Non-linear Effect of Islamic Banks' Liquidity Risk to Financial Stability; Evidence from the Indonesian Banking Industry

Faaza Fakhrunnas


Liquidity risk is a pivotal aspect that determines the soundness of financial performance in the banking system. Therefore, the study aims to examine the influence of Islamic banks' liquidity risk on banking stability. Using time series data ranging from 2004m1 to 2022m8, the study adopts a non-linear autoregressive distributed lag (NARDL) approach to examine the influence of liquidity risk on financial stability in the Indonesian banking sectors. The result of the study reveals that it has a non-linear and asymmetric relationship between liquidity risk and financial stability in the banking system. In the short run, an additional increase/decrease in the change of liquidity risk negatively affects financial stability. In addition, the long-run relationship shows that only an additional increase in change has a negative and significant relationship to financial stability. The COVID-19 pandemic also becomes a significant determinant that affects financial stability in the long-run relationship. The findings of the study imply that the Indonesian financial authorities should set suitable regulations to mitigate and address the issue of Islamic banks' liquidity risk, particularly in anticipating its non-linear and asymmetric impact on financial stability.


financial stability; Islamic bank; liquidity risk; NARDL

Full Text:



Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic Banking. Review of Finance, 17(6), 2035–2096.


Ahmad, S., Wan Ahmad, W. M., & Shaharuddin, S. S. (2022). Is Excess of Everything Bad? Ramifications of Excess Liquidity on Bank Stability: Evidence from the Dual Banking System. Borsa Istanbul Review, 22(4), 1-16.

Alqahtani, F., & Mayes, D. G. (2018). Financial Stability of Islamic Banking and The Global Financial Crisis: Evidence from the Gulf Cooperation Council. Economic Systems, 42(2), 346–360.

Berger, A. N., Boubakri, N., Guedhami, O., & Li, X. (2019). Liquidity Creation Performance and Financial Stability Consequences of Islamic Banking: Evidence from a Multinational Study. Journal of Financial Stability, 44, 100692.

Bilgin, M. H., Danisman, G. O., Demir, E., & Tarazi, A. (2021). Economic Uncertainty and Bank Stability: Conventional vs Islamic Banking. Journal of Financial Stability, 56(100911), 1–20.

Chen, W. D., Chen, Y., & Huang, S. C. (2021). Liquidity Risk and Bank Performance During Financial Crises. Journal of Financial Stability, 56, 100906.

Chen, Y. (2022). Bank Interconnectedness and Financial Stability: The Role of Bank Capital. Journal of Financial Stability, 61(May), 1–10.

Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38(2), 95–113.

Contreras, S., Ghosh, A., & Kong, J. H. (2021). Financial Crisis, Bank Failures and Corporate Innovation. Journal of Banking and Finance, 129, 106161.

Diamond, D. W., & Dybvig, P. H. (1983). Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91(3), 401–419.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74(366), 427.

Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global Banking Stability in the Shadow of Covid-19 Outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322.


Elsayed, A. H., Naifar, N., & Nasreen, S. (2022). Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries. Quarterly Review of Economics and Finance, 87(C), 396-405.


Fakhrunnas, F., Nugrohowati, R. N. I., Haron, R., & Anto, M. B. H. (2022). The Determinants of Non-Performing Loans in the Indonesian Banking Industry: An Asymmetric Approach Before and During the Pandemic Crisis. SAGE Open, 12(2), 1–13.


Fakhrunnas, F., Tumewang, Y. K., & Anto, M. B. H. (2021). The Impact of Inflation on Islamic Banks' Home Financing Risk: Before and During the COVID-19 Outbreak. Banks and Bank Systems, 16(2). https://doi.


Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The Effects of Liquidity Risk and Credit Risk on Bank Stability: Evidence from the MENA Region. Borsa Istanbul Review, 17(4), 238–248.


Hassan, M. K., Khan, A., & Paltrinieri, A. (2019). Liquidity Risk, Credit Risk and Stability in Islamic and Conventional Banks. Research in International Business and Finance, 48, 17–31.


Khattak, M.A.,Ali, M., Hamid, B.A., & Islam, M. U. (2021). Competition, Diverisfication and Stability in the Indonesian Banking System. Buletin Ekonomi Moneter dan Perbankan, 24(Special Issue), 59–88.

Kleinow, J., & Nell, T. (2015). Determinants of Systemically Important Banks: the Case of Europe. Journal of Financial Economic Policy, 7(4), 446-476.

Mdaghri, A. A. (2021). How Does Bank Liquidity Creation Affect Non-performing Loans in the MENA Region? International Journal of Emerging Markets, 17(7), 1635–1658.

Mohammad, S., Asutay, M., Dixon, R., & Platonova, E. (2020). Liquidity Risk Exposure and its Determinants in the Banking Sector: A Comparative Analysis between Islamic, Conventional and Hybrid Banks. Journal of International Financial Markets, Institutions and Money, 66, 101196.

Morkoetter, S., Schaller, M., & Westerfeld, S. (2014). The Liquidity Dynamics of Bank Defaults. European Financial Management, 20(2), 291–320.

Patel, A., Sorokina, N., & Thornton, J. H. (2022). Liquidity and Bank Capital Structure. Journal of Financial Stability, 62(July). https://doi.


Phillips, P. C. B., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335–346.

Robatto, R. (2019). Systemic Banking Panics, Liquidity Risk, and Monetary Policy. Review of Economic Dynamics, 34, 20–42.

Shin, Y., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Non-linear ARDL Framework. In R. Sickels and W. Horrace (Ed.), In Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications. Springer.

Sriyana, J., & Ge, J. J. (2019). Asymmetric Responses of Fiscal Policy to the Inflation Rate in Indonesia. Economics Bulletin, 39(3), 1701–1713.

Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, Diversification, and Bank Margins: Evidence from Indonesian Islamic Rural Banks. Borsa Istanbul Review, 18(4), 349–358.


Waemustafa, W., & Sukri, S. (2015). Bank Specific and Macroeconomics Dynamic Determinants of Credit Risk in Islamic Banks and Conventional Banks. International Journal of Economics and Financial Issues, 5(2), 476–481.

Wagner, W. (2007). The Liquidity of Bank Assets and Banking Stability. Journal of Banking and Finance, 31(1), 121–139.




  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.


Creative Commons License

MUQTASID by is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

MUQTASID Jurnal Ekonomi dan Perbankan Syariah UIN SALATIGA p-ISSN: 2087-7013, e-ISSN: 2527-8304