Article Sidebar

The effect of liquidity risk on Sharia rural banks’ profitability The role of size and ownership
Submitted
November 11, 2025
Accepted
February 21, 2026
Published
February 18, 2026
Download
PDF Review Reports Originality Report
Statistic
Read Counter : 0 Download : 0

Main Article Content

Abstract

Introduction
Liquidity risk arises from its inability to meet its obligations or to fund an increase in assets at maturity without incurring unacceptable costs or losses. Accordingly, it is essential to gain a deeper understanding of the underlying relationship between bank liquidity and bank performance.
Objectives
The goal of this study is to investigate the impact of liquidity risk on the profitability of Shariah Rural Banks (SRBs), controlling for market competition, bank-specific variables, and macroeconomic conditions.
Method
The study analyzed 154 SRBs from 2015 to 2023 using quarterly data. The total number of observations is 5,496 with unbalanced panel data. This study employs panel regression to investigate the impact of liquidity risk on profitability.
Results
The liquidity risk decreases profitability. Small SRBs encounter more risks related to liquidity risk than large Islamic banks. The local state-owned SRBs are more effective in mitigating the negative impact of funding risk on profitability. Also, strong market power and bank fundamentals support profitability. Furthermore, a good economic condition boosts profitability.
Implications
First, policymakers must oversee the liquidity risk management of SRBs to ensure that the negative impact of mismatched maturity on profits is relatively small. Second, SRB must effectively manage liquidity risk by carefully selecting customers and closely monitoring financing when they are at high liquidity risk.
Originality/Novelty
The empirical research on the impact of liquidity risk on SRB's profitability is still rare to date. Our research explores the effect of liquidity risk on profitability, considering bank size and bank ownership as moderating variables.

Keywords

bank ownership liquidity risk market competition profitability Sharia rural banks size sustainable banking

Article Details

License

Copyright (c) 2026 Sri Rahmany, Agus Widarjono, Noraziah Che Arshad, Zul Hendri

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
  3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
How to Cite
Rahmany, S., Widarjono, A. ., Che Arshad, N. ., & Hendri, Z. . (2026). The effect of liquidity risk on Sharia rural banks’ profitability: The role of size and ownership. Journal of Islamic Economics Lariba, 12(1), 731–750. https://doi.org/10.20885/jielariba.vol12.iss1.art26
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX

References

  1. Abasimel, N. A. (2023). Islamic banking and economics: Concepts and instruments, features, advantages, differences from conventional banks, and contributions to economic growth. Journal of the Knowledge Economy, 14(2), 1923–1950. https://doi.org/10.1007/s13132-022-00940-z

  2. Abbas, F., Ali, S., Yousaf, I., & Wong, W.-K. (2021). Dynamics of funding liquidity and risk-taking: Evidence from commercial banks. Journal of Risk and Financial Management, 14(6), 281. https://doi.org/10.3390/jrfm14060281

  3. Abdelaziz, H., Rim, B., & Helmi, H. (2022). The interactional relationships between credit risk, liquidity risk and bank profitability in MENA region. Global Business Review, 23(3), 561–583. https://doi.org/10.1177/0972150919879304

  4. Abdo, K. Y. M., Md. Noman, A. H., & Hanifa, M. H. (2022). Exploring the dynamics of bank liquidity holding in Islamic and conventional banks. International Journal of Islamic and Middle Eastern Finance and Management, 16(3), 557–575. https://doi.org/10.1108/IMEFM-02-2021-0068

  5. Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366. https://doi.org/10.1016/j.jfineco.2012.05.014

  6. Addou, K. I., Boulanouar, Z., Anwer, Z., Bensghir, A., & Ramadilli Mohammad, S. M. (2024). The impact of Basel III regulations on solvency and credit risk-taking behavior of Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management, 17(5), 915–935. https://doi.org/10.1108/IMEFM-05-2024-0248

  7. Adwan, S., Alhaj-Ismail, A., & Girardone, C. (2020). Fair value accounting and value relevance of equity book value and net income for European financial firms during the crisis. Journal of International Accounting, Auditing and Taxation, 39, 100320. https://doi.org/10.1016/j.intaccaudtax.2020.100320

  8. Ahmad, N., Naveed, A., Ahmad, S., & Butt, I. (2020). Banking sector performance, profitability, and efficiency: A citation‐based systematic literature review. Journal of Economic Surveys, 34(1), 185–218. https://doi.org/10.1111/joes.12346

  9. Al-Sari, A. (2025). The collapse of Silicon Valley Bank: A critical analysis of regulatory shortcomings and risk management under Basel III. Journal of Banking Regulation, 26(4), 661–677. https://doi.org/10.1057/s41261-025-00281-2

  10. Ardana, Y., & Nurmalia, G. (2025). Determination of Islamic social responsibility disclosure in Indonesian Sharia commercial banks. Economics, Finance, and Business Review, 2(1), 32–42. https://doi.org/10.20885/efbr.vol2.iss1.art4

  11. Arif, A., & Anees, A. N. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and Compliance, 20(2), 182–195. https://doi.org/10.1108/13581981211218342

  12. Berrospide, J. M. (2021). Bank liquidity hoarding and the financial crisis: An empirical evaluation. The Quarterly Journal of Finance, 11(4), 2150020. https://doi.org/10.1142/S2010139221500208

  13. Bilal, Z., AlGhazali, A., & Samour, A. (2024). GCC banks liquidity and financial performance: Does the type of financial system matter? Future Business Journal, 10(1), 57. https://doi.org/10.1186/s43093-024-00348-y

  14. Birindelli, G., Ferretti, P., Ferri, G., & Savioli, M. (2022). Regulatory reform and banking diversity: Reassessing Basel  3. Annals of Finance, 18(4), 429–456. https://doi.org/10.1007/s10436-021-00406-3

  15. Dahir, A. M., Mahat, F. B., & Ali, N. A. B. (2018). Funding liquidity risk and bank risk-taking in BRICS countries: An application of system GMM approach. International Journal of Emerging Markets, 13(1), 231–248. https://doi.org/10.1108/IJoEM-03-2017-0086

  16. Dahir, A. M., Mahat, F. B., Razak, N. H. A., & Bany-Ariffin, A. N. (2019). Capital, funding liquidity, and bank lending in emerging economies: An application of the LSDVC approach. Borsa Istanbul Review, 19(2), 139–148. https://doi.org/10.1016/j.bir.2018.08.002

  17. Dias, R. (2021). Capital regulation and bank risk‐taking – New global evidence. Accounting & Finance, 61(1), 847–884. https://doi.org/10.1111/acfi.12595

  18. Eltweri, A., Sawan, N., Al-Hajaya, K., & Badri, Z. (2024). The influence of liquidity risk on financial performance: A study of the UK’s largest commercial banks. Journal of Risk and Financial Management, 17(12), 580. https://doi.org/10.3390/jrfm17120580

  19. Fungacova, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100937. https://doi.org/10.1016/j.jfs.2021.100937

  20. Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2020). Liquidity risk determinants: Islamic vs conventional banks. International Journal of Law and Management, 63(1), 65–95. https://doi.org/10.1108/IJLMA-03-2018-0060

  21. Gunawan, I., & Soma, A. M. (2025). Why do bank risks affect stock returns? Examining the mediating role of profitability in Indonesia’s tier-1 banks‎. Journal of Islamic Economics Lariba, 11(2), 815–846. https://doi.org/10.20885/jielariba.vol11.iss2.art7

  22. Hassan, M. K., Khan, A., & Paltrinieri, A. (2019). Liquidity risk, credit risk and stability in Islamic and conventional banks. Research in International Business and Finance, 48, 17–31. https://doi.org/10.1016/j.ribaf.2018.10.006

  23. Hendri, Z., Wulandari, E., & Sollehudin Shuib, M. (2025). Do we need large Islamic rural banks? Economics, Finance, and Business Review, 2(1), 1–11. https://doi.org/10.20885/efbr.vol2.iss1.art1

  24. Hidayah, N., & Karimah, N. A. (2023). Are sharia financing schemes profitable? The case of islamic rural banks in Indonesia. EL DINAR: Jurnal Keuangan Dan Perbankan Syariah, 11(1), 58–76. https://doi.org/10.18860/ed.v11i1.19561

  25. Hoque, H., & Liu, H. (2023). Impact of bank regulation on risk of Islamic and conventional banks. International Journal of Finance & Economics, 28(1), 1025–1062. https://doi.org/10.1002/ijfe.2462

  26. Hsieh, M., & Lee, C. (2020). Bank liquidity creation, regulations, and credit risk. Asia-Pacific Journal of Financial Studies, 49(3), 368–409. https://doi.org/10.1111/ajfs.12295

  27. Hung, J.-C., Su, J.-B., Chang, M. C., & Wang, Y.-H. (2020). The impact of liquidity on portfolio value-at-risk forecasts. Applied Economics, 52(3), 242–259. https://doi.org/10.1080/00036846.2019.1644442

  28. Hussain, S., & Rasheed, A. (2022). Impact of capital adequacy, liquidity management and credit risk management on economic performance: Evidence from Pakistan. Journal of Social Sciences and Management  Studies, 1(4), 44–56. https://doi.org/10.56556/jssms.v1i4.346

  29. Ibrahim, M. H., & Rizvi, S. A. R. (2017). Do we need bigger Islamic banks? An assessment of bank stability. Journal of Multinational Financial Management, 40, 77–91. https://doi.org/10.1016/j.mulfin.2017.05.002

  30. Imbierowicz, B., & Rauch, C. (2014). The relationship between liquidity risk and credit risk in banks. Journal of Banking & Finance, 40, 242–256. https://doi.org/10.1016/j.jbankfin.2013.11.030

  31. Jusuf, N., & Widarjono, A. (2024). Funding liquidity risk, bank-specific variables and profitability of Islamic rural banks. IQTISHADUNA: Jurnal Ilmiah Ekonomi Kita, 13(2), 434–450. https://doi.org/10.46367/iqtishaduna.v13i2.2227

  32. Khan, S. N. (2024). How bank‐specific factors affect access to financing for small and medium enterprises: Evidence from an emerging economy. International Journal of Finance & Economics, 29(2), 2095–2115. https://doi.org/10.1002/ijfe.2771

  33. Ledhem, M. A., & Mekidiche, M. (2020). Economic growth and financial performance of Islamic banks: A CAMELS approach. Islamic Economic Studies, 28(1), 47–62. https://doi.org/10.1108/IES-05-2020-0016

  34. Lestari, L. B., Yeni, A. A. P., & Ayu, A. Y. (2026). Determinants of non-performing financing of Islamic rural banks in Indonesia. Economics, Finance, and Business Review, 2(2), 100–112. https://doi.org/10.20885/efbr.vol2.iss2.art4

  35. Li, X., Feng, H., Zhao, S., & Carter, D. A. (2021). The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic. Finance Research Letters, 43, 101957. https://doi.org/10.1016/j.frl.2021.101957

  36. Li, Y., & Peng, W. (2024). Bank price competition and enterprise innovation—Based on empirical evidence of Chinese A-share listed companies. International Review of Financial Analysis, 91, 103004. https://doi.org/10.1016/j.irfa.2023.103004

  37. Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on profitability of the domestic banking sector in Ghana. Transnational Corporations Review, 12(1), 37–52. https://doi.org/10.1080/19186444.2019.1704582

  38. Megeid, N. S. A. (2017). Liquidity risk management: Conventional versus islamic banking system in Egypt. Journal of Islamic Accounting and Business Research, 8(1), 100–128. https://doi.org/10.1108/JIABR-05-2014-0018

  39. Miklian, J., & Hoelscher, K. (2022). SMEs and exogenous shocks: A conceptual literature review and forward research agenda. International Small Business Journal, 40(2), 178–204. https://doi.org/10.1177/02662426211050796

  40. Mikou, S., Lahrichi, Y., & Achchab, S. (2024). Liquidity risk management in Islamic banks: Review of the literature and future research perspectives. European Journal of Studies in Management and Business, 29, 56–73. https://doi.org/10.32038/mbrq.2024.29.04

  41. Mogaji, E., & Nguyen, N. P. (2022). Managers’ understanding of artificial intelligence in relation to marketing financial services: Insights from a cross-country study. International Journal of Bank Marketing, 40(6), 1272–1298. https://doi.org/10.1108/IJBM-09-2021-0440

  42. Mustafa, O. A. O. (2020). Impact of liquidity shortage risk on financial performance of Sudanese Islamic banks. International Journal of Islamic Economics and Finance (IJIEF), 3(2), 251–282. https://doi.org/10.18196/ijief.3229

  43. Neves, M. E., Proença, C., & Dias, A. (2020). Bank profitability and efficiency in Portugal and Spain: A non-linearity approach. Journal of Risk and Financial Management, 13(11), 284. https://doi.org/10.3390/jrfm13110284

  44. Oktaviana, U. K. & Titis Miranti. (2025). Modeling technology and profitability as moderators of competition, efficiency, and risk in Islamic bank stability. Journal of Islamic Economics Lariba, 11(2), 1049–1078. https://doi.org/10.20885/jielariba.vol11.iss2.art15

  45. Otoritas Jasa Keuangan. (2024). Laporan publikasi keuangan perbankan [Banking financial publication report] [HTML]. Otoritas Jasa Keuangan. https://ojk.go.id/id/kanal/perbankan/data-dan-statistik/laporan-keuangan-perbankan/Default.aspx

  46. Pamikatsih, M., & Purwanto, P. (2025). Competition and profitability of Sharia rural banks in Indonesia. Economics, Finance, and Business Review, 2(2), 88–99. https://doi.org/10.20885/efbr.vol2.iss2.art3

  47. Pratami, A., Roslan, M. N. H., & Ismail, I. (2025). Determinants of financing in Indonesian Islamic banking. Economics, Finance, and Business Review, 2(2), 67–77. https://doi.org/10.20885/efbr.vol2.iss2.art1

  48. Prenaj, V., Imeraj, J., & Smajli, S. (2023). Albania and kosovo with development potential, but limited support from the banking sector. International Journal of Sustainable Development and Planning, 18(5), 1377–1383. https://doi.org/10.18280/ijsdp.180507

  49. Priyadi, U., Utami, K. D. S., Muhammad, R., & Nugraheni, P. (2021). Determinants of credit risk of Indonesian Sharīʿah rural banks. ISRA International Journal of Islamic Finance, 13(3), 284–301. https://doi.org/10.1108/IJIF-09-2019-0134

  50. Putri, D. W. E. P., & Misbah, H. (2025). The impact of funding risk on the stability of Islamic rural banks in Indonesia. Economics, Finance, and Business Review, 2(1), 12–21. https://doi.org/10.20885/efbr.vol2.iss1.art2

  51. Putri, D. W. E. P., & Widarjono, A. (2023). Effect of stability and funding risk on shariah rural bank’s profitability. Jurnal Ekonomi Syariah Teori Dan Terapan, 10(6), 620–631. https://doi.org/10.20473/vol10iss20236pp620-631

  52. Rahmadany, A. N., Risfandy, T., Achsanta, A. F., & Rifai, B. (2024). Liquidity and credit risks during the COVID-19 pandemic: Evidence from a dual banking system. Journal of Islamic Accounting and Business Research. https://doi.org/10.1108/JIABR-11-2023-0407

  53. Rita, S. D., & Sugiarti, D. (2025). Islamic performance index and profitability with the moderating role of intellectual capital in Indonesian Islamic banks. Economics, Finance, and Business Review, 2(1), 43–54. https://doi.org/10.20885/efbr.vol2.iss1.art5

  54. Rokhim, R., & Min, I. (2020). Funding liquidity and risk taking behavior in Southeast Asian banks. Emerging Markets Finance and Trade, 56(2), 305–313. https://doi.org/10.1080/1540496X.2018.1483230

  55. Rudhani, L. H., & Balaj, D. (2019). Management of liquidity risk and the banking activity: The banking system of Kosovo as a case. International Journal of Finance & Banking Studies, 8(2), 1–8. https://doi.org/10.20525/ijfbs.v8i2.299

  56. Saif-Alyousfi, A. Y. H. (2020). Determinants of bank profitability: Evidence from 47 Asian countries. Journal of Economic Studies, 49(1), 44–60. https://doi.org/10.1108/JES-05-2020-0215

  57. Siddique, A., Khan, M. A., & Khan, Z. (2021). The effect of credit risk management and bank-specific factors on the financial performance of the South Asian commercial banks. Asian Journal of Accounting Research, 7(2), 182–194. https://doi.org/10.1108/AJAR-08-2020-0071

  58. Smaoui, H., Mimouni, K., Miniaoui, H., & Temimi, A. (2020). Funding liquidity risk and banks’ risk-taking: Evidence from Islamic and conventional banks. Pacific-Basin Finance Journal, 64, 101436. https://doi.org/10.1016/j.pacfin.2020.101436

  59. Spada, A., Fiore, M., & Galati, A. (2024). The impact of education and culture on poverty reduction: Evidence from panel data of European countries. Social Indicators Research, 175, 927–940. https://doi.org/10.1007/s11205-023-03155-0

  60. Sudarsono, H., Afriadi, F., & Suciningtias, S. A. (2021). Do stability and size affect the profitability of Islamic rural bank in Indonesia? Jurnal Ekonomi & Keuangan Islam, 7(2), 161–174. https://doi.org/10.20885/jeki.vol7.iss2.art5

  61. Sudarsono, H., Hendrie Anto, M., & Perdana, A. (2024). Financial risk determinants in Islamic rural banks: Static and dynamic models. Jurnal Ekonomi Pembangunan, 22(1), 54–72. https://doi.org/10.22219/jep.v22i01.33404

  62. Sunarsih, S., Al Hashfi, R. U., Munawaroh, U., & Suhari, E. (2022). Nexus of risk and stability in Islamic banks during the pandemic: Evidence from Indonesia. Journal of Islamic Monetary Economics and Finance, 8(4), 599–614. https://doi.org/10.21098/jimf.v8i4.1444

  63. Sutrisno, S., & Widarjono, A. (2024). Determinants of capital buffer in Islamic banks: The lesson from Indonesia. Cogent Business & Management, 11(1), 2331707. https://doi.org/10.1080/23311975.2024.2331707

  64. Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks. Borsa Istanbul Review, 18(4), 349–358. https://doi.org/10.1016/j.bir.2018.07.006

  65. Wang, C., & Zhuang, L. (2022). Bank liquidity and the risk-taking channel of monetary policy: An empirical study of the banking system in China. PLOS ONE, 17(12), e0279506. https://doi.org/10.1371/journal.pone.0279506

  66. Wasiaturrahma, Sukmana, R., Ajija, S. R., Salama, S. C. U., & Hudaifah, A. (2020). Financial performance of rural banks in Indonesia: A two-stage DEA approach. Heliyon, 6(7), e04390. https://doi.org/10.1016/j.heliyon.2020.e04390

  67. Wastuti, W., Thalib, H. A. H., & Fitrijanto, A. (2025). The determinants of Islamic rural banks’ efficiency in Indonesia. International Journal of Islamic Economics and Finance (IJIEF), 8(1), 58–81. https://doi.org/10.18196/ijief.v8i1.21491

  68. Widarjono, A., & Anto, M. B. H. (2020). Does market structure matter for Islamic rural banks’ profitability? Jurnal Keuangan Dan Perbankan, 24(4), 393–406. https://doi.org/10.26905/jkdp.v24i4.4810

  69. Widarjono, A., Anto, M. B. H., & Fakhrunnas, F. (2020). Financing risk in Indonesian islamic rural banks: Do financing products matter? The Journal of Asian Finance, Economics and Business, 7(9), 305–314. https://doi.org/10.13106/JAFEB.2020.VOL7.NO9.305

  70. Widarjono, A., Suseno, P., Utami Rika Safitri, D., Yaseen, A., Azra, K., & Nur Hidayah, I. (2023). Islamic bank margins in Indonesia: The role of market power and bank-specific variables. Cogent Business & Management, 10(2), 2202028. https://doi.org/10.1080/23311975.2023.2202028

  71. Widarjono, A., Wijayanti, D., & Suharto, S. (2022). Funding liquidity risk and asset risk of Indonesian Islamic rural banks. Cogent Economics & Finance, 10(1), 2059911. https://doi.org/10.1080/23322039.2022.2059911

Governance violations and their impact on business growth: A case study of Sharia Rural Bank Saka Dana Mulia Kudus

Sumarno Sumarno, Muchlis Yahya, Rahman El Junusi, Ali Murtadho, Misbah Zulfa Elizabeth, Irwan...
Abstract View : 0
Download :0
10.20885/jielariba.vol12.iss1.art28
Review Reports Originality Report

ESG disclosure, capital structure, and profitability in explaining firm value of Indonesia’s IDX ESG Leaders: Some notes from Islamic finance perspectives‎

Hastin Riska Dewi, Muhyarsyah Muhyarsyah
Abstract View : 2479
Download :1544
10.20885/jielariba.vol12.iss1.art1
PDF Review Reports Originality Report

Modeling technology and profitability as moderators of competition, efficiency, and risk in Islamic bank stability

Ulfi Kartika Oktaviana, Titis Miranti
Abstract View : 721
Download :443
10.20885/jielariba.vol11.iss2.art15
PDF Review Reports Originality Report

Why do bank risks affect stock returns? Examining the mediating role of profitability in Indonesia’s tier-1 banks‎

Indri Gunawan, Abdul Mukti Soma
Abstract View : 489
Download :1017
10.20885/jielariba.vol11.iss2.art7
PDF Review Reports Originality Report

Marketing strategy of Saruhan packaged sambal MSME in Bandung, Indonesia: Some notes from Islamic perspective‎

Annisa Octaviola Ramadhani, Imanuddin Hasbi, Herdiansyah Gustira Pramudia Suryono
Abstract View : 696
Download :738
10.20885/jielariba.vol11.iss2.art4
PDF Review Reports Originality Report