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.

1 2

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

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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 Bank Limited, 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 managing liquidity 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 the banks for the period 2003-20063. To calculate net liquidity gap, we have collected maturity-wise information of both assets and liabilities, which is segmented according to the following maturity buckets:
i. Up to 1 month maturity

ii. 1-3 months maturity

iii. 3-12 months maturity

iv. 1-5 years maturity v. 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)

We 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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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 Credit or investment-deposit ratio Years the ABBL the IBBL 85.77% 86.89% 86.36% 86.34% 0.53% 3.43% 3.25% 6.92% 4.53% 37.26%

2006 74.36% 2005 78.16% 2004 60.10% Average 70.87% 10.97% CV Ratio of classified loans against total loans and advances or investments 2006 4.02% 2005 8.21% 2004 11.37% Average 7.87% 38.27% CV Return on assets (ROA)

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Journal of Islamic Economics, Banking and Finance, Volume-5 Number-1 2006 2005 2004 Average CV 1.31% 0.50% 0.39% 0.73% 55.94% 93.08 31.26 18.19 47.51 68.75% 9.59 11.68 20.95 14.07 35.08% 1.03% 1.00% 1.10% 1.04% 4.02% 485.94 487.57 518.59 497.37 3.02% 8.31 9.24 9.32 8.96 5.12% 2.67% 2.50% 3.47% 2.88% 14.77%

Earnings per share 2006 2005 2004 Average CV Price-earnings ratio (Times) 2006 2005 2004 Average CV Net interest or investment margin4 2006 1.68% 2005 2.88% 2004 2.30% Average 2.28% CV 21.45% 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
4

2004

2005

2006

To calculate this ratio, we have divided the net interest income or net investment income by the interest/profit generating assets.

A Comparative Study of Liquidity Management of an Islamic Bank and a Conv Net Liquidity Gap -14,035 3,558 12,479 -384 Net Liquidity Gap -22,425 976 21,406 -1,742 Net Liquidity Gap -25,579 1,563 23,524 -1,014 9,721 8,215 23.83% Net Liquidity Gap 5,843 1,728 -646 -2,268 5,350 10,007 21.80%

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Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 3,583 8,419 years 5,201 6,634 Total Growth Rate 27.55% 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 assets to 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 longterm 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 liquidity Long-term liquidity Total liquidity gap5 gap6 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
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 3-12 months maturity bucket, we can get the amount of short-term liquidity gap. By 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 higher volatility 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 Percentage of Short Percentage of Short Growth Growth Year Term Assets in Total Term Liabilities in Rate Rate Assets Total Liabilities 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 Percentage of Long Percentage of Long Growth Growth Year Term Assets in Term Liabilities in Rate Rate Total Assets Total Liabilities 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% Source: Own calculation In case of growth rate of long-term assets and liabilities, the scenario was just opposite 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 assets had 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 Net Liquidity Net Liquidity Net Liquidity Gap Gap Gap 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 Long-term liquidity Total liquidity gap gap gap 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

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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 and 2006, 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 Percentage of Short Percentage of Short Growth Growth Year Term Assets in Total Term Liabilities in Total Rate Rate Assets Liabilities 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% Source: Own calculation 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 in managing short-term liquidity gap. Table 9: Analysis of long-term assets & long-term liabilities of the ABBL Percentage of Long Term Assets to Total Assets Percentage of Long Term Liabilities to Total Liabilities 9.19% 16.19% 24.32% 24.86% 18.64% Growth Rate 76.28% 50.18% 2.25% 42.90%

Year

Growth Rate 33.48% 55.98% -8.44% 27.01%

2003 14.52% 2004 19.38% 2005 30.23% 2006 27.68% Average 22.95% Source: Own calculation

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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%) in comparison 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 longterm 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 4-year average net liquidity gap of the IBBL (in million gap of the ABBL (in million TK. & figures are rounded to TK. & figures are rounded to nearest whole number) nearest whole number) Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Source: Own calculation -14,049 1,956 14,191 -1,352 6,768 7,514 152 -548 162 1,481 375 1,623

In the above table, we have calculated 4-year average net liquidity gap of the two banks 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 extent to 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 IBBL performed 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 situation more 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 Growth Total Liquidity Gap of Growth of the IBBL (in Rate the ABBL (in million Rate

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million tk.) 2003 5,201 2004 6,634 2005 8,215 2006 10,007 Average 7,514 Source: Own calculation 27.55% 23.83% 21.80% 24.41%

tk.) 1137 1243 1527 2583 1,623 9.32% 22.85% 69.16% 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 longterm 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 Source: Own calculation 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 Source: Own calculation 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 Percentage of Short Term Assets in Total Assets Liabilities in Total Liabilities IBBL ABBL IBBL ABBL 2003 71.40% 85.48% 73.64% 90.81% 2004 80.62% 83.81% 72.27% 77.34% 2005 71.68% 69.77% 77.25% 75.68% 2006 72.32% 75.14% 72.61% 72.85% Average 77.05% 81.36% 71.99% 75.27% Source: Own calculation 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 that percentage 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 Term Percentage of Long Term Assets in Total Assets Liabilities 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% Source: Own calculation 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 the ABBL for the period 2003 - 2006

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Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Source: Own calculation

CV of net liquidity gap of the IBBL 87.09% 49.38% 67.06% 52.85% 35.89%

CV of net liquidity gap of the ABBL 528.72% 61.50% 686.02% 13.14% 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 shortterm and long-term liquidity gap. Table 17: Comparison of CV of short-term, long-term and total liquidity gap of the IBBL 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% Source: Own calculation 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 two banks: Table 18: List of KPIs

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KPIs of IBBL Price-Earnings (P/E) Ratio Earnings Per Share (EPS) Return on Equity (ROE) Return on Assets (ROA) Investment-Deposit ratio (INV/DEP) Percentage of classified investments against total investments (Classing/TINV) Capital Adequacy Ratio (CAR)

KPIs of ABBL Price-Earnings (P/E) Ratio Earnings Per Share (EPS) Return on Equity (ROE) Return on Assets (ROA) Advance-Deposit ratio (ADV/DEP) Non-performing loans as percentage of total loans & advances (NPL/ADV) 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 (in P/E ADV NPL/ EPS ROE ROA million tk.) Ratio /DEP ADV 2003 5200 23.26 195.52 0.074300 0.0053 0.8437 0.0814 2004 6634 9.32 518.59 0.151500 0.0110 0.8636 0.0692 2005 8216 9.24 487.57 0.135100 0.0100 0.8689 0.0325 2006 10007 8.31 485.94 0.134208 0.0103 0.8577 0.0343 Source: Annual reports of the IBBL and own calculation

CAR 0.0943 0.0921 0.0944 0.0943

Table 20: Values of the variables for regression analysis - the ABBL
2003 2004 2005 2006 TLG (in million tk) 1136 1244 1527 2583 P/E Ratio 53.89 20.95 11.68 9.59 EPS 3.63 18.19 31.26 93.08 ROE 0.0153 0.0724 0.1064 0.2061 ROA 0.0007 0.0039 0.0050 0.0111 ADV /DEP 0.7496 0.6010 0.7816 0.7436 NPL/ ADV 0.1925 0.1137 0.0821 0.0402 CAR 0.0917 0.0909 0.0917 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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TLG7 Vs. P/E Ratio TLG Vs. EPS TLG Vs. ROE TLG Vs. ROA TLG Vs. INV/DEP TLG Vs. ClassInv/TINV TLG Vs. CAR

TLG = 10348 - 226 P/E Ratio TLG = 3574 + 9.34 EPS TLG = 3068 + 35919 ROE TLG = 2669 + 529549 ROA TLG = - 77559 + 99098 INV/DEP TLG = 11698 - 76972 ClassInv/TINV TLG = - 42701 + 535484 CAR

61.4% 46.9% 34.7% 44.3% 27.1% 84.5% 8.4%

3.18 1.77 1.06 1.59 0.74 10.93 0.18

0.217 0.315 0.411 0.334 0.480 0.081 0.711

From the above table, we see that total liquidity gap of the IBBL was mostly influenced by classified investment to total investment ratio. The value of r2 in this case is 84.5%, which indicates that 84.5% variations in total liquidity gap of the IBBL can be explained by classified investment to total investment ratio. However, P-value of F-test confirms the validity of the model at 91.9% confidence level. b. Multiple regression analysis for the IBBL:
Models Model - A Model B Model C Model - D Regression Equation TLG = 49733 - 1431 P/E Ratio - 57.6 EPS TLG = 4917 - 449849 ROE + 6369262 ROA TLG = 39095 - 31333 INV/DEP - 86137 Classing/TINV TLG = 10057 + 129556 ROA - 68604 Classing/TINV r2 99.4% 98.4% 86.0% 86.2% F-test value 80.48 30.89 3.08 3.12 P-value of F-test 0.079 0.126 0.374 0.372

From multiple regression analysis, we find that the total liquidity gap of the IBBL had very high degree of relationship with P/E ratio and the EPS. Moreover, ROE and ROA had also substantial impact on liquidity gap. Though these profitability indicating variables (P/E ratio, EPS, ROE and ROA) showed little relationship when we considered them in isolation by simple regression, but now from multiple regression we can understand that collectively they had a huge influence in determining liquidity position of the IBBL. However, from P-value of F-test, we see that Model A had the highest degree of statistical significance than the other three models. With 92.1% confidence level, the P/E ratio and the EPS combined can describe 99.4% variations in total liquidity gap of the IBBL.

TLG = Total Net Liquidity Gap

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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-test value P-value of F-test

TLG Vs. P/E TLG = 2118 - 20.6 P/E Ratio 41.0% 1.39 0.360 Ratio 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. TLG = - 137 + 2447 ADV /DEP 8.8% 0.19 0.703 ADV /DEP TLG Vs. TLG = 2535 - 8516 NPL/ ADV 68.8% 4.40 0.171 NPL/ ADV 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 Model - A Model B Model C Model - D Model - E Model - F Regression Equation TLG = 895 + 3.10 P/E Ratio + 17.9 EPS TLG = 358 + 11.6 P/E Ratio + 190723 ROA TLG = 1084 + 22.1 EPS - 2687 ROE TLG = 1100 + 24.9 EPS - 75173 ROA TLG = 140 + 15.2 P/E Ratio + 11161 ROE TLG = 1178 + 1857 ADV /DEP - 8310 NPL/ ADV r2 99.8% 98.7% 99.7% 99.9% 99.9% 73.8% F-test value 206.32 38.24 168.33 788.48 635.14 1.41 P-value of F-test 0.049 0.114 0.054 0.025 0.028 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 shortterm 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 for the Co-existence of Lending and Deposit-Taking, Working Paper No.6962, NBER. Toby, Adolphus J. (2006), Empirical Study of the Liquidity Management Practices of Nigerian 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 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total 29,932,782,510 52,357,637,964 8,764,031,623 7,788,027,215 35,126,894,257 13,721,202,930 16,420,047,592 18,161,971,512 11,905,526,176 3,486,523,219 102,149,282,158 95,515,362,840 2005 37,960,403,301 10,735,777,084 39,388,141,821 20,324,626,597 14,471,399,419 122,880,348,222 47,897,441,420 16,731,526,160 44,464,758,570 25,292,743,057 15,866,351,594 150,252,820,801 63,539,073,407 9,172,353,476 15,864,179,418 21,338,214,401 4,750,786,314 114,664,607,016 2006 42,054,078,669 15,003,856,505 45,110,643,803 27,561,008,008 10,516,001,019 140,245,588,004 -22,424,855,454 976,004,408 21,405,691,327 -1,741,923,920 8,419,002,957 6,633,919,318 -25,578,670,106 1,563,423,608 23,523,962,403 -1,013,587,804 9,720,613,105 8,215,741,206 5,843,362,751 1,727,669,655 -645,885,233 -2,268,264,951 5,350,350,575 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 9,969,011,362 5,540,078,698 12,672,920,396 4,265,904,403 521,535,816 32,969,450,675 2004 3,589,781,180 6,401,196,614 16,216,875,805 6,070,662,111 230,111,083 32,508,626,793 2005 2,551,658,800 5,451,626,899 15,065,790,149 8,888,801,428 1,107,525,278 33,065,402,554 2006 4,143,424,393 12,323,056,314 18,238,866,404 12,596,498,458 687,491,653 47,989,337,222 Liabilities 8,927,145,696 5,684,319,961 14,298,090,334 2,504,316,014 419,601,090 31,833,473,095 2,769,716,854 7,328,424,655 16,104,727,749 4,645,541,007 416,639,753 31,265,050,018 3,415,168,423 6,281,815,268 14,172,805,584 7,668,733,444 0 31,538,522,719 4,535,030,389 12,612,487,879 16,969,787,103 11,079,970,516 209,298,423 45,406,574,310 Net Liquidity Gap 1,041,865,666 -144,241,263 -1,625,169,938 1,761,588,389 101,934,726 1,135,977,580 820,064,326 -927,228,041 112,148,056 1,425,121,104 -186,528,670 1,243,576,775 -863,509,623 -830,188,369 892,984,565 1,220,067,984 1,107,525,278 1,526,879,835 -391,605,996 -289,431,565 1,269,079,301 1,516,527,942 478,193,230 2,582,762,912

Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total Up to 1 Month 1-3 Months 3-12 Months 1-5 Years More than 5 years Total

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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.) Standard Coefficient of Variation Average Deviation (SD) (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.) Standard Coefficient of Variation Average Deviation (SD) (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.) Short-term Year Long-term liquidity gap Total liquidity gap 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 total liquidity gap of the ABBL for the period 2003 2006 (Amounts are in million TK.) Short-term liquidity Year Long-term liquidity gap Total liquidity gap gap
8

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

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2003 2004 2005 2006 Average SD CV

-727 5 -801 588 -233.75 569.5047739 243.64%

1,864 1,238 2,328 1,995 1856.25 394.9977 21.28%

1,137 1,243 1,527 2,583 1622.5 572.5843 35.29%