Introduction

In corporate financial arena Islamic financing has highlighted various evoluti-onary setups by heading simultaneous growth potential in competition with conventional banking system¹. Islamic banking system success and sustaina-bility is now being widely adopted by the entire financial plate forms reducing various financial risks to financial transactions². Despite all of the certain Islamic banking system is still emerging and its practices are still reviving found as unbiased enhancing corporate performance³. Because, Islamic bank-ing system is working out of the question of Riba⁴ following Islamic fundam-entals–Figh Al Muamelat in accordance to gain and loss proportionate⁵.

Thus the study is aiming to answer following questions,

Q1: What is the role of risk management (liquidity risk) on Islamic bank performance under high competitiveness, less knowledge and high consumer expectation?

Q2: What are the key recommendations to narrate for risk management practices, enhancing financial performance and creating corporate finance culture in Islamic banking industry?

So the objective is to evaluate nexus between banks performance and risk management practices in Islamic banks of Pakistan by covering the contextual gap of Pakistani context in order to recommend theoretical implications to risk management practices and to Islamic banking spectrum of Pakistan on practical grounds. The study is covering on five sections as(i)Introduction(ii)literature review(iii)methodology(vi)results and(v)findings and conclusion.

Literature Review

Islamic finance is obliging Sharia fundamentals – against riba transactions because Riba is an additional amount charged on lending amount. In Islamic knowledge this is named as Qarz A Hasna and recognises intrinsic value of money on time value principal with respect to current practices. Here purchased items are sold to buyer in debt financing and payment is executed on minor crunches of instalments and assets is transfer to owner at maturity period after paying entire due amount with shared gain and loss as per agreed ratio⁸.

Continuing this argument⁹ has investigated mater or liquidity with disclo-sure of corporation and have found that good disclosure of corporate matters better policy raises the sentiments of trust by the side of stakeholders that has much impact on corporate liquidity in support on financial panels. But in some cont-exts reveals that disclosure in miner item that participates in plethora main item is investor motives that’s planning his wishes schematically to attain something desired that makes price structure thinner ultimately to price shocks¹⁰. Not limiting to it, another main role is played by the information movement in market about funds specifically informational efficiency has bigger partici-pation to it¹¹. While, such participative role of information is not always found in all the market who are heterogeneous in their nature or matter of business. Therefore, the heterogeneity also has sense able association with volatility that divides funds flow path¹². And it is volatility that makes funds movements steeper to negative in graph and leaves big holes in price structure participating to fragi-lity in arbitrage presence¹³. Such arbitragers are habitually rational being mark-et players invests by being inspired by any else key crocodile of market and ruins entire market graph because of being limited in many ways¹⁴. They have also extended that arbitragers are the individuals that have specific funds availability relying on their vulnerability to consume. Moreover,¹⁵ have also found similar result.¹⁶ argued that there is power full and significant affect of individual incomes, economical and poverty level as being an arbitrager or being participant of business activity in specialized markets. And it is signi-ficant linkages to predict financial fragility as making prices more sensitive¹⁷. Moreover,¹⁸ have also conducted a study on literature by taking above citations as giants have resulted that economic factors, vulnerability and movements plays significant role in predicating fragility in financial side. These results are wider in their existence and are spread around the globe.

Similarly,¹⁹ said that this fragility is also significant in Malaysia in households sectors prices. Hence, these findings have provided deep inside outlook that fragility is bigger concept in finance as well which is expanded not only in financial instruments it is also available in real instruments instead of financial. Have found all these producing factors of fragility works out of the country and they have a spillover effect or association regionally or internationally harming value of assets of entity financial mechanism of rates²⁰.

While,²¹ have conducted a study to investigate fragility behind the mirror by focusing that either it is market driven output or there lies sentiments in it. They found their quite successful in their observation/investigation and said perception towards financial difficulties makes on self dishearten that has dynamic role in excessive buying/selling to run oneself results in shape of fragility.²² have said it before that people really mean what they perceive and narrates in their conversation. And the objective to use these perceptions results in positive or negative way, specifically when fragility of prices is there it is due to insufficient resources of funds in case of assets, bank loans and other accruals²³. Moreover, by the side of market such expectations of price fragile side also rewards sentimentally as some becomes big winners and some are found as accidentally winers only because of price movement and ownership variation²⁴.

Thus,²⁵ have argued about it that how this structure is rewarding and they found fragility as matter of liquidation and non-liquidation because it is basing again a risk that is inn reverses of fundamental attitude. Again there is major role of income and wealth that makes price as fragile or thick beyond traditional way about it²⁶. While, moral objective and leverage are also two factors that are ass-ociated to liquidity and strong relation with it participating in price thinness²⁷ but²⁸ have extended that prices are also based on frequency of trading – as how much frequency shall be more that much reduction in change of prices will result in these stated prices and ownership shall automatically change with continuity, completing fragility structure. Somehow this movement makes on self in taking the outcomes from market by this change in price up to their margin and they are benefited by fragility too²⁹.

Thus, these both financing methods are non loss and profit oriented. Therefore, Sharia bounds against massive un clarity of results³⁰. So Islamic banking system is found more risky as compare to other banking system because here practice and religion both are questionable. Islamic banks are found allowed to attain funds deposit and sustain fresh accounts balance and adjust accounts in time. Moreover profit and loss shared during dire need conditions. While, Islamic banking is value delivering presenting special to customer in value provision hence Islamic banks are more flexible fundamentally³¹.

Therefore, Islamic banks are found transferring their funds to the institutions that are rewarding more in Monterey terms to speculate desired profit and loss. By this financial performance is successfully attained and risk is speculated. While, lower pay outs leads to transaction withdraw by the depositor and practically Islamic banking are heterogeneous to conventional banking system. Therefore, high competitive pressure is found leading to risky spectrum. So the hypothesis of the study are,

H1: There is significant role risk management proponents and financial performance of Islamic banking sector of Pakistan.

H1.1: There is significant role of risk management proponents on ROA of Islamic banking.

H1.2: There is significant role of risk management proponents and earnings per share.

Methodology

The ontological frame of the study is to assess the performance of Islamic banks and epistemologically study is grounding the factors of liquidity risk on banks performance. Thus, the study is following positivists’ research paradigm and is deductive in nature. The banking industry is opted as study population. While,sample of the study is Islamic banking industry specifically Bank Islami, Meezan Bank, Alfalah Bank, Duabi Islamic bank, MCB Islamic bank and UBL

Islamic bank.

The sample of the study is selected via systematic sampling specifically i-e banks having listed status in stock market since two years, highly volatile in transactions and more than 20 cities converge in context. This sampling method is used to attain sensed and supreme results to recommend sound policy guide-lines. The data is obtained from virtual sources of banks audited and publically published financial reported and from virtual databases of state bank of Pakistan. The data ranges from July, 2014 to June 2018 sequentially. To assess the cause and effects risk management practices are measured by the liquidity risk comprising on Working capital performance, Cash Ratio, Acid Test ratio and debt ratio (Iqbal et al., 2015). And for performance assessment profitability of the Islamic banks is used as proxy of it and is measured by using profita-bility index comprising on EPS, ROA, ROE AND WACC. Hence the model of study is as follows,

y=c+\mathit{\Omega i}t\left(i\right)

Here y is dependent variables performance of the Islamic banking industry, c is the constant factor and \Omega is the independent variable of study as liquidity risk, i represent the intersections and t is the time. Moreover, we have used descriptive analyses techniques along with correlation and regression analysis.

Data analysis

The above table is elaborating descriptive statistics of data where n = 6 Islamic banks with data range from 4.11 to 39.14. Here the mean value is ranging from 2.78 to 86.19 and the standard deviation is ranging from 8.87 to 76.00 respectively

* Significance level as p < 0.05

The table is showing the results of correlation analysis about liquidity risk and

firm performance. However, the variables are found statistically significant and correlating with (p<0.05).

The table three is about model summary where r square is 74.12 by these variables of study showing high contribution of variables to in prediction of relationships and the standard error of estimates is as 26.88 respectively.

This table is representing analysis of variance incurred in the model shown significant as 0.000 (p<0.05) with 4.17 f statistics and 2.81 as sum of the square of model along with 1 degree of freedom.

The table is showing the results of coefficients where working capital ratios are found significant with banks performance as 11.78 participation and 0.000 (p<0.05). Current ratio significant as 0.22 and 0.000 (p<0.05), accounts receivable as 0.36 and 0.000 (p<0.05) and acid test ratio as 0.14 and 0.000 (p < 0.05) significantly. Hence, all the company specific aspects of liquidity risk are found significant with banks performance and all the hypothesis are accepted here.

Conclusion

The nexus of liquidity risk and Islamic banking performance in Islamic bank-ing sector of Pakistani is investigated. The study results revealed that there is positive significant relationship of liquidity risk and banks performance. All the variable proxies are found significant with proxies of Islamic banks performa-nce in results. Thus, all the hypotheses of study variables are accepted. While, none of the hypothesis of the is rejected here. Hence, the study has revealed its findings parallel to all forms of associated historic investigations which aids the study as liquidity risk is found significantly associated with banks performance. But still there is need to look liquidity risk on banks product level. Moreover, accurate data and time limitation is found serious hurdle to this research.

References

²Iqbal, S. (2015). Working Capital Management antecedents impact on firm specific factors: a ten year review of Karachi stock exchange. International Letters of Social and Humanistic Sciences. 107-111. Exchange Investor’s. International Letters of Social and Humanistic Sciences. 126-130

³Iqbal, S. & Butt, S, A. (2015). Impact of Behavioral Biases on Working Capital Management of Manufacturing Sector of Pakistan. International Letters of Social and

Humanistic Sciences. (55), 147-153

⁴Iqbal, N. & Iqbal, S. (2015). Investor Behavior and Fundamental Analysis: a case of Karachi Stock Exchange Investor’s. International Letters of Social and Humanistic Sciences. 126-130

⁵Obaidullah, M. 2005, “Islamic financial services” Islamic Economics Research Center, King Abdulaziz University, Jeddah, Saudi Arabia.

⁶Iqbal, N., Chaudhry, S.N. & Iqbal, S. (2015). Impact of firm specific factors on credit risk: a case of Karachi Stock Exchange.International Letters of Social and Humanistic Sciences. 140-143.

⁷Khan, T. and Ahmed, H., 2001, “Risk management: An analysis of issues in Islamic financial industry” Occasional Paper No. 5, IRTI, Islamic Development Bank, Jeddah.

⁸Obaidullah, M. 2005, “Islamic financial services” Islamic Economics Research Center, King Abdulaziz University, Jeddah, Saudi Arabia.

⁹Shleifer, A. a. (1997). The limits to arbitrage. Journal of Finance 52, 35–55.

¹⁰Singleton, K. J.(2011).Investor flows and the 2008 boom/bust in oil prices,. Stanford University, Working paper.

¹¹SIPRA, N. (2006) “Mutual Fund Performance in Pakistan, 1995–2004”, CMER Working, Paper No. 06-45.

¹²Sirri, E. a. (1998). Costly search and mutual fund flows,. Journal of Finance 53.

¹³Stein, J. (2009). Sophisticated investors and market efficiency. Journalof Finance 64, 1517–1548.

¹⁴TREYNOR, J. L.(1965).“How to Rate Management of Investment Funds”, Harvard Business Review, vol. 43(1), p. 63 – 75.

¹⁵Treynor, J. (1962). Toward a Theory of Market Value of Risky Assets. Unpublished Manuscript.

¹⁶USMANI, M. T. (2002) “An Introduction to Islamic Finance, The Hague: Kluwer Law International”.

¹⁷Warther, V. (1995). Aggregate mutual fund flows and security returns. Journal of Financial .

¹⁸Yusof, S. A. (2015). Financial fragility of urban households in Malaysia. Jurnal Ekonomi Malaysia, 49(1), 15-24.

¹⁹Sundararajan, V. and Errico, L. 2002, “Islamic financial institutions and products in the global financial system: Key issues in risk management and challenges ahead” IMF Working Paper, WP/02/192.

²⁰Chong, B.S., and Liu, M.H., 2009,“Islamic banking: Interest-free or interest-based?” Journal of Pacific-Basin Finance, Vol.17, pp. 125-144.

²¹Bernake, B. S.(1983). Non-monetary effects of the financial crisis in the propagation of the great depression. American Economic Review, 73, , 488–500.

²²Bernardo, A. E. (2004). Liquidity and financial market runs. The Quarterly Journal of Economics, 135–158.

²³Bertrand, M. a.(2001)“Do People Mean What They Say? Implications for Subjec-tive Survey Data” American Economic Review, Papers and Proceedings, 91(2),67-72.

²⁴Bessembinder, H. M. (2006). Market transparency, liquidity externalities, and institutional trading costs in corporate bonds. Journal of Financial Economics .

²⁵Blank, R. M. (2009). “Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households,” New York: Russell Sage Foundation Publications.

²⁶Bloomfield, R. O. (2009). How noise trading affects markets: An experimental analysis. Review of Financial Studies, 22(6), 2275–2302.

²⁷Bolton P. a. O.(2011). “Sovereign default risk and bank fragility in financially integrated economies”, IMF Economic Review, 59, 162-194.

²⁸Brickman, P. D.-B. (1978). “Lottery Winners and Accident Victims: Is Happiness Relative?,” Journal of Personality and Social Psychology, 36(8), 917-927.

²⁹Brunetti M., E. G. ( Review of Income and Wealth, 62(4), ). “Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households,”. 2016, 628-649.

³⁰Bushee, B. J. (2000). Corporate disclosure practices, institutional investors, and stock return volatility. . Journal of accounting research, 171– 202.

³¹Calomiris C.W. (1995). “Financial fragility: issues and policy implications”, Journal of Financial Services Research, 9, 241-57.