Corporate governance and liquidity creation in a duality banking system

Nurhastuty Wardhani, Robert Faff and Lewis Liu

Journal of Financial Regulation and Compliance, 2024, vol. 33, issue 2, 214-243

Abstract: Purpose - This study aims to investigate the factors influencing liquidity creation in banks, particularly focusing on the role of bank governance. Using a unique panel data set, it compares Islamic and conventional banks to discern governance’s impact on liquidity creation, offering insights for policymakers and bank managers. Design/methodology/approach - Quantitative analysis is used on a panel data set to assess liquidity creation determinants in banks. A governance index is constructed, analyzing metrics such as risk management, audit committee effectiveness and Shariah board presence. Regression models identify significant relationships between governance factors and liquidity creation. Findings - This study reveals a positive relationship between governance index and liquidity creation, especially in banks with better performance, higher credit risk, smaller size and lower equity, particularly in low-inflation environments. Specific governance practices significantly impact liquidity creation, alongside a positive relationship with Tier1 ratio, supporting the risk absorption hypothesis. Originality/value - This research offers empirical evidence on the relationship between bank governance and liquidity creation, highlighting its significance for both Islamic and conventional banks. It provides valuable insights for policymakers and bank managers aiming to enhance banking sector stability and efficiency.

Keywords: Liquidity creation; Corporate governance; Banking system; Emerging economies (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-08-2024-0162

DOI: 10.1108/JFRC-08-2024-0162

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