Empirical Analysis of Liquidity Risk and Operational Risk in Islamic Banks: Case of Pakistan

his paper aims to identify the impact of firm specific factors on liquidity risk and operational risk management for Islamic banks. The performance of Islamic financial institutions has been explored at length in regards to their operational differences, product offering and customer patronage. However, firm specific factors related to risk management have not been explored in Pakistan. This paper intends to fill that gap using empirical analysis. This study utilizes full-fledged Islamic banks operating in Pakistan during the period of 2006-2014. The ratio of capital to total assets us used as a proxy for liquidity risk and the ratio of return on assets is used as a proxy for operational risk. Size, NPL ratio, capital adequacy ratio, leverage and asset management have been used as independent variables. Results show that CAR, NPL ratio, leverage and asset management have a significant impact on liquidity risk. Size, car, and asset management have a significant impact on operational risk. The findings of this study can be utilized to create policies for enhanced risk management for Islamic financial institutions.