Profitability and Liquidity of Islamic Banks in the United Kingdom
The objectives of this research are to investigate the effect of liquidity on profitability and also the directions of causality between liquidity and profitability of Islamic banks in the United Kingdom. Five Islamic banks out of the existing twenty Islamic banks were selected for the study. They are Al Rayan Bank, Bank of London and Middle East, European Islamic Investment Bank, Gatehouse Bank and Qatar Islamic Bank. Econometrics analysis which include; regression and Granger causality test were carried out on UK Islamic banks’ liquidity and profitability. The results of the regression analysis showed that there exists co-integration among the variables, that is, long run relationship exists and also liquidity negatively and significantly affects profitability of the Islamic banks in the United Kingdom both in the short and long runs. However, the result of the pairwise granger causality test showed that there is no unidirectional or bidirectional causal effect between liquidity and profitability of Islamic banks in United Kingdom. Based on the results and conclusions, the study suggests that the apex bank (Bank of England) should guarantee close regulation and monitoring of Islamic banks’ strength and level of liquidity in an attempt to alleviate and strengthen the financial sector of the economy.
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