Paper Example on Managing Liquidity Risk in the Banking Industry

Introduction

The backbone of the economy of all states depends on the daily monetary activities from the commercial institutions. The financial engagement of banks in commercial segment is relevant in the advancement of various economies. This mechanism relates to every countries participation into the fiscal structure and the commercial strategy. The commercial segment provides a significant signal of the crucial status of the financial position of a state, with the administration of different and vast commercial responsibilities that aid in the motivation of all operations that deal with monetary supervision. Taking in any form of payments, issuing both types of credit amenities (direct and indirect), assessing the available valuables, provision of letters of guarantee and the checking the filed credits are the most key duties provided in the financial sector (Komarkova et al., 2016).

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Financial institutions act as middlemen working between clients that bring deposits thus contributing to the supply of funds to banks and the creditors who intend to raise the demand for the deposited money.

Adler (2012) asserts that the possible whispers of the continuous deprivation of assets in a bank can lead to the withdrawal of investors since they believe that the institution is facing monetary insolvency.

For the last two decades, financial institutions went through various obstacles endangering the reliability of banks (Aduda and Gitonga, 2011). The situation, however, was experienced differently in various states (Edem, 2017). According to Abdelrahim (2013), Saudi Arabia's financial situation is directly affected by the international economy. Therefore, it is logical to conclude that the country has been influenced by the deteriorating international crisis that led to Saudi's diminishing achievement in the stock market within some few years. With the increase in the international economic catastrophe, financial institutions in Saudi Arabia are facing insolvency probabilities and unexpected events on the country's banks achievements (Saif-Alyousf et al., 2017). Such a situation needs an expansion in the efficacy of the liquidity risk management.

The international economic segment has gone through various advancements within the final decade of the 20th century. This is illustrated by the extensive technological changes in the financial institutions industry, the expansion of new commercial tools, and the exceptional commencing of monetary markets in various states. These favorable developments, however, did not curb the effect of the troubles faced in the economic segment. This effect was experienced in both flourished and blossoming countries, which impacted negatively on their financial statuses (Kumar and Yadav, 2013).

The research is conducted in Saudi Arabia, mostly around the Saudi's financial institutions and Islamic banks.

The research illustration includes managers and staff members of Saudi's financial institutions and Islam banks.

Liquidity is one of the most crucial affairs in commercial institutions that directly influences the production of banks and the degree to which clients confide in the facility. The deprivation of enough liquid assets signify that the financial institution is prone to a crisis since the facility cannot provide the clients with monetary assistance within ample time. Liquidity is known in its entire meaning as financial. In a complex approach, it implies that the wealth can be quickly changed to cash with minimal loss, as the aim of having liquid assets is to meet current liabilities (Bouabdelli & Tabbi, 2015). Liquidity in financial facilities refers to the much a bank can offer in terms of assets and how it can expand its worth of assets without being in a position that forces it to sell its valuables at unfair prices or turn to expensive lenders (Ahmed, 2013).

Olagunju and others (2012) observed that liquidity has three aspects, cost, risk, and time. Cost refers to the commercial obligations that must be done in the process of executing change. Risk on the other hand refers to the probable decrement of assets while time is about how fast the valuables can be changed to liquid cash.

Liquidity risk is referred to as the restrictions a financial institution has in settling its commercial duties, and also the incapacity to provide monetary assistance on the assets section without requiring to sell the valuables at poor amounts or result to funds that need a lot of funds (Sohami, 2013).

Liquidity risk in normal financial institutions is caused by the scarce liquidity required for usual daily operations and hence minimizing the chances of the facility to settle its current liabilities at maturity (Bouabdelli and Tabbi, 2015).

Bouabdelli and Tabbi (2015) carried out a research between Islamic and commercial financial institutions to find out the correlation between the facility's size, equity returns, liquid returns, capital adequacy ratio and liquidity risk. The research made a conclusion that the correlation between the independent and dependent variables is favorable.

The methodology of the research and the steps are key concentration to which the practical element of the project is done. The statistics needed to perform an analysis are taken to get to the outcome that are assessed with the research literature's benefit related to the study's objective (Mertens, 2014).

This chapter defines the executed methods, the research society and the illustration, the used mechanism, the groundwork process, the method of construction and development, and the magnitude of its legitimacy and satiability. The chapter also contains an explanation of the investigator's processes in providing a proper scheme, and the instruments used in the assembling of important data. The chapter concludes with the statistical procedures used in assessing the data and coming up with results (Levac, Colquhoun & O'Brien, 2010).

This chapter involves the chief assumptions the investigator has settled with after the analysis. This section also includes the proposed references and concludes with proposals for future studies.

The assessment of the outcome of the current research showed that the contributors attained the chief objective of the study that analyzed the causes of liquidity risk management on the productivity of normal and Islamic financial institutions in Saudi Arabia. The outcome showed that there is an effect of liquidity risk management on the productivity of normal and Islamic financial institutions.

Following the positive outcome of the research, assumptions, and references, the recommendation below is appropriate for additional research:

Conclusion

Refer to the current research. It could be copied in other illustrations for a long time with the aim of answering additional questions.