Excess Liquidity and Financial Performance of Islamic Banks in the Kingdom of Bahrain: An Field Study

Abstract

This study aims to investigate the relationship between excess liquidity and financial performance in Islamic banks in the Kingdom of Bahrain during the period (2009-2016). The study sample included twelve Islamic banks. To achieve this goal, the data were analyzed using the Heterogeneous Multiprotocol Analysis using the random effect model (STATA). The necessary data were collected from the annual reports of the sample. The study showed a statistically significant inverse relationship between excess liquidity and financial performance in Islamic banks. The study showed a statistically significant positive correlation between capital adequacy and financial performance in Islamic banks. The study concluded with a number of recommendations, the most important being the Central Bank of Bahrain to consider the possibility of opening an Islamic window to take advantage of excess cash available in Islamic banks through the acceptance of short and medium-term investment deposits in return for those Islamic banks on a profit margin in line with one of the Islamic investment formulas, And in return to grant loans with a profit margin also in accordance with one of the forms of Islamic finance.