The Impact of Liquidity on Islamic Bank’s Profitability

Abstract — Islamic Banking is a key area in economies of all Muslim countries, where customers are willing to invest their money in banks which are in accordance to Shariah and Islamic laws. In Pakistan it is also a growing field and now customers are more aware of investments and products that are prohibited in Islam and demand those products and processes that are Halal. In Pakistan number of Islamic banking institutions has reached to 19, among which 5 are full-fledged Islamic private commercial banks and the rest are conventional banks with Islamic banking branches. These institutions are following all the requirements that are necessary to pursue a Halal transaction. This study is an attempt to find the profitability and liquidity relationship of full-fledged Islamic banks operating in Pakistan. Key variables used to identify the direction and strength of the relationship among profitability and liquidity are Return on Asset (ROA), cash to total assests, investment to total assets and net advances to total assets. This study has analyzed the panel data through simple regression analysis. Results show that liquidity has inverse relationship with Islamic banks profitability