Impact of Liquidity Risk on Financial Stability

Yousfi, Ridha (2025): Impact of Liquidity Risk on Financial Stability.

Abstract

This study examines the effect of liquidity risk on the financial stability of Islamic commercial banks in Tunisia over the period 2012–2021. Using a purposive sample of 10 Islamic banks and a balanced panel that yields 78 bank-year observations, we estimate a set of OLS regressions to assess direct and indirect relationships among liquidity risk (measured by the Financing to Deposit Ratio, FDR), credit risk (Non-Performing Financing, NPF), operational efficiency (BOPO) and bank stability (Z-score). Diagnostic tests (normality, multicollinearity, heteroscedasticity and autocorrelation) support the adequacy of the models. Empirical results show that higher liquidity risk (FDR) is associated with lower bank stability, and that elevated NPF significantly reduces stability. Operational efficiency (lower BOPO) is positively associated with bank stability. The analysis also reveals that FDR negatively affects NPF, while NPF strongly reduces operational efficiency. These findings underscore the need for balanced liquidity management that preserves lending activity without compromising solvency and operational performance. Policy implications for regulators and bank managers in emerging Islamic banking systems are discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Liquidity Risk; Bank Stability; Islamic Banks; Credit Risk; Operational Efficiency
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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