Major Causes of Bank's Liquidity Risk in Saudi Arabia Essay Example

Introduction

The differences and similarities of the research data will be evaluated based on the research objectives and also the data obtained from the population that was sampled by the researcher. Since the Islamic banking system is a system that is entirely based on the Islamic laws that are sharia law, some principles and regulations ought to be followed by the system to ensure concurrency with their economic, religious and social beliefs.

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With the commercial banking system, the rules and regulations issued by the monetary regulation system and inconsistency with all the regulations that are nor Islamic banking based. From the data, the following differences were evaluated by the researcher concerning the Islamic banking system and commercial banking system based on each research objectives and the research tool used.

Differences based on Major Causes of Bank's Liquidity Risk in Saudi Arabia

Banks are mandated to provide liquidity regulations in the system and to ensure that their movement of the same, with Islamic banking, this is not the case since the respondent disagree whereas in the commercial bank it is the regulatory system that provides for liquidity movement in the baking system. This difference is as a result of differences in the governing rules and regulations though under the same banking system, the commercial banks rely entirely on the issued conventions and do not rely solely on social and religious moral boundaries with Islamic moral boundaries are taken into consideration.

Crisis in one of the countries affects the growth of an economy. Economic stagnation is as a result of economic policy factors that inhibits the growth of the economy based on the data collected by the researcher, the Islamic banking system perceives that this eternal factor strongly and negatively affects the economic growth but on the other hand, the degree of correlation between the economic growth, external factors and stagnation is perceived and taken with a lesser Wight buy the commercial banking in the country. This, therefore, shows that the Islamic banking laws always attribute negative results of the bank with eternal factors while with the commercial banks, they still perceive the stagnation as contributed with other factors and amongst them is the stability of the economy.

With the Islamic banking, there are no fixed profits that are promised between the borrower and the lender, what is perceived as the actual profit arising from the transaction is based on the two parties since they are all involved in the risk sharing idea where the parties engage in risk profit sharing within the transaction. On the other hand, with the commercial banking system, an investor from a transaction is promised a fixed rate and the real rate is based on the interest rate that is postulated by the regulatory body mandated to control the banking system within the country.

Measurement Tools of Liquidity Risks

Liquidity risk is based on different tools of measurement. An organization will only know if the company is performing or not based on its liquidity as well as its profitability.Excess liquidity in the bank is exploited in other forms of investment. According to the Islamic banking , chares that is in excess of the company level of interest rates set does not entirely contrabass to the earnings of the charity but not to the profits of the banking sector since with Islamic banking , any additional amount that results from punishment of non -compliance is not treated as an earning but it is taken as a financial aid to charitable institutions On the other hand , charge that results from the delay in the payment of interest rates and default payment is compounded to the loan and therefore it cannot be added back to charity but it is rather consolidated to the profitability of the organization in the commercial banking sector .

To meet financial obligations and commitment, with Islamic banking system, cash flow forecasting, and understanding of trend cannot be used as a measure of firm's liquidity since the company has more utility and renting of property as well as other financial assets rather than interest. On the other hand, utilization of forecasting of cash flow statement by the commercial banking system will help the company understand the company's trend, and through this understanding, the company will be able to meet its financial commitments. Achieving this will help the company analyses the market performance as well as the possibility of the market shortly if it will either grow or not.

Effects of Liquidity Risk Management on the Performance

Performance of any organization is based on the company's ability to control its liabilities and generate substantially sufficient profits to meet any financial risk. Based on this analysis, with Islamic banking system, ability to meet commitment and performance by organizations cannot be achieved by the company since it ought to give more concentration on one system to help the company attain other success factors. This is also supported by the firms giving less emphasis to the worthiness of the credit in the evaluation of the performance and appraisal of the projects that are undertaken by the company. On the other hand, with commitment and performance, there is a greater emphasis and strong correlation since the company places more emphasis on the viability of the project. Through this, the company will, therefore, put more emphasis on meeting project appraisal when measuring the creditworthiness of any borrower which will, in turn, affect performance.

The imbalance between inflows and outflows has a strong correlation with liquidity risk and financial performance in the Islamic banking system. Since it is the interest of the public to ensure that there is an ultimate growth in the company's equity which will then affect the bank's inflows and outflows. On the other hand, liquidity risk and financial performance has a least correction with the inflows and outflows of the company in the commercial banks since that aim of the company is to ensure that there is a balance between the lenders and borrower so as at the end of any financial period the interest will be based on financial meeting the party's interest.

Trends in Management Methods in Reducing Liquidity Risk

It is the role of every internal control system in an organization to control liquidity risk through detection, correction, and reporting of errors with a greater magnitude of materiality. With Islamic banking, the role of internal control system is greatly tied in managing the firm as it sustains its financial risk through instituting a strong internal control on the other hand, respondents who are based on the commercial banks see no effectiveness in the internal controls as taking a greater role in the management of the risk since the governing authority is under the larger part of the finance act and operates globally.

Using the past data from the financial information cannot be relied I upon by the Islamic banking system since the data is historical and judgmental rather than reality and objective on the other hand with financial information and ratio computation, commercial banking system aids the company in identification or risks. When the risk is identified, then the risk profiling and management control are instituted to help the company mitigate the financial risk.

Requirements of Public Disclosure

With financial statements, its role is to give a disclosure as to the liquidity risk of the organization to users and this information is more relied upon by the Islamic banking whereas on the other hand, information presented in the financial statements to commercial banks does not have a greater role in portraying the liquidity of the organization. It is the requirement by the Islamic banking laws to have a clear understanding of the business to advance loan to that is why there are substantial scrutiny and reliance of financial information to assess the liquidity risk through financial statements.

Islamic banking believes that capital adequacy, dividends and their impact on liquidity to be disclosed has no greater financial relationship with disclosure of liquidity since they entirely rely of laws governing their disclosure and information to rely on the other hand, commercial banks have greater relationship since it is the requirement of the cat that such disclosure is needed so as to assess the firm's liquidity before loan advancement by the central bank.

Similarities between the Islamic banking system and commercial banking system

The role of any financial institution is to offer credits and financial support to businesses within the industry to thrive. This, therefore, meat that both banking system core substratum is to support the small businesses in meeting their financial requirements as well as its expansion. It is the role of the management in both the banking institution s to report the performance of the company on the daily basis since it aims to analyze and assess the performance and if changes are needed, they will be affected before casing greater liquidity harm to the business in operation.

With the governance of the financial institution and monitoring of daily liquidity of the business, it is the role of the regulatory institution in both banks to monitor performance to alert the general public and h interested parties on the liquidity position of the company. Since commercial and other banks rely entirely on the support from the central banking system, the advancement act as a loan and with shareholders, who invest in the bank will be liable if the company does not pay its obligation. So, with this, therefore, monitoring of performance should be by monitoring authority recognized by the government of country's in operation to prevent liquidity risk.

With the long-term deposits in both banks, the returns are higher compared to the short-term deposit since both rely on the interest charge as well as the duration it will take for the deposit to mature.It is the duty of both departmental managers and internal oversight service in both financial institutions to control the risk since they r the one delegated the dories by the monitory authority to control such risks and in case there is an identified risk, they are obliged to take immediate corrective actions based on the delegation or report to relevant oversight authority so as to control the risk.

Short-term financial investments are offered to borrowers to aid them to meet their day as well as short-term financial requirements. This is therefore possible in both firms since the interest or the Riba charged by the two-banking system is higher over the shorter period. Also, both banking institutions require to prepare financial statements to help in assessing the profitability of the firm. This, therefore, will help the ender asses the viability as well as the going concern status of the company by performance.

It is also the requirement of both banking system before making any commitment which is contractual with other third parties to ensure that there is a well and scrutinized assessment of the financial reports to aid lender know the performance and reduces the liquidity gap.In both banks, there is a strong correlation between the management of performance and its impact on liquidity management. Since a shortfall in performance indicates less flexibility and efficiency in the company, it is the rationality of the management to assess the performance and devise ways to diversify re risk through other methods of risk mitigation.

It is the role of financial regulations to shape what is required and what is not in both the firms since the laws might be different, but its overall impact on financial performance and...