Financial Openness and Islamic Bank Liquidity: Evidence from Pakistan

Abstract

This study looks at how financial openness impacts the liquidity of Islamic banks in Pakistan from 2011 to 2023, using a specific data analysis method called System GMM to consider changes over time and other influencing factors. Despite the growing relevance of Islamic finance, the influence of macroeconomic openness, particularly financial openness, on Islamic bank liquidity remains underexplored in the context of developing economies like Pakistan. The analysis includes a full sample of Islamic banks as well as sub-samples based on bank size. Findings reveal a significant and positive relationship between financial openness and Islamic bank liquidity, suggesting that liberalized financial environments enhance banks’ access to capital and support better liquidity management, even under Shariah constraints. The results offer practical insights for regulators and policymakers seeking to improve liquidity resilience in Islamic banks through macro-level reforms. This study will be a contribution to the literature by connecting the liquidity of Islamic banking with financial openness and will also emphasize the value of taking into account institutional and regulatory environments in determining financial outcomes.

Keywords: Islamic Bank, Liquidity, Financial Openness, GMM, Bank Size, Pakistan.