An empirical investigation between liquidity and key financial ratios of Islamic banks of United Arab Emirates (UAE)

Abstract: This paper empirically analyzes the impact of liquidity risk on key financial performance aspects of Islamic banks in the UAE. To document the association between liquidity risk and other performance ratios, time series data are taken for full-fledged Islamic banks working in the UAE from 2000 to 2014. Liquidity ratios and capital adequacy ratios, profitability ratios, and tangibility ratios are determined. Correlation and regression analyses are used to test the study hypotheses using SPSS. The findings indicate that capital adequacy and tangibility ratios are the main factors to determine liquidity risk of UAE Islamic banks. Furthermore, the results showed that the size of Islamic banks’ assets and capital adequacy had a positive and significant association with liquidity risk. Policymakers and Islamic finance experts should devote more attention to enhancing the base of Islamic finance assets to manage liquidity issues.