Bank capital and liquidity creation: evidence from Islamic and conventional MENA banks

This paper estimates the amount of liquidity created by MENA banks over the period 2011-2016, and further investigates the impact of bank capital on liquidity creation, controlling for a set of bank-level and macro variables. The findings reveal that banks created 5.281 trillion US dollars of liquidity, which equals 28.4% of their total assets and conventional banks create more liquidity than Islamic banks, as do large banks compared to medium and small banks. But, the Islamic banks are the best in terms of liquidity creation per asset. The regression results also show a negative relationship between equity capital and liquidity creation, which support the financial fragility crowding-out hypothesis, but only for conventional banks and for large and small size banks. Finally, the study contains some implications for decision makers and regulators in the region.