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A Comparative Study of Liquidity Management of an

Islamic Bank and a Conventional Bank:

The Evidence from Bangladesh

M. Muzahidul Islam1

Hasibul Alam Chowdhury2

Abstract

Liquidity management is undoubtedly one of the most crucial tasks of a bank. The analysis in

this study focuses on the comparative liquidity situation of an Islamic bank (Islami Bank

Bangladesh Limited) and a conventional bank (AB Bank Limited) for the period of 2003 -

2006. Both short-term and long-term liquidity positions have been taken into consideration.

However, maturity-wise liquidity situation has also been observed. To estimate the liquidity

situation maturity-wise and total liquidity gap have been calculated. Furthermore, this study

also tries to examine whether key performance indicators of these banks had any influence on

liquidity position during the period under study.

Key words: liquidity, net liquidity gap, volatility

JEL Classification: C52, G21

1. Introduction:

Any commercial bank, conventional or Islamic, is required to monitor and manage its

liquidity position effectively and cautiously. In this study, we will try to focus

whether any significant differences exists in managing liquidity position of Islamic

and conventional banks in Bangladesh. For our analysis, we have taken one bank

from each category. That is, in this study, we have compared Islami Bank Bangladesh

Limited (the IBBL) with AB Bank Limited (the ABBL) in respect of maintaining

liquidity position.

Islami Bank Bangladesh Limited was established in 1983 and started functioning with

effect from March 30, 1983. It was the first of its kind in Southeast Asia. This bank is

committed towards conducting all the banking activities free of interest and based on

profit-loss sharing system.

1Professor and Chairman, Department of Banking, University of Dhaka

2Lecturer, Department of Banking, University of Dhaka


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Journal of Islamic Economics, Banking and Finance, Volume-5 Number-190

AB Bank Limited, on the other hand, was incorporated in Bangladesh on December

31, 1981 as the first private sector Bank under Joint Venture with Dubai BankLimited, UAE, and started its operation from April 12, 1982. However, in the early

part of 1987, Dubai Bank Limited (name subsequently changed to Union Bank of the

Middleast Limited) sold their share. The shares were transferred to Bangladeshi

Sponsor Shareholders (Group A shareholders).

2. Objectives of the study:

The main objective of this study is to analyze and compare the liquidity position of an

Islamic bank with a conventional bank. In Bangladesh, as a matter of fact, whereas

the conventional banks require maintaining 18% of their deposits as Statutory

Liquidity Requirement (SLR), the Islamic banks require to maintain only 10% of

their deposit as SLR. So, obviously there will be different perspective in managingliquidity of these two types of banks. However, our secondary objective is to analyze

whether liquidity position of these two types of banks are influenced by the key

performance indicators (KPIs).

3. Methodology:

In this study, at first we have calculated the net liquidity gaps for both thebanks for the period 2003-20063. To calculate net liquidity gap, we havecollected maturity-wise information of both assets and liabilities, which issegmented according to the following maturity buckets:

i. Up to 1 month maturityii. 1-3 months maturityiii. 3-12 months maturityiv. 1-5 years maturityv. More than 5 years maturity

With this information, we have calculated the net liquidity gap for each maturity

bucket from 2003 to 2006 by adding all the assets falling under that bucket and then

subtracting all the liabilities falling under that bucket from the assets of the same

maturity bucket. That is

NLG = A - L . (1)

3We have collected the information used to calculate the net liquidity gap from the liquidity

statement included in the annual reports of these two banks. As liquidity statements before

2003 were not available, we have to start our analysis from 2003.


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A Comparative Study of Liquidity Management of an Islamic Bank and a Conv 91

Where,

NLG = Net liquidity gap during a particular maturity bucket

A = Assets falling under a particular maturity bucket

L = Liabilities falling under a particular maturity bucket

Positive net liquidity gap implies that the bank has sufficient assets to satisfy the

liabilities of the same maturity bucket and negative net liquidity gap implies that the

liabilities exceed the assets for that particular maturity bucket. We found the

percentage of assets and liabilities held for each maturity bucket in respect of total

assets for the particular year. We have also calculated percentage of short-term and

long-term assets and liabilities for each of the year under discussion. This provides a

direction of liquidity situation of the concerned banks for the years under discussion.

We also measured the extent of volatility in the liquidity position of these two banks.In case of calculating volatility, we used coefficient of variation (CV) analysis of both

assets and liabilities. By measuring volatility we concluded the liquidity analysis part

of our study.

In the next part, we analyzed whether the liquidity position of these two different

types of banks was influenced by their key performance indicators (KPIs). For this

section, we used some statistical tools like, simple regression analysis, step-wise

multiple regression analysis, t-test and f-test.

4. A comparative analysis of the financial performance of the IBBL and the

ABBL

In this section, we analyzed the financial performance of two banks under study.

We considered 3 years (2004-2006) for the purpose of analysis.

Table-1: Year-wise financial performance the ABBL Vs. The IBBL

Ratios Years the ABBL the IBBL

Credit or investment-deposit ratio

2006 74.36% 85.77%2005 78.16% 86.89%2004 60.10% 86.36%

Average 70.87% 86.34%

CV 10.97% 0.53%Ratio of classified loans against total loans and advances or investments

2006 4.02% 3.43%2005 8.21% 3.25%

2004 11.37% 6.92%Average 7.87% 4.53%

CV 38.27% 37.26%Return on assets (ROA)


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2006 1.31% 1.03%

2005 0.50% 1.00%2004 0.39% 1.10%

Average 0.73% 1.04%CV 55.94% 4.02%

Earnings per share2006 93.08 485.942005 31.26 487.572004 18.19 518.59

Average 47.51 497.37CV 68.75% 3.02%

Price-earnings ratio (Times)

2006 9.59 8.31

2005 11.68 9.24

2004 20.95 9.32

Average 14.07 8.96

CV 35.08% 5.12%

Net interest or investment margin4

2006 1.68% 2.67%

2005 2.88% 2.50%

2004 2.30% 3.47%

Average 2.28% 2.88%

CV 21.45% 14.77%

Source: Annual reports of the ABBL & the IBBL and own calculation

In the above table, it can be observed that the IBBL has better performance in almost

all the cases. The values of coefficient of variation show that the ABBL has much

fluctuation in the ratios in comparison to those of the IBBL.

5. Analysis of the liquidity position of the IBBL

In this section, we analyzed the liquidity position of the IBBL from three angels. We

calculated total as well as maturity bucketwise liquidity gap for a particular year,

percentage of short-term and long-term assets and liabilities in total assets and

liabilities for each of the year under consideration.

In the following table, we furnish the net liquidity gap from 20032006 (both

maturity-wise and total figure):

Table 2: Year-wise net liquidity gap of the IBBL

(Amounts are rounded and expressed in million taka)

2003 2004 2005 2006

4To calculate this ratio, we have divided the net interest income or net investment income by

the interest/profit generating assets.


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Net Liquidity

Gap

Net Liquidity

Gap

Net Liquidity

Gap

Net Liquidity

GapUp to 1 Month -14,035 -22,425 -25,579 5,843

1-3 Months 3,558 976 1,563 1,728

3-12 Months 12,479 21,406 23,524 -646

1-5 Years -384 -1,742 -1,014 -2,268

More than 5

years3,583 8,419 9,721 5,350

Total 5,201 6,634 8,215 10,007

Growth Rate - 27.55% 23.83% 21.80%

Source: Annual reports of the IBBL and own calculation

Net liquidity gap for Islami Bank Bangladesh Limited (the IBBL) increased each year

but rate of growth decreased gradually from the year 2004 to 2006. It indicates that

during the period under study, Islami Bank Bangladesh Limited got sufficient assetsto satisfy the liabilities. The positive growth of net liquidity gap indicates that the

IBBL maintains this favorable situation throughout the period under study.

In order to understand the extent to which the IBBL maintains short-term and long-

term liquidity gap, we have to focus on the following table:

Table 3:Year-wise decomposition of net liquidity gap of the IBBL(Amounts are rounded and expressed in million TK.)

Year Short-term liquiditygap5

Long-term liquiditygap6

Total liquiditygap

2003 2,002 3,199 5,201

2004 -43 6,677 6,634

2005 -492 8,707 8,2152006 6,925 3,082 10,007

Average 2,098 5,416 7,514

Source: Own calculation

Only in two years (2003 & 2006), the IBBL experienced positive short-term net

liquidity gap and in the other two years (2004 & 2005) the short-term liquidity gap

became negative. On the other hand, long-term liquidity gap for the IBBL was

positive for all the years under consideration. It indicates that the IBBLs overall

short-term liquidity management was not as good as its management of long-term

liquidity. That is, in 2004, the IBBL was unable to satisfy the current liability

requirement by using the available current assets. In 2005, the situation became worse

5

By adding the amount of net liquidity gap under up to 1 month, 1-3 months, and 3-12months maturity bucket, we can get the amount of short-term liquidity gap.

6By adding the amount of net liquidity gap under 1-5 Years and More than 5 years

maturity bucket, we can get the amount of long-term liquidity gap.


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than the previous year. However, in 2006 the IBBL was able to maintain current

assets sufficient to meet the current liabilities. The IBBL also experienced highervolatility in managing short-term liquidity gap. In future, the IBBL should focus more

on managing short-term liquidity gap.

Again, if we analyze short-term assets and short-term liabilities of the IBBL, we can

find that the amount of short-term assets and liabilities that the IBBL maintained was

much higher than its long-term assets and liabilities as depicted in table 4 below.

Table 4: Analysis of short-term assets & shot-term liabilities of the IBBL

Year

Percentage of Short

Term Assets in Total

Assets

Growth

Rate

Percentage of Short

Term Liabilities in

Total Liabilities

Growth

Rate

2003 71.40% - 73.64% -

2004 72.27% 1.21% 77.34% 5.01%

2005 71.68% -0.81% 77.25% -0.11%

2006 72.61% 1.29% 72.85% -5.69%

Average 71.99% 0.56% 75.27% -0.26%Source: Own calculation.

But, unfortunately, short-term assets of the IBBL during the period under study were

not sufficient to meet the short-term obligations. Moreover, short-term assets had

higher average rate of growth than that of the short-term liabilities, which could be

considered as a good indicator of financial strength. From our previous analysis, we

found that the IBBL experienced negative short-term liquidity gap in 2004, which

was mostly contributed by higher growth rate of short-term liabilities (5.01%)

comparing the growth rate of short-term assets (1.21%).In the following table, we provide long-term assets and liabilities of the IBBL.

Table 5: Analysis of long-term assets & long-term liabilities of the IBBL

Year

Percentage of Long

Term Assets in

Total Assets

Growth

Rate

Percentage of Long

Term Liabilities in

Total Liabilities

Growth

Rate

2003 28.60% - 26.36% -

2004 27.73% -3.03% 22.66% -14.01%

2005 28.32% 2.12% 22.75% 0.39%

2006 27.39% -3.26% 27.15% 19.33%

Average 28.01% -1.39% 24.73% 1.90%


In case of growth rate of long-term assets and liabilities, the scenario was justopposite to that of short-term assets and liabilities. Long-term liabilities grew at a

higher rate than long-term assets. In fact, long-term assets had a negative average


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growth during the period under study. It indicates that the IBBL experienced positive

long-term liquidity gap during the period under study although its long-term assetshad a gradual decrease in value. Long-term liabilities, on the other hand, experienced

a positive growth and were pacing with long-term assets almost to the same extent. If

this trend continues, in future there may be a possibility of experiencing negative

liquidity gap for the IBBL.

6. Analysis of the liquidity position of the ABBL:

AB Bank Limited (the ABBL) experienced positive liquidity gap for the period under

study. That is in all the years under consideration, AB Bank Limited could

satisfactorily maintain higher amount of assets than liabilities. It implies AB Banks

ability to satisfy the liabilities as and when necessary.

Table 6: Year-wise net liquidity gap of the ABBL(Amounts are rounded and expressed in million TK.)

Year 2003 2004 2005 2006

Net Liquidity

Gap

Net Liquidity

Gap

Net Liquidity

Gap

Net Liquidity

Gap

Up to 1 Month 1042 820 -864 -392

1-3 Months -144 -927 -830 -289

3-12 Months -1625 112 893 1269

1-5 Years 1762 1425 1220 1517

More than 5

years 102 -187 1108 478

Total 1137 1243 1527 2583

Growth Rate - 9.32% 22.85% 69.16%Source: Annual reports of the ABBL and own calculation

Moreover, net liquidity gap of the ABBL had an increasing growth rate. In each year

from 2004 to 2006, net liquidity gap increased at a very high rate.

Table 7: Year-wise decomposition of net liquidity gap of the ABBL

(Amounts are rounded and expressed in million TK.)

Year Short-term liquidity

gap

Long-term liquidity

gap

Total liquidity

gap

2003 -727 1,864 1,137

2004 5 1,238 1,243

2005 -801 2,328 1,5272006 588 1,995 2,583

Average -233.75 1856.25 1622.5


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In the above table, we can see that the ABBLs 4-year average short-term liquidity

gap is negative. If we consider single years, we see that only in the year 2004 and2006, the ABBL experienced positive short-term liquidity gap and the highest gap

could be found in 2006. On the other hand, average long-term liquidity gap of the

ABBL had a positive figure. So, we can say that the ABBL should focus more on

managing short-term assets to satisfy short-term liabilities so that in future average

short-term net liquidity gap becomes positive. However, the ABBL could manage the

long-term assets appropriately to satisfy the long-term debts.

Table 8: Analysis of short-term assets & shot-term liabilities of the ABBL

Year

Percentage of Short

Term Assets in Total

Assets

Growth

Rate

Percentage of Short

Term Liabilities in Total

Liabilities

Growth

Rate

003 85.48% - 90.81% -

2004 80.62% -5.69% 83.81% -7.71%

2005 69.77% -13.46% 75.68% -9.69%

2006 72.32% 3.66% 75.14% -0.72%

Average 77.05% -5.16% 81.36% -6.04%


From the above table, we can see that both short-term assets and short-term liabilities

of the ABBL experienced negative growth rate during the period under study. The

ABBL had more short-term assets in its assets portfolio than long-term assets. In the

same way it had more short-term liabilities than long-term liabilities. Above all, every

pertaining analysis here indicates that the ABBL experienced some difficulties inmanaging short-term liquidity gap.

Table 9: Analysis of long-term assets & long-term liabilities of the ABBL


Year

Percentage of Long

Term Assets to

Total Assets

Growth Rate

Percentage of Long

Term Liabilities to

Total Liabilities

Growth

Rate

2003 14.52% - 9.19% -

2004 19.38% 33.48% 16.19% 76.28%

2005 30.23% 55.98% 24.32% 50.18%

2006 27.68% -8.44% 24.86% 2.25%

Average 22.95% 27.01% 18.64% 42.90%


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If we consider the long-term situation for the ABBL, we can see that the ABBLs

long-term liabilities grew very rapidly (as average growth rate became 42.90%) incomparison to long-term assets (where average growth rate was 27.01%). However,

the ABBL had more long-term assets and it had long-term liabilities but as the growth

rate of liabilities continues in a very high rate, in future if the ABBL does not focus

on this issue, long-term liquidity gap may be negative and the ABBL may face long-

term liquidity problem.

7. Comparative analysis of the liquidity position: the IBBL Vs. the ABBL

In this section, we will analyze the liquidity position of the IBBL and the ABBL from

different perspectives. At first, we will compare the liquidity situation of these two

different types of banks from the perspective of net liquidity gap.

Table 10: Maturity-bucket wise 4-year average net liquidity gap of the IBBL & the ABBL

4-year average net liquidity

gap of the IBBL (in million

TK. & figures are rounded tonearest whole number)

4-year average net liquidity

gap of the ABBL (in million

TK. & figures are rounded tonearest whole number)

Up to 1 Month -14,049 152

1-3 Months 1,956 -548

3-12 Months 14,191 162

1-5 Years -1,352 1,481

More than 5 years 6,768 375

Total 7,514 1,623


In the above table, we have calculated 4-year average net liquidity gap of the twobanks on basis of maturity bucket. From the analysis, we have the following findings:

a. The IBBL lacked appropriate up to 1 month maturity assets to a greater extentto satisfy the liabilities of the same maturity but the ABBL was able to manage more

assets of that maturity to cover the liabilities of the same maturity.

b. In case of 1-3 month and 3-12 month maturity liquidity gap, the IBBLperformed better than the ABBL. That is, during the period under analysis, the IBBL

managed liquidity situation of these two durations more efficiently than the ABBL.

c. Again, in 1-5 year maturity case, the ABBL handled the liquidity situationmore effectively than the IBBL, whereas, in More than 5 year maturity situation,

the IBBLs liquidity performance was better.

Table 11: Year-wise growth rate of total liquidity gap of the IBBL & the ABBL

Total Liquidity Gap

of the IBBL (in

Growth

Rate

Total Liquidity Gap of

the ABBL (in million

Growth

Rate


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million tk.) tk.)

2003 5,201 - 1137 -

2004 6,634 27.55% 1243 9.32%

2005 8,215 23.83% 1527 22.85%

2006 10,007 21.80% 2583 69.16%

Average 7,514 24.41% 1,623 33.80%


Again, if we consider the growth rate of total liquidity gap, we find that although the

IBBL experienced higher amount of net liquidity gap than the ABBL, net liquidity

gap of the ABBL experienced more growth rate than the IBBL. It indicates that the

ABBL is gradually improving its overall liquidity situation.

Now, we will compare these two banks from the perspective of short-term and long-term liquidity situation.

Table 12: Comparison of short-term liquidity gap (figures are in million TK.)

Year IBBL ABBL

2003 2,002 -727

2004 -43 5

2005 -492 -801

2006 6,925 588

Average 2,098 -233.75


From the above table it is evident that the IBBL managed its short-term liquidity

situation more efficiently than that of the ABBL for the period under study. From the

data of this table and the previous table, we can say that the ABBL should focus on

managing 1-3 month maturity liquidity gap in proper manner.

However, from long-term liquidity perspective, the IBBL again performed better than

the ABBL as is evident from table no. 13 that follows.

Table 13: Comparison of long-term liquidity gap (Figures are in million TK.)

Year IBBL ABBL

2003 3,199 1,864

2004 6,677 1,238

2005 8,707 2,328

2006 3,082 1,995

Average 5,416 1856.25


However, in the year 2006 both the IBBL and the ABBL experienced negative

growth in terms of long-term liquidity gap.


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Now, lets consider the following table:

Table 14: Comparison of short-term assets & shot-term liabilities

Percentage of Short Term

Assets in Total Assets

Percentage of Short Term

Liabilities in Total Liabilities

IBBL ABBL IBBL ABBL

2003 71.40% 85.48% 73.64% 90.81%

2004 72.27% 80.62% 77.34% 83.81%

2005 71.68% 69.77% 77.25% 75.68%

2006 72.61% 72.32% 72.85% 75.14%

Average 71.99% 77.05% 75.27% 81.36%


Table 14 above furnishes the comparison of the two banks under study from the

perspective of having short-term assets and short term liabilities; where we see thatpercentage of short-term assets and liabilities that the ABBL maintained in its

portfolio was higher than those of the IBBL. It implies that the ABBL was focusing

more on short-term assets and liabilities to long-term. However, the ABBL inspite of

its focus more on short-term assets and liabilities, showed poor performance in the

management of short-term liquidity, which suggests that the ABBL should devise

some new strategies to ensure efficient management of its short-term liquidity

situation.

However, from the following table, we can see that the IBBL was focusing on the

management of long term assets and liabilities to a higher extent than the ABBL.

Table 15: Comparison of long-term assets & long-term liabilities

Percentage of Long TermAssets in Total Assets Percentage of Long TermLiabilities in Total Liabilities

the IBBL the ABBL the IBBL the ABBL

2003 28.60% 14.52% 26.36% 9.19%

2004 27.73% 19.38% 22.66% 16.19%

2005 28.32% 30.23% 22.75% 24.32%

2006 27.39% 27.68% 27.15% 24.86%

Average 28.01% 22.95% 24.73% 18.64%


8. Volatility analysis of the liquidity position:

In this section, we analyze the volatility in net liquidity gap of the IBBL and that of

the ABBL to judge the fluctuation in the liquidity situation. We have used coefficient

of variation (CV) in order to estimate volatility in net liquidity gap.

Table 16: Comparison of maturity-wise CV of net liquidity gap of the IBBL and theABBL for the period 2003 - 2006


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CV of net liquidity gap of

the IBBL

CV of net liquidity gap of

the ABBLUp to 1 Month 87.09% 528.72%

1-3 Months 49.38% 61.50%

3-12 Months 67.06% 686.02%

1-5 Years 52.85% 13.14%

More than 5 years 35.89% 129.07%


From the above table we see that other than 1-5 year maturity bucket the ABBL

experienced higher volatility in liquidity gap. The level of fluctuation in Up to 1

month, 3-12 months, and More than 5 years was very high. On the other hand,

the IBBL maintained some degree of consistency in each of the maturity buckets in

comparison to the ABBL. However, the IBBL experienced highest volatility in Up

to 1 month maturity liquidity gap and it experienced lowest volatility in More than

5 years maturity liquidity gap. This indicates that the IBBL is much more consistent

in maintaining liquidity situation than the ABBL during our period under study.

Now, we will decompose the total liquidity gap and analyze the volatility in short-

term and long-term liquidity gap.

Table 17: Comparison of CV of short-term, long-term and total liquidity gap of theIBBL and the ABBL for the period 2003 - 2006

CV of the IBBL CV of the ABBL

Short-term liquidity gap 140.19% 243.64%

Long-term liquidity gap 44.07% 21.28%

Total liquidity gap 23.84% 35.29%


From the above table, we find that both the IBBL and the ABBL experienced higher

volatility in managing short-term liquidity but the ABBL had higher fluctuation than

the IBBL. In case of long-term liquidity management, the ABBL experienced less

fluctuation than the IBBL. We also observe that the IBBL experienced lower

fluctuation than the ABBL in case of managing overall liquidity situation, which is

evident from the CV of the total liquidity gap.

9. Is liquidity position influenced by Key Performance Indicators (KPIs)?

In this section, we try to find out whether key performance indicators of these two

different types of banks have any influence in determining their liquidity position. In

this study, we have used the following ratios as key performance indicators of the twobanks:

Table 18: List of KPIs


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KPIs of IBBL KPIs of ABBL

Price-Earnings (P/E) Ratio Price-Earnings (P/E) RatioEarnings Per Share (EPS) Earnings Per Share (EPS)

Return on Equity (ROE) Return on Equity (ROE)

Return on Assets (ROA) Return on Assets (ROA)

Investment-Deposit ratio (INV/DEP) Advance-Deposit ratio (ADV/DEP)

Percentage of classified investments

against total investments

(Classing/TINV)

Non-performing loans as percentage of

total loans & advances (NPL/ADV)

Capital Adequacy Ratio (CAR) Capital Adequacy Ratio (CAR)

We take total figure of net liquidity gap for each year as the dependent variable and

all the KPIs as the independent variable. At first, we do simple regression analysis

with these variables then we go for multiple regression analysis.

The data for regression analysis for each of the two banks are given below:

Table 19: Values of the variables for regression analysis - the IBBL

TLG (inmillion tk.)

P/ERatio

EPS ROE ROAADV/DEP

NPL/ADV

CAR

2003 5200 23.26 195.52 0.074300 0.0053 0.8437 0.0814 0.0943

2004 6634 9.32 518.59 0.151500 0.0110 0.8636 0.0692 0.0921

2005 8216 9.24 487.57 0.135100 0.0100 0.8689 0.0325 0.0944

2006 10007 8.31 485.94 0.134208 0.0103 0.8577 0.0343 0.0943

Source: Annual reports of the IBBL and own calculation

Table 20: Values of the variables for regression analysis - the ABBLTLG (in

million tk)

P/E

Ratio

EPS ROE ROA ADV

/DEP

NPL/

ADV

CAR

2003 1136 53.89 3.63 0.0153 0.0007 0.7496 0.1925 0.0917

2004 1244 20.95 18.19 0.0724 0.0039 0.6010 0.1137 0.0909

2005 1527 11.68 31.26 0.1064 0.0050 0.7816 0.0821 0.0917

2006 2583 9.59 93.08 0.2061 0.0111 0.7436 0.0402 0.0923

Source: Annual reports of the ABBL and own calculation

By using the above data, we have conducted simple and multiple regression analysis

for both the IBBL and the ABBL.

a. Simple regression analysis for the IBBL:

Variables Regression Equation r2

F-test

value

P-value of

F-test


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Though Model B showed very high degree of relationship (r2= 98.4%), but P-value

of F-test showed that we could depend on this model just only at only 87.4%confidence level. So, Model A provides better explanation than Model B.

Model C and D are not much reliable as P-value of F-test for these two models was

very high in respect of first two models.

However, we did not include CAR in our multiple regression analysis, as it showed

very low degree of relationship with liquidity gap in the simple regression analysis.

c. Simple regression analysis for the ABBL:

Variables Regression Equation r2

F-testvalue

P-value

ofF-test

TLG Vs. P/E

Ratio TLG = 2118 - 20.6 P/E Ratio 41.0% 1.39 0.360

TLG Vs. EPS TLG = 1011 + 16.7 EPS 99.3% 274.63 0.004

TLG Vs. ROE TLG = 827 + 7952 ROE 92.7% 25.51 0.037

TLG Vs. ROA TLG = 860 + 147345 ROA 94.0% 31.32 0.030

TLG Vs.

ADV /DEPTLG = - 137 + 2447 ADV /DEP 8.8% 0.19 0.703

TLG Vs.

NPL/ ADVTLG = 2535 - 8516 NPL/ ADV 68.8% 4.40 0.171

TLG Vs. CAR TLG = - 79761 + 887980 CAR 59.5% 2.94 0.229

From the above table, we can see that total liquidity gap of the ABBL had a very

significant relationship with EPS, ROA and ROE. Among these three KPIs, EPS was

the most influential during the period under study as it could alone explain 99.3%

variations in total liquidity gap with 99.6% confidence level.

d. Multiple regression analysis for the ABBL:

Models Regression Equation r2

F-testvalue

P-value ofF-test

Model - A TLG = 895 + 3.10 P/E Ratio + 17.9 EPS 99.8% 206.32 0.049

Model B TLG = 358 + 11.6 P/E Ratio + 190723 ROA 98.7% 38.24 0.114

Model C TLG = 1084 + 22.1 EPS - 2687 ROE 99.7% 168.33 0.054

Model - D TLG = 1100 + 24.9 EPS - 75173 ROA 99.9% 788.48 0.025

Model - E TLG = 140 + 15.2 P/E Ratio + 11161 ROE 99.9% 635.14 0.028

Model - FTLG = 1178 + 1857 ADV /DEP - 8310 NPL/

ADV73.8% 1.41 0.512

From multiple regression analysis, we see that the profitability ratios (like the IBBL)had greater influence on determining liquidity position of the ABBL. From the above

six models, we can say that Model D is statistically most significant model. With


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97.5% confidence level Model D explained 99.9% variations in total liquidity gap of

the ABBL during the period under study.

From Model F, we can say that advance-deposit ratio and non-performing loan as

percentage of total advances didnt contribute much in determining the liquidity

position of the ABBL during the period under study.

So, from regression analysis, we can say as a whole, for both the IBBL and the

ABBL, profitability ratios had greater influence on determining the liquidity position.

10. Conclusion:

From the whole analysis, we see that Islami Bank Bangladesh Limited (the IBBL)

showed comparatively better performance in liquidity management than the

conventional AB Bank Limited for the period 2003 to 2006 both on short-term and

long-term basis. Though the IBBL showed comparatively lower volatility in short-term liquidity management but in long-term liquidity management the ABBL showed

better performance. However, in short-term the IBBL had positive liquidity gap on an

average while the ABBL had the opposite. In long-term analysis both the banks

experienced positive liquidity gap. In other words, both the banks could efficiently

keep the long-term assets to satisfy long-term liabilities as and when they would be

falling due. However, in case shorter-term though the IBBL had average positive

liquidity gap but if we consider single year we find that in 2004 & 2005, it

experienced negative liquidity gap. So, both the banks should take steps accordingly

to manage and improve the short-term liquidity position. However, from regression

analysis, we have found that profitability ratios had a greater impact on liquidity. For

both of the banks, the KPIs like EPS, P/E ratio, ROE, ROA had influential role in

determining the extent of liquidity.

References

Khasyap, A., R. Rajan and J. Stein (1999), Banks as Liquidity Providers: An Explanation forthe Co-existence of Lending and Deposit-Taking, Working Paper No.6962, NBER.

Toby, Adolphus J. (2006), Empirical Study of the Liquidity Management Practices ofNigerian Banks, Journal of Financial Management and Analysis, Vol. 19, No. 1.

Diamond, D. W., 1997, Liquidity, Banks, and Markets, Journal of Political Economy, 105,928-956.

Diamond, D. W., and R. Rajan, 1998, Liquidity Risk, Liquidity Creation and Financial

Fragility: A Theory of Banking, Working Paper, University of Chicago.

Qi, J., 1998, Deposit Liquidity and Bank Monitoring, Journal of Financial Intermediation, 7,198-218.


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Appendix

A.1: Calculation of net liquidity gap for the IBBL for the period 2003 2006

(Data were taken from annual report)

(Amounts are in TK.)2003

Assets Liabilities Net Liquidity Gap

Up to 1 Month 27,394,574,832 41,429,813,277 -14,035,238,445

1-3 Months 7,802,657,439 4,244,788,384 3,557,869,055

3-12 Months 23,143,965,687 10,664,809,245 12,479,156,442

1-5 Years 14,099,687,940 14,483,941,406 -384,253,466

More than 5 years 9,263,860,091 5,681,021,584 3,582,838,507

Total 81,704,745,989 76,504,373,896 5,200,372,093

2004

Up to 1 Month 29,932,782,510 52,357,637,964 -22,424,855,454

1-3 Months 8,764,031,623 7,788,027,215 976,004,408

3-12 Months 35,126,894,257 13,721,202,930 21,405,691,327

1-5 Years 16,420,047,592 18,161,971,512 -1,741,923,920

More than 5 years 11,905,526,176 3,486,523,219 8,419,002,957

Total 102,149,282,158 95,515,362,840 6,633,919,318

2005

Up to 1 Month 37,960,403,301 63,539,073,407 -25,578,670,106

1-3 Months 10,735,777,084 9,172,353,476 1,563,423,608

3-12 Months 39,388,141,821 15,864,179,418 23,523,962,4031-5 Years 20,324,626,597 21,338,214,401 -1,013,587,804

More than 5 years 14,471,399,419 4,750,786,314 9,720,613,105

Total 122,880,348,222 114,664,607,016 8,215,741,206

2006

Up to 1 Month 47,897,441,420 42,054,078,669 5,843,362,751

1-3 Months 16,731,526,160 15,003,856,505 1,727,669,655

3-12 Months 44,464,758,570 45,110,643,803 -645,885,233

1-5 Years 25,292,743,057 27,561,008,008 -2,268,264,951

More than 5 years 15,866,351,594 10,516,001,019 5,350,350,575

Total 150,252,820,801 140,245,588,004 10,007,232,797


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A.2: Calculation of net liquidity gap for the ABBL for the period 2003 2006

(Amounts are in TK.)2003

Assets Liabilities Net Liquidity Gap

Up to 1 Month 9,969,011,362 8,927,145,696 1,041,865,666

1-3 Months 5,540,078,698 5,684,319,961 -144,241,263

3-12 Months 12,672,920,396 14,298,090,334 -1,625,169,938

1-5 Years 4,265,904,403 2,504,316,014 1,761,588,389

More than 5 years 521,535,816 419,601,090 101,934,726

Total 32,969,450,675 31,833,473,095 1,135,977,580

2004

Up to 1 Month 3,589,781,180 2,769,716,854 820,064,326

1-3 Months 6,401,196,614 7,328,424,655 -927,228,041

3-12 Months 16,216,875,805 16,104,727,749 112,148,056

1-5 Years 6,070,662,111 4,645,541,007 1,425,121,104

More than 5 years 230,111,083 416,639,753 -186,528,670

Total 32,508,626,793 31,265,050,018 1,243,576,775

2005

Up to 1 Month 2,551,658,800 3,415,168,423 -863,509,623

1-3 Months 5,451,626,899 6,281,815,268 -830,188,369

3-12 Months 15,065,790,149 14,172,805,584 892,984,565

1-5 Years 8,888,801,428 7,668,733,444 1,220,067,984

More than 5 years 1,107,525,278 0 1,107,525,278

Total 33,065,402,554 31,538,522,719 1,526,879,835

2006

Up to 1 Month 4,143,424,393 4,535,030,389 -391,605,996

1-3 Months 12,323,056,314 12,612,487,879 -289,431,565

3-12 Months 18,238,866,404 16,969,787,103 1,269,079,301

1-5 Years 12,596,498,458 11,079,970,516 1,516,527,942

More than 5 years 687,491,653 209,298,423 478,193,230

Total 47,989,337,222 45,406,574,310 2,582,762,912


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A.3: Calculation of maturity-wise Coefficient of Variation for the IBBL for the period

2003 2006 (Amounts are in million TK.)

Average

Standard

Deviation (SD)

Coefficient of Variation

(CV)8

Up to 1 Month -14,049 12235.09 87.09%

1-3 Months 1,956 966.0793 49.38%

3-12 Months 14,191 9516.152 67.06%

1-5 Years -1,352 714.567 52.85%

More than 5 years 6,768 2429.041 35.89%

Total 7,514 1791.007 23.83%

A.4: Calculation of maturity-wise Coefficient of Variation for the ABBL for the

period 2003 2006 (Amounts are in million TK.)

AverageStandard

Deviation (SD)Coefficient of Variation

(CV)

Up to 1 Month 152 801.0173 528.72%

1-3 Months -548 336.6976 61.50%

3-12 Months 162 1113.068 686.02%

1-5 Years 1,481 194.624 13.14%

More than 5 years 375 484.3219 129.07%

Total 1,623 572.5843 35.29%

A.5: Calculation of Coefficient of Variation for short-term, long-term, and total

liquidity gap of the IBBL for the period 2003 2006 (Amounts are in million TK.)

Year Short-termliquidity gap Long-term liquidity gap Total liquidity gap

2003 2,002 3,199 5,201

2004 -43 6,677 6,634

2005 -492 8,707 8,215

2006 6,925 3,082 10,007

Average 2,098 5,416 7,514

SD 2941.13609 2386.6 1791.007

CV 140.19% 44.07% 23.84%

A.6: Calculation of Coefficient of Variation for short-term, long-term, and totalliquidity gap of the ABBL for the period 2003 2006 (Amounts are in million TK.)

Year Short-term liquiditygap

Long-term liquidity gap Total liquidity gap

8In the calculation of CV, we have taken the absolute value.


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2003 -727 1,864 1,137

2004 5 1,238 1,243

2005 -801 2,328 1,527

2006 588 1,995 2,583

Average -233.75 1856.25 1622.5

SD 569.5047739 394.9977 572.5843

CV 243.64% 21.28% 35.29%

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