Effect of Liquidity Risk to Financal Performance in Malaysia Banking Industry

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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 liste...

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...btained from the annual report of the selected banks. Chapter 1 is related to the introduction such as the background of liquidity risk in Malaysia banking industry, motivation, problem statement, objective and significant of study. Chapter 2 is about summarized and literature review of liquidity risk, financial performance and other review that are related to this study. Chapter 3 will explain the methodology that will be adopted to conduct the empirical analysis for this study. In this study, the dependent variable is banking financial performance which includes the profit margin (PM), return on assets (ROA) and return on equity (ROE) while the independent variable is liquidity risk. Chapter 4 will discusses the result of the empirical analysis. Lastly is chapter 5, which contain the conclusion of this study with relevant recommendation and policy implementations.

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