Determinants of maturity transformation risk in Islamic banks: A perspective of Basel III liquidity regulations

Maturity transformation risk is highlighted as one of the major causes of recent global financial crisis. Basel III has proposed new liquidity regulations for transformation function of banks and hence to monitor this risk. Specifically, net stable funding ratio (NSFR) is introduced to enhance medium- and long-term resilience against liquidity shocks. Islamic banking is widely accepted in many parts of the world and contributes to a significant portion of the financial sector in many countries. Using a data-set of 68 fully fledged Islamic banks from 11 different countries, over a period from 2005 - 2014, this study attempts to analyze various factors that may significantly affect the maturity transformation risk in these banks. We utilize a 2-step system GMM estimation technique on unbalanced panel and find bank capital, credit risk, financing, size and market power as significant bank specific factors in determining maturity transformation risk. Furthermore, gross domestic product and inflation are found to be the significant macroeconomic factors that influence this risk. However, we find no evidence for the effect of bank profitability, cost efficiency and income diversity on maturity transformation risk in Islamic banking system