varies with overall economic environment. If there is an economic crisis, bank will also face the liquidity crisis. A bank normally has high liquidity risk...