Does High Liquidity Creation Reduce the Efficiency of GCC Islamic Banks? The Role of Sustainability and Governance Factors

Wafa Khémiri ()
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Wafa Khémiri: Manouba University

No 1793, Working Papers from Economic Research Forum

Abstract: This paper investigates the impact of liquidity creation on the efficiency of Islamic banks. More precisely, it examines the curvilinear relationship between liquidity creation and Islamic bank efficiency in Gulf Cooperation Council (GCC) countries. To do this, a sample of 34 Islamic banks is selected over the period 2012-23. Employing a system GMM technique to address issues of endogeneity, the outcomes reveal the existence of an inverted U-shaped nexus between liquidity creation and Islamic bank efficiency, signaling the risk of excess liquidity. Additionally, CSR disclosure, audit quality, the Shariah Supervisory Board, and institutional quality moderate this relationship. This study provides several important implications for bank managers and policymakers in effectively managing excess liquidity risk and optimizing the efficiency of Islamic banks.

Pages: 41
Date: 2025-09-20, Revised 2025-09-20
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Published by The Economic Research Forum (ERF)

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