Asset Liability Management

Pacific Accounting Review
Asset-Liability Management in Islamic Banks: Evidence from Emerging Markets

Heba Abou-El-Sood Osama El-Ansary
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Heba Abou-El-Sood Osama El-Ansary , (2017)," Asset-Liability Management in Islamic Banks: Evidence from Emerging
Markets ", Pacific Accounting Review, Vol. 29 Iss 1 pp. -
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Asset-Liability Management in Islamic Banks: Evidence from Emerging Markets
Structured Abstract
Purpose: Motivated by massive bank failures during the financial crisis and the remarkable
resilience of Islamic banks, this paper analyzes the interdependencies between asset/liability
portfolio choices of Islamic banks in emerging markets.
Design/Methodology/Approach: We collect data from the financial statements of Islamic

banks (IBs) in the Middle East and North Africa (MENA) region and Southeast Asia during
the period 2002–2012. Using Canonical Correlation Analysis, we investigate the degree of
interdependencies between the asset/liability accounts unique to IBs and how their ALM
models work at times of economic turmoil.
Findings: IBs tend to make decisions on sources of finance based on their asset portfolio
choices. The interdependencies are stronger for small banks. IBs direct more of their
investments to risk-mitigating instruments that share the risk with the borrower/client and are
based on the purchase and sale of real goods rather than financial instruments. Additionally,
banks tend to rely less on equity to finance their investments during economic boom and
increase their equity holdings during economic bust.
Practical Implications: This paper contributes to research on an under-researched, globally

growing finance sector. It extends research on ALM while providing novel evidence using
non-standardized asset/liability accounts unique to IBs.
Originality/Value: The analysis of unique accounts has not been discussed in prior studies,
which mainly used standardized account balances to compare Islamic and conventional
banks. Moreover, the resilience of IBs and whether their ALM models are superior at times
of turmoil has remained a black box. Our results are relevant to unravel this unanswered
question.
Key words: asset-liability management (ALM); Islamic banks (IBs); financial crisis;
emerging markets
JEL classification: G32 G21 G11 M41 G01
1
1. Introduction
With the turmoil of the 2007 financial crisis and the advent of Basel III, the ability of
Islamic banks to implement robust risk management and maintain stability and resilience is
considered one of the most important current issues. The growth of the Islamic banking and
finance (IBF) industry has been remarkable in the last decade. According to Ernst & Young
World Islamic Banking Competitiveness Report (2016), Islamic banking assets with
commercial banks globally have reached $882 billion in 2014, a significant jump of 16%
from their 2010 level. The Islamic banking assets in the Middle East and North Africa
(MENA) region and Southeast Asian markets have increased massively relative to those of
conventional banks, reaching $854 billion in 2014 despite the political and economic
volatility of most regions. The IBF industry is expected to grow, in emerging markets of
MENA and Southeast Asia, with many financial instruments becoming more attractive to a
wide range of customers. Research has been lagging the growing IBF market in a dynamic
and emerging market. Moreover, at the 2nd Islamic Financial Services Board Forum, the
general manager of the Bank for International Settlements (BIS) has emphasized the
importance of robust risk management to enhance the soundness and stability of a growing
industry (Knight, 2007). Therefore, we find it crucial to investigate the unique nature of
asset-liability management (ALM) decisions in Islamic financial institutions in an emerging
market context.
This paper aims at analyzing the interdependencies between the assets and liabilities
portfolio choice of Islamic banks in emerging markets. It employs Canonical Correlation
Analysis (CCA) to investigate the degree of integration between assets and liability accounts,
which include financial instruments unique to Islamic banks. The uniqueness of the Islamic
financial instruments provide a rich dataset not provided through studies comparing
standardized asset and liability-equity items across Islamic and conventional banks.
This paper contributes to the accounting and finance literature in many ways. First,
we provide evidence on ALM in a globally growing finance sector by demonstrating the
interdependencies among assets and liability accounts in Islamic financial institutions. To
date, prior work on ALM has not tackled Islamic banks (IBs) although IBs constitute a
widely spread and promising sector. We take the initiative to explore the unique nature and
the interdependencies of Islamic banks’ assets and liability accounts. Second, we complement
the literature pioneered by Simonson, et al., (1983) on ALM, which have not investigated the
uniqueness of the Islamic banking model. Islamic banks have constituted a black box in terms
of showing resilience and stability during times of turmoil. The failure of several banks upon
the financial crisis has encouraged economists worldwide to consider Islamic finance as an
alternative financial solution. Consequently, there has been ample debate on how Islamic
banks make investment decisions in asset positions to absorb shocks during times of turmoil.
We close a gap in literature by examining the ALM structure and how asset/liability
investment decisions are matched during the late 2007 financial crisis. Third, we construct a
rich dataset -in the Middle East and North Africa (MENA) region and Southeast Asian
markets- that includes accounts unique to Islamic banks rather than balances grouped or
disclosed in a standardized format. Hence, our data taps on Islamic bank asset-liability
2
management practices to provide a more relevant analysis without loss of data. Fourth, unlike
few papers comparing ALM practices between conventional and Islamic banks in a national
setting, our analysis covers emerging markets with a growing economic outlook.
We find that the assets and liability-equity accounts in IBs are significantly
interdependent. The interdependencies are stronger for small banks. As suggested by the
direction of the causality, banks tend to make decisions on sources of finance based on their
asset portfolio choices. This result holds for the total sample, large banks, and small banks.
Banks with a large proportion of loan investments tend to finance their investments through
customers’ accounts. This result also holds for the subsamples. Furthermore, large banks tend
to rely more on equity to finance their operations relative to small banks. During the pre-
crisis boom, we find that the interdependencies between banks’ asset and liability portfolios
are substantially stronger relative to those during the financial crisis and the after-crisis
periods. Interestingly, we reckon that during the crisis, IBs directed more of their investments
to risk mitigating instruments that share the risk with the borrower/client and are based on the
purchase and sale of real goods rather than financial assets. Additionally, banks tend to rely
less on equity to finance their investments during economic boom while they increase their
equity holdings during economic bust. The findings on the unique nature and structure of IBs
asset and liability portfolios are particularly relevant to bank regulators.
The remainder of the paper is organized as follows. Section 2 discusses background

on the asset-liability portfolio structure of banks and the special nature of Islamic banks.
Section 3 sets the research hypotheses. Section 4 examines the variables used, provides a
basic outline of canonical correlation analysis (CCA), and lays down the model employed in
this study. Section 5 describes the data and sample. Section 6 presents the empirical results of
our analysis. Finally, section 7 concludes.
2. Background
2.1. The Unique Nature of Islamic Banking and Finance
Islamic finance and Islamic banks offer Islamic financial services or contracts (IFS/C)
and mainly apply profit/loss/risk sharing principle between all the contracting parties, in this
case the bank and the clients. Additionally, all the IFS/C should adhere to Islamic Shari'a
principles, which prohibit dealing with interest (Riba) investing in illicit (non-Halal) types of
projects, goods, or services. The nature of Islamic banking and finance advocates real
creation of value and social welfare of the economy. This basic concept of real value creation
may contradict with conventional banks’ creating credit for financial transactions that are
unrelated to the creation of real assets (Werner, 2010). Hence, the illicit nature of Riba comes
from money market fluctuations and their effect on real economic activities, which eventually
cause imbalances and divergence from long-run stability goals.
Before issuing any IFS/C the Islamic bank and the client should agree in advance and
determine who acts as agent/manager and who acts as capital/funds provider. As for
managing the Islamic bank's liabilities and owners' equity, the bank acts as agent/manager of
all sources of finance and make decisions on investing in asset positions in return for a certain
3
predetermined ratio of realized net profits for each type of IFS/C as compensation for
management services provided. The providers of funds in the liabilities and owners' equity
side of the bank's balance sheet gain a certain predetermined ratio of realized net profits for
each type of IFS/C as agreed.
While distributing realized profits for each transaction or contract, the bank takes into
account the predetermined ratio for both agent/manager and capital/funds provider. For
example, client/investor who deposits money as mudaraba mutlaqa (general investment
account) will authorize the bank to use the money in projects selected as appropriate by the
bank's Shari’a board that is responsible for the application of Islamic principles. As for banks'
shareholders, they enter into a partnership-like relationship with the bank, with the latter
acting as an agent to manage the entire bank's sources of finance.
On the assets side, there are various types of financial services provided (financial
instruments issued) by Islamic banks as IFS/C. For each type of asset position, the bank has
to specify who acts as agent/management and who acts as funds provider. The roles played
by the bank and the clients are different from one financial service to another. For example,
in musharaka (equity financing with partnership structure and profit-sharing), the bank
provides finance for corporate clients and both, the bank and the corporation, act as capital
providers, in return for a certain predetermined ratio of realized net profits according to the
proportion of funds provided. In case of musharaka or equity financing, the bank can
participate in the enterprise’s management.1
2.2. Prior Research on Asset-Liability Management
Financial institutions are exposed to various types of risks due to the transactions they
conduct. Therefore, banks are inclined to devise tools to protect them and make these risks
bearable. Accordingly, asset-liability management aids banks in quantifying and managing
risk exposures. ALM focuses on the dependency and interrelationships between the two sides
of a bank's balance sheet. The idea is to match the two sides of the balance sheet to allow for
different liquidity scenarios.
According to prior studies, ALM is motivated by: 1) managerial self-interest in

mitigating risks and preserving their human capital in the bank, 2) cost of failure leading to
loss of charter value, 3) costs of raising funds due to asymmetric information, and 4) non-
linearity of taxes, where a reduction of profit variances leads to a reduction of tax payments
(Santomero, 1995; Froot and Stein, 1998). Therefore, there are various motives to manage
asset/liability accounts and the inherent risks. In doing so, banks' management has to achieve
the appropriate matching between the maturities of the two sides of the balance sheet and to
manage interest rate risk and liquidity risk. Interest rate risk arises from fluctuating interest
rates, which are exacerbated during economic turmoil. Liquidity risk may arise from the
failure of a bank to provide liquidity as stipulated in the contracts with investors and
1
Further discussion of the asset positions and liability accounts unique to Islamic banks’ IFS/C is provided in
the section 4.1.
4
depositors. Nonetheless, the main feature of IBF is the prohibition of interest payments in all
transactions in line with the Islamic Shari’a rulings (Abdul-Majid et al., 2010). Specifically,
Shari'a-compliant finance utilizes a predetermined profit-sharing ratio on banking services
rather than charge an interest rate on transactions.
The empirical investigation of the interdependency between banks' asset and liability
accounts was pioneered by Fraser et al., (1974). They used CCA as it allows measuring
simultaneous associations between two sets of variables, where there are multiple inter-
correlated outcome variables. In an attempt to measure the degree of correlation and
integration between more than one dependent variable and independent variables
simultaneously, the most important determinants of bank performance were bank's cost,
deposits, and loans composition. Since then, studies have examined the interdependency of
decisions related to balance sheet accounts in non-financial settings (Stowe et al., 1980; Jang
and Ryu, 2006; Jang et al., 2008; Jang and Kim, 2009). Nonetheless, the literature on ALM in
the financial industry is scarce and ALM in the developing sector of Islamic banking is still
under-researched.
The attention has been directed to the interest rate mismatch between assets and
liabilities (Simonson, et al., 1983). The unbalanced structure based on the maturities of assets
and liabilities is due to financing interest sensitive assets with long-term liabilities, financing
long-term loans with short-term deposits or using financial assets such as accounts
receivables and real estate assets as a collateral for short-term loans and mortgage loans.
Obben (1992) and Jain and Gupta (2004) examined the ALM structures to manage liquidity,
increase profitability, and control interest rate risk. The investigation of ALM patterns has
been extended to examine the dimensions of bank size (DeYoung and Yom, 2008) and bank
type (Memmel and Schertler, 2012).
In an emerging market setting, Dash and Pathak (2016) showed that ALM was very
efficient in IBs and generated maximum profitability. Jaiswal (2010) found strong
interdependencies between the two sides of the balance sheet with a decreasing trend over
time due to exposure to off balance sheet transactions. The mismatching problem between the
two sides of the bank's balance sheet encouraged Singh (2013) and Karthigeyan et al., (2013)
to study the ALM behavior of Indian commercial banks. The analysis showed that the high
proportion of short-term deposits and short-term liabilities were used to finance long-term
assets as a result of maturity mismatch. The literature on ALM in Islamic banks is even more
limited. Haron (1993) examined the effect of managing asset, liability and expense items on
IBs profitability. Bidabad and Allahyarifard (2008) pointed out that the objective of Islamic
banks is the maximization of economic value added (EVA). They introduced a model
employing an EVA index to test the efficiency of Islamic banks. However, how risk-
management patterns make Islamic banks resilient and whether ALM models are superior at
times of turmoil has remained a black box.
ALM in Islamic bank has a special nature as the IFS/C used to pool and transmit
funds is different relative to conventional banks. Additionally, the markets, ruled by the time-
value-of-money model, in which Islamic banks operate, affect ALM. Most of the prior
5
studies on ALM in banks agreed that hedging and management of interest rate risk to match
the maturities of assets and liabilities reduce banks’ exposure to risk. As for the dependency
relationship between the two sides of the balance sheet, it was found that there is a positive
relationship between risky assets (loans and securities) and the equity account. The literature
discussing ALM in Islamic banks is severely restricted.
3. Hypotheses Development
Assets and liabilities are significantly correlated as they are matched according to
maturities and in order to reduce interest rate risk and sensitivity gap (Simonson et al., 1983;
DeYoung and Yom, 2008). ALM is embedded as a risk management tool as banks transform
maturities on the banking book. They borrow short and lend long. Hence banks are
vulnerable to risks and need to manage the two sides of the banking book. Beck et al. (2013)
find few significant differences in the business orientation of Islamic and conventional banks.
While some of the products offered by IBs are either similar to or similarly structured as
those offered by conventional banks, the unique feature of profit/loss/risk sharing is a strong
element in IBs. Hence, we preliminarily examine the significance and direction of the
correlation between assets, liabilities, and equity in Islamic banks. Accordingly, the first
hypothesis can be stated as:
H1: There is a significant correlation between assets and the liability-equity accounts
in Islamic banks
Bank size is one of the factor banks should consider in determining the integration
between assets and liabilities and the framework of risk management (Bank for International
Settlements, 2011). DeYoung and Yom (2008) found a positive association between the
strength of asset-liability linkages and bank size. We argue that there are significant
differences in ALM practices in Islamic banks based on size. The micro nature of individual
loans and the inflexibility of deposit mix in small banks may drive the results. On the other
hand, larger banks with more scale economies are expected to have better ALM practices.
Another explanation can be attributed to the dynamic trading ability of large banks relative to
small banks (Memmel and Schertler (2012). Moreover, small banks generally have limited
access to capital and face higher costs of raising external equity (Chittenden et al., 1996).
Bank regulators or lender of last resort may only be willing to provide protection or bailing to
banks that are too big or too systemic to fail, relative to smaller banks (Bonfim and Kim,
2012). Consequently, financing behavior and matching the two sides of the balance sheets
may not be the same for the banks of different sizes. Accordingly, we conjecture that there is
a significant difference in the dependency of assets and liability-equity accounts in Islamic
banks based on size. Thus, the second hypothesis can be stated as:
H2: The interdependency of assets and liability-equity accounts is significantly
different in large Islamic banks relative to small banks
Prior studies examined the dependency of assets and liability accounts of financial
institutions (Fraser, et al., 1974; Stowe et al., 1980; DeYoung and Yom, 2008; Dash and
Pathak, 2009; Karthigeyan et al., 2013). However, the interdependency and integration
between the assets and liabilities portfolios in Islamic banks has not been tested. Hence, we
6
investigate the interdependency between the assets and the sources of finance unique to
Islamic banks. The third hypothesis can be stated as:
H3: There is a significant interrelationship between asset and liability structures in
Islamic banks
The global banking system has been affected significantly by the financial crisis that
hit banks in the late 2007. In turbulent economic periods, changes in liquidity position affect
the interbank credit market (Adrian and Shin, 2008). Consequently, it is crucial to examine
the ALM behavior of Islamic banks across the pre-crisis boom, the financial crisis, and the
after-crisis period. Ellul and Yerramilli (2010) confirm differences in risk management
strategies leading to the financial crisis. Beck et al., (2013) assessed the performance of
Islamic and commercial banks during the financial crisis. They found that Islamic banks were
having higher assets quality and were better capitalized. Dietrich and Wanzenried (2011) find
significant differences in bank profitability before and after the financial crisis. After the
crisis, a period of monetary easing, asset price volatility has diminished, the balance sheets
have been strengthened, and the focus has shifted to more solid risk management techniques.
Our aim is to evaluate whether the interdependency between IBs’ asset and liability accounts
has changed significantly. Thus, the fourth hypothesis can be stated as:
H4: The interrelationship of assets and liability structures of Islamic banks is
significantly different during the pre-crisis boom relative to the financial crisis
and after-crisis periods
4. Research Design
4.1. Definition of Variables
Nine asset categories and seven liability/equity categories are expressed as a

proportion of total assets. Table 1 illustrates assets and liability-equity variables, which were
used for the analysis. Assets variables were used as dependent variables and liabilities and
equity items as independent variables. The following section explains briefly the meaning of
each dependent and independent variable.
4.1.1. Asset items (Dependent variables)
Y1: Cash and Balances with Banks: represents liquid assets and cash accounts. It includes:
(i) the required cash reserves and balances with the Central Bank and (ii) cash balances due from
other banks in the form of deposits and local and international current accounts.
Y2: Murabaha Investments: are short-term trade financing to clients. It is often referred to
as "cost-plus financing" or "mark-up financing" (Shanmugam and Zahari, 2009). Usually the
mark-up ratio is predetermined between the bank and the client before the bank purchases the
required goods for the client.
Y3: Mudaraba Investments: are also known as trust financing or venture capital (Qadri,
2008). In a Mudaraba contract, the client acts as agent/manager and the bank acts as
capital/funds provider. Realized profits are distributed according to predetermined ratios to
the agent and the funds provider. In case of Mudaraba contract loss, the funds provider, the
7
bank, incurs all the loss as long as the agent/client had done all its best and has been a
competent agent.
Y4: Musharaka Investments: represent a type of partnership or joint venture between the
Islamic bank and the clients (individuals or corporations). Both parties have to act as
capital/funds providers and the management role is agreed upon between partners. Realized
profits are distributed according to predetermined ratios among partners. A special case is a
diminishing Musharaka that can be used to purchase residential properties as a form of
Islamic mortgage.
Y5: Sukuk Investments: are legal claims of financial assets issued as financial certificates,
which are the Islamic equivalent of bonds (Shanmugam and Zahari, 2009). The Sukuk
certificate represents ownership in a wide range of IFS/C such as: financial leasing and equity
finance, Musharaka, and industrial and agricultural projects.
Y6: Qard Investments: involve interest-free loans, where the borrower is required to repay
only the principal amount of the loan. The borrower may elect to pay an extra amount as a
token of gratitude for the lender. No interest is charged by the bank, as any such interest is
considered as usury (Riba) that is prohibited under Shari’a principles. The borrower
compensates the bank for the time value of money in the form of a predetermined profit
mark-up rather than an interest payment.

Y7: Securities: include the Islamic bank's entire securities portfolio such as, Islamic money
market instruments and mutual fund shares.
Y8: Other Assets: represents the following items: prepaid expenses, down payments to
purchase fixed assets and equipments, accruals, collaterals, assets transferred to the bank as a
result of clients' default.
Y9: Net Fixed Assets: represents property, plant, and equipment owned by the bank, net of
accumulated depreciation.
4.1.2. Liability-equity Side Items (Independent Variables)
X1: Customers’ Accounts: include current and savings deposits. The bank requests the
client’s permission to freely use these funds in any type of IFS/C and in return the bank
guarantees the amount of deposits. The bank is not obliged to pay profits for these accounts.
X2: Due to Banks: deposit accounts supplied to the Islamic bank by other local and
international banks.
X3: Murabaha Payable: is a contract involving a set-price sale of goods, where the bank is
the client seeking financing rather than the provider of funds. In other words, it is a fixed-
income loan for the purchase of assets with a fixed interest payable by the bank in the form of
profit margin to funds provider.
X4: Mudaraba Payable: represents (i) general and (ii) special investment accounts, which
are both similar to time deposits. As for the general accounts, the depositors authorize the
bank to act as an agent to invest funds in IFS/C without any restrictions. In case of special
investment accounts, investors have the right to deposit money and select special investment
opportunities or projects as announced by the bank. The investors in either type receive a
predetermined share of realized profits as funds providers and the bank receives a
predetermined ratio as the agent/manager.
8
X5: Sukuk Payable: is a long-term financial certificate issued by the bank to finance special
projects (for example, residential projects). Investors receive a certain ratio out of realized
profits as funds providers and the bank receives a set ratio as the agent/manager.
X6: Other Liabilities: include credit accounts, accrued liabilities, unearned revenue, bank's
creditors, deferred taxes and all provisions allocated to manage bank's risks.
X7: Total Equity: includes total shareholders’ capital, reserves, and retained earnings.
Shareholders are considered as partners in a Musharaka contract (partnership) entered with
the bank.
4.2. Canonical Correlation Analysis
Canonical correlation analysis (CCA) analyzes the relations that exist among vectors
of criterion variables and predictor variables. The vectors of variables are then replaced by
one or more linear combinations of the variables in each vector, where linear weights are
selected to produce the maximum correlation between the linear combinations. Unlike
multiple regression analysis that examines the behavior of a single, dependent, variable as a
function of a set of independent variables, CCA relates two sets of variables. Although CCA
has not been used extensively in examining asset-liability structure in banks, it is an

appropriate and flexible technique to analyze the interrelationships between two sets of
variables (for example assets and liabilities). It does not impose a certain structure on the data
neither does it make any assumptions about the causal direction between the two sets of
variables (Hair et al., 2006).
The magnitude and significance of the canonical correlation is the basis for
identifying relations between specific asset and liability positions. Therefore, we use the
redundancy index to measure the percentage of the dependent variable variance accounted for
by the independent variables to identify the degree of interdependency and the direction of
the causality. The redundancy index is a measure that represents the amount of variance in
one set of variables that can be explained by the variables in the other set. This index is used
similarly to the R2 used in multiple regression analysis. A high redundancy index entails a
better ability to and a greater confidence in measuring the asset-liability dependencies
(Fornell and Larcker, 1980).
4.3. The Model
We express the liability-equity (independent) variables as X = [X1,X2,…,Xm] and

denote the asset (dependent) variables as Y = [Y1,Y2,…,Yn]. The X and Y variables are both
expressed as a proportion of total assets.
The linear combinations of X and Y can be constructed as follows:
=∝ =∝ +∝ + ⋯ +∝

(1)
= = + + ⋯ + (2)
Where ∝´ = [∝ 1, ∝ 2,…, ∝ n] and ´ = [ 1, 2,…, m] are vectors of scalars to be

estimated. The scalars that comprise the vectors ∝´ and ´ are referred to as the canonical
9
coefficients, and the linear combinations L and A are the canonical variables. The canonical
coefficients are chosen in a way to maximize the canonical correlation between the canonical
variables L and A as follows:
∑
= (3)
(∑ )(∑ )
Where a and l denote mean differences for the variables L and A. Subsequently, the
interrelationships between assets and liabilities are investigated through canonical loadings,
which are the correlations between the actual variables and their own canonical variables. For
a liability account, a canonical loading of the variable X1 and the first canonical variable L1 is
as the following correlation:
( . ) = ( . ∝ +∝ + ⋯ +∝ ) =∝ , +∝ , + ⋯ +∝ , (4)
Where ∝ , ∝ , …, ∝ are the first canonical coefficients for canonical variable L1,
σx,11 is standard deviation of X1, σx,12 is the correlation between X1 and X2, and so forth. If the
canonical correlation (3) between assets and liabilities is strong and the canonical loadings
(4) for assets and liabilities are strong, then we can conclude that a relationship exists
between the relevant assets and liabilities. The coefficient of variation in variables accounted
for by the canonical variables is:
(#$%%&'( ,) *)

!," = ∑+, (5)
Where R2L,j is the proportion of variation in the liability variables accounted for by the
jth liability canonical variable (j=1,…, p). This measure also indicates how well a canonical
variable captures the total amount of variance in the X variables. Finally, the redundancy
coefficient measures the average ability of the set of asset (liability) variables to explain the
variation in liability (asset) variables taken one at a time. It can be expressed as follows:

!\ " = ." !,"

(6)
Where ." is the jth squared canonical correlation (or eigen value). It measures the
proportion of variance in jth asset canonical variable predictable from the jth liability canonical

variable. !," measures the proportion of asset variance accounted for by its jth canonical
variable. Summing the product of the two terms across all canonical correlations provides the
redundancy index.
5. Data and Sample
We collect accounting data reported in the balance sheets of Islamic banks in the
Middle East and North Africa (MENA) region and Southeast Asia during the period 2002 –
2012. 2 All accounting variables are inflation-adjusted and reported in US dollar to control for
2
We obtained the data used in our analysis from Zag Trader (http://www.zagtrader.com). Then we aggregated
the assets and liability accounts to fit into the categories defined in detail in section 4.1.
10
heterogeneity of economic conditions across countries. The sample is restricted to banks
listed in the stock exchanges of MENA and Southeast Asian countries. Banks with Islamic
windows and those whose data on Islamic financial instruments are not available are
excluded from our sample. We do not exclude banks that ceased operations or banks with
financial data that are not available in one of the sample years to avoid survivorship bias.
Table 2 shows sample distribution by country and total assets as a percentage of assets in the
global market.
The final sample consists of 60 Islamic banks and 491 bank-year observations, where
full details on Islamic asset and liability positions are available in a detailed form rather than
being reported in a standardized format. The choice of the MENA region is justified by the
high concentration of Islamic banks and the rapid growth of Islamic banking in the past few
decades (Harrigan et al., 2006; Sufian and Noor, 2009).
6. Empirical Results
This section discusses the descriptive statistics for the sample of Islamic banks. Then
it presents empirical findings of the CCA. Finally, it demonstrates results of the sensitivity
checks.
6.1. Descriptive Statistics
Table 3 displays summary statistics for the variables used to calculate canonical
correlations, where panel A, B, and C present results for the overall sample, large-size banks,
and small-size banks, respectively. On average, the largest asset on the banks’ balance sheet
is Qard or loans (the mean is 23% of total assets). The results of prior studies confirm that
loans represent the largest asset on non-Islamic banks’ balance sheet (Ryan, 2007; Abou-El-
Sood, 2012) 3 . However, one should bear in mind that Shari'a-compliant Qard is viewed
differently than loans in non-Islamic banks. Large banks invest more in loans compared to
small banks (average Qard represents 24% and 21% of total assets, respectively). For the
overall sample, Islamic banks invest 11%, 10%, 9%, and 10% of their funds in Murabaha,
Mudaraba, Musharaka, and Sukuk investments, respectively. Large banks direct more funds
towards Sukuk (11% of total assets) compared to the overall sample. Whereas small banks
invest more funds (12% of total assets) in Murabaha compared to the total sample.
On the liabilities side, on average, 37% of IBs’ funds come from customer accounts,
where customer accounts represent 38% (34%) of funds in large (small) banks. Islamic banks
finance 9%, 10%, and 8% of their activities through Murabaha¸ Mudaraba, and Sukuk
liabilities respectively. On average, IBs finance 87% of their activities through external
sources of finance and 13% through equity. Large banks rely more on external sources of
finance than on equity, where liabilities represent 89% of total assets compared to 81% for
small banks.
3
On average, loans comprise 65% - 80% of US commercial banks’ and thrifts’ balance sheets (Ryan, 2007). In
US bank-holding companies, loans comprise approximately 66.7 % of total assets (Abou-El-Sood, 2012).
11
Table 4 provides Pearson correlation coefficients between individual asset and
liability accounts. Most variables have statistically significant correlation with other assets
and liability-equity items at conventional levels. The liabilities of customers’ accounts,
Mudaraba payable, Sukuk payable and equity have significant correlations with almost all
assets positions. Collectively, the correlation statistics provide empirical support to H1 that
there is a significant correlation between assets and liability-equity accounts in Islamic banks.
6.2. Findings of the Interdependencies between Assets and Liability Accounts
The results of separate canonical correlation analyses are presented for the two sides
of the balance sheet. Seven canonical variate pairs were derived. As seen in table 5, for the
panels presenting results of the overall sample, large banks, and small banks, respectively,
four of the canonical variate pairs are significant below the 0.01 level. The canonical R2 of
the first variate pair for the large (small) banks subsample is 84% (83%), which is higher than
the canonical R2 for the overall sample of 78%.
Column (a) of table 6 shows that for the total sample, the proportion of the variance in
the asset variables predictable from the liability-equity variables is 0.40 as computed using
the redundancy index for the large banks. The proportion of the variance in the liability-
equity variables predictable from the asset variables is 0.46. The same redundancy indices for
large banks are 0.42 and 0.47, respectively as shown in column (b). For small banks, the
same redundancy indices are relatively higher (0.45 and 0.56, respectively) as illustrated in
column (c). These results are higher relative to prior results on non-Islamic banks (for
example, Simonson et al., 1983). Moreover, the test statistics shown in table 6 show that there
is a significant difference between assets and liability-equity accounts in large banks relative
to small banks. Taken together, we can conclude that the findings support H2. The
interdependency of assets and liability-equity accounts is significantly different in large
Islamic banks relative to small banks.
It can be inferred from tables 6 and 7 that the liability-equity variables are more fully
explained by the asset canonical variables than vice versa. Therefore, it seems that Islamic
banks make financing decisions after determining the mix of investment opportunities rather
than seek funds then look for investment channels. Consequently, there is sufficient empirical
evidence to support H3 that there is a significant interrelationship between asset and liability
structures in Islamic banks.
The empirical results are stronger relative to prior studies examining the non-Islamic
banking sector as evident by the high redundancy indices shown in table 8. The redundancy
index reflects the amount of shared variance between the independent and the dependent
variables. Hence, it provides a summary index of the average strength and ability of a
predictor variate to explain the variability in a set of dependent variables. Furthermore, it can
be noted that, in the studies examining financial institutions, the proportion of liability-equity
variance explained by asset canonical variables is larger than the proportion of assets
variance explained by liability-equity canonical variables. This finding is contrary to the
ALM concept that the sources of finance affect the firm’s decisions to invest in particular
12
assets in order to achieve the matching of maturities. For the studies involving financial
institutions, including the current study, the decisions to invest in specific assets affect the
decisions to finance these investments.
We look more closely at the integration between the individual asset and liability
accounts. In doing so, the analysis is limited to the linkages suggested by the first canonical
loading. Results of table 9 on the correlation between variables and their canonical loadings
show that sample Islamic banks have extensive investments in Sukuk, Musharaka, and
Mudaraba, as shown by the strong loadings of 0.79, 0.59, and 0.41, respectively.4 On the
other side of the balance sheet, banks have reduced their reliance on core deposits and
customers’ accounts (as shown by the negative sign loading of -0.80) and obtained more
funds through Mudaraba payable, equity capital, and Sukuk payable, respectively, as
suggested by the positive signs of canonical loadings 0.72, 0.47, and 0.38, respectively. Our
findings show a strong positive linkage between Sukuk, Musharaka, and Mudaraba on one
hand and Mudaraba payable and equity on the other hand, as suggested by the positive strong
canonical loadings. Therefore, banks with large amounts of Mudaraba payable and equity
base are better able to invest more in joint ventures, venture capital, and Islamic financial
instruments. The findings also show that there is a strong linkage between investing in
Islamic loans (Qard) and financing this investment through customers’ accounts as evident
by the negative sign canonical loadings. Finally, the canonical loading of fixed assets has a
positive sign yet relatively weak. This finding is consistent with the report of Ernst and
Young (2013) on the expansion of Islamic banks worldwide with an obvious slowdown in
some countries of the MENA region due to political and economic instability.
As to the subsample analysis, we find different results in large banks.5 There is a

strong positive link between investments in all Shari’a-compliant assets except Qard on one
hand and financing operations through Mudaraba payable and Sukuk payable on the other
hand. Whereas in small banks, there is a strong positive link between investments in all
Shari’a-compliant assets except Qard on one hand and financing operations through
Mudaraba payable on the other hand. Similar to the total sample, there is a strong linkage
between investing in Islamic loans (Qard) and financing this investment through customers’
accounts in large and small banks alike. Finally, large banks rely less on equity as a source of
finance relative to small banks (canonical loadings are 0.28 and 0.50, respectively).
6.3. Results for the Pre-crisis Boom, the Financial Crisis, and the After-crisis Period
As shown in table 10, overall, the canonical variate pairs are significant at
conventional levels in the three subsamples. The canonical R2 of the first variate pair for the
boom period subsample is 98%, which is higher than the canonical R2 for the overall sample
of 78%. The canonical R2 of the first variate pair for the financial crisis (after-crisis) period
subsample is 77% (84%).
4
In the additional analysis of integration between variables, we use a 0.30 threshold to identify a strong
interrelationship between the original variables and the canonical variables (DeYoung and Yom, 2008).
5
We define large (small) banks as banks with natural log of total assets more than or equal to (less than) sample
mean.
13
In table 11, during the boom period, the proportion of the variance in the asset
variables predictable by the liability-equity variables is 0.60 as computed using the
redundancy index. The proportion of the variance in the liability-equity variables predictable
from the asset variables is 0.76. During the financial crisis period, the same redundancy
indices are relatively lower (0.44 and 0.47, respectively). During the after-crisis period, the
redundancy indices are the lowest (0.39 and 0.43, respectively).6 Collectively, the empirical
evidence support H4 that the interrelationship of assets and liability structures of Islamic
banks is significantly different during the pre-crisis boom relative to the financial crisis and
after-crisis periods.
The results of table 12 on the integration between assets and liabilities reveal that IBs
rely heavily on customers’ accounts and Mudaraba payable during pre-crisis boom relative
to other Shari’a-compliant financing sources. They use the obtained funds to invest more
heavily in Sukuk and Qard investments as apparent in the positive loadings of 0.76 and 0.49,
respectively. During the financial crisis and the after-crisis period, banks rely more heavily
on Sukuk payable to finance their investments. They tend to invest more heavily in Murabaha
and Musharaka investments as shown by the strong positive loadings of 0.73 and 0.46 (0.52
and 0.31), respectively during the financial crisis (after-crisis period). This result is
economically significant as Murabaha is a short-term investment that relies on profit sharing
upon the sale of real goods rather than other financial instruments that have been severely hit
by massive losses during the financial crisis. Therefore, Murabaha provides a risk mitigation
tool during times of economic turmoil as it shares risk with the borrower. It has become the
backbone of contemporary Islamic banking to finance the purchase of raw materials,
equipment, and consumer durables. Moreover, Musharaka is a form of partnership to
purchase residential properties that both the customer and the bank own. Therefore, it is also
viewed as a risk mitigation tool compared to conventional residential mortgages. IBs tend to
rely less on equity to finance their investments during booming periods while increase their
equity holdings during times of economic turmoil, with a lower degree after the crisis
(loadings are -0.60, 0.15, and 0.09, respectively). This latter remark needs further research to
investiate whether banks manage their liability/equity portfolios during times of financial
crisis according to regulatory capital requirements.
7. Conclusion and Further Implications
Asset-liability management (ALM) focuses on matching the maturities of the two

sides of the balance sheet and managing interest rate risk. The rapid growth of Islamic
financial institutions, the resilience of the system at times of turmoil, and the regulatory
deliberations to ensure robust risk management of this remarkably growing sector motivate
our research.
We analyze the linkages and the integration between the assets and liability structures
of IBs in emerging markets and how it can help understand the resilience of Islamic banks at
times of turmoil. Consequently, we collect data reported in the financial statements of Islamic
6
Unreported ANOVA tests show significant difference between the assets and liability-equity accounts of IBs
during the three subsamples, as per F statistics.
14
banks in the MENA region during the period 2002 – 2012. Furthermore, we examine the size
effect on the dependencies between banks’ assets and liability-equity accounts. Finally, we
identify whether there is an underlying difference in the interdependencies between the two
portfolios during the pre-crisis boom, the financial crisis, and the after-crisis period.
We find that Islamic banks’ assets and liability-equity accounts are significantly
interrelated with these interrelationships being stronger for small banks. Banks tend to make
decisions on sources of finance based on their asset portfolio choices and not vice versa.
Additionally, banks with a large proportion of loan investments tend to finance their
investments through customers’ accounts. Moreover, large banks tend to rely more on equity
to finance their investments relative to small banks. The latter finding might have a bearing
on further research investigating capital adequacy models in banks based on their size.
During the pre-crisis boom, the interdependencies between banks’ asset and liability
portfolios are substantially stronger relative to those during the financial crisis and after-crisis
period. The pass-through feature and risk-sharing arrangements of Islamic banks might be
viewed as a risk-mitigating tool. An interesting finding is that Islamic banks tend to direct
more of their investments to risk mitigating instruments that share the risk with the
borrower/client and are based on the purchase and sale of real goods and value creation rather
than financial instruments. This result primarily explains prior evidence of Islamic banks not
being adversely affected by the financial crisis relative to non-Islamic banks. This finding
suggests further empirical testing in terms of the interest-prohibition feature of Islamic banks
Additionally, Islamic banks tend to rely less on equity to finance their investments during
booming periods while they increase their equity holdings during times of economic turmoil.
Further investigation is needed on whether banks manage their liability/equity portfolios
during times of financial crisis according to regulatory capital requirements. Our findings are
particularly relevant to the academia, bank managers, and regulators, especially with the
rising international interest in the unique nature and structure of ALM in Islamic banks.
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18
Table 1: Description of Variables
Left hand-side of the balance sheet Right hand-side of the balance sheet
Dependent Variables Independent Variables
Variable Notation Description Variable Notation Description
Cash &
the ratio of cash to Customers' the ratio of total
Balances
Cash it total assets for bank i Deposit Cust_accit customer deposit
Due from
at year t Accounts accounts to total assets
Banks
the ratio of Murabaha Balances the ratio of total
Murabaha
Murabit investments to total Due to Due_banksit balances due to banks to
Investments
assets Banks total assets
the ratio of Mudaraba
Mudaraba Murabaha the ratio of Murabaha
Mudarit investments to total Murab_payit
Investments Payable payable to total assets
assets
the ratio of Musharaka
Musaraka Mudaraba the ratio of Mudaraba
Musharit investments to total Mudar_payit
Investments Payable payable to o total assets
assets
the ratio of Sukuk
Sukuk Sukuk the ratio of Sukuk
Sukukit investments to total Sukuk_payit
Investments Payable payable to total assets
assets
the ratio of Qard

Qard Other the ratio of total other
Qardit investments to total Other_Lit
Investments Liabilities liabilities to total assets
assets
the ratio of total other
the ratio of total
Securities securities and Total
Secit Total_Eqit shareholders’ equity to
Investments investments to total Equity
total assets
assets
Other the ratio of total other
Other_Ait
Assets assets to total assets
Net Fixed the ratio of net fixed
Fixed_Ait
Assets assets to total assets
Notes: Table 1 provides description and notations of variables examined in this study. All variables are inflation-
adjusted and expressed in US Dollar to control for heterogeneity of cross-country economic conditions.
Table 2: Sample Distribution

Overall sample observations (n = 491)
Country No. of Islamic Banks Islamic Banks % Global Market Share (% Assets)†
Bahrain 6 10% 1%
Egypt 2 3% 0.05%
Indonesia 4 7% 2%
Iraq 2 3% 0.05%
Kuwait 4 7% 8%
Lebanon 2 3% 0.05%
Malaysia 8 13% 13%
Pakistan 4 7% 8%
Palestine 2 3% 0.05%
Oman 2 3% 0.05%
Saudi Arabia 7 12% 21%
Sudan 4 7% 0.05%
Qatar 6 10% 7%
UAE 7 12% 11%
Total 60 100% 74%
Notes: Table 2 presents sample banks listed in the MENA region and South Asia and total assets as a percentage
of global market assets.
† Percentages of assets to global assets are reported as of 31 December 2012.
19
Table 3: Descriptive Statistics – Islamic Banks (2002-2012)
Panel A: overall sample (n = 491)

Variable Mean Median Std. Variable Mean Median Std.
Cash it 0.10 0.10 0.12 Cust_accit 0.37 0.32 0.20
Murabit 0.11 0.05 0.14 Due_banksit 0.12 0.07 0.15
Mudarit 0.10 0.06 0.12 Murab_payit 0.09 0.05 0.13
Musharit 0.09 0.07 0.07 Mudar_payit 0.10 0.04 0.12
Sukukit 0.10 0.08 0.15 Sukuk_payit 0.08 0.03 0.11
Qardit 0.23 0.11 0.21 Other_Lit 0.11 0.04 0.16
Secit 0.14 0.10 0.13 Total_Eqit 0.13 0.14 0.13
Other_Ait 0.12 0.07 0.23
Fixed_Ait 0.01 0.01 0.01 Total liabilities 0.87 0.86 0.13
Total assets 1.00 Total liabilities and equity 1.00
Panel B: large-size § Islamic banks (above sample mean n = 271)

Qardit 0.24 0.14 0.24 Other_Lit 0.09 0.04 0.16

Secit 0.12 0.09 0.14 Total_Eqit 0.11 0.10 0.14
Other_Ait 0.15 0.06 0.26
Fixed_Ait 0.01 0.01 Total liabilities 0.89 0.86 0.14
Panel C: small-size § Islamic banks (below sample mean n = 220)

Qardit 0.21 0.08 0.19 Other_Lit 0.12 0.05 0.18
Secit 0.14 0.12 0.13 Total_Eqit 0.19 0.14 0.13
Other_Ait 0.10 0.07 0.22
Fixed_Ait 0.01 0.01 0.01 Total liabilities 0.81 0.80 0.13
Notes: Table 3 presents the descriptive statistics of the variables for the period of 2002–2012. The sample
reflects Islamic banks listed in the MENA region. Panel A provides descriptive statistics for the overall sample,
whereas panels B and C provide descriptives for the subsamples above and below sample mean asset size,
respectively.
§ Size is defined as the natural log of total assets
20
Table 4: Pearson Correlation Coefficients – Islamic Banks Overall Sample (2002-2012)
Variables Cust_accit Due_banksit Murab_payit Mudar_payit Sukuk_payit Other_Lit Total_Eqit

-0.29 0.04 0.09 0.25 -0.05 -0.06 0.37
Cash it
(<0.01) (0.52) (0.15) (<0.01) (0.43) (0.34) (<0.01)
-0.35 0.15 0.24 -0.12 0.51 0.04 0.22
Murabit
(<0.01) (0.02) (<0.01) (0.06) (<0.01) (0.51) (<0.01)
-0.06 -0.11 0.01 0.30 0.03 -0.15 0.01
Mudarit
(0.36) (0.08) (0.95) (<0.01) (0.66) (0.02) (0.92)
-0.52 0.31 -0.01 0.33 0.39 0.03 0.18
Musharit
(<0.01) (<0.01) (0.92) (<0.01) (<0.01) (0.66) (<0.01)
-0.35 -0.06 -0.14 0.41 -0.01 0.23 0.21
Sukukit
(<0.01) (0.37) (0.04) (<0.01) (0.83) (<0.01) (<0.01)
0.61 -0.18 -0.21 -0.28 -0.43 -0.07 -0.37
Qardit
(<0.01) (<0.01) (<0.01) (<0.01) (<0.01) (0.28) (<0.01)
-0.15 0.20 0.27 -0.34 0.26 -0.07 -0.12
Secit
(0.01) (<0.01) (<0.01) (<0.01) (<0.01) (0.22) (0.05)
0.28 0.30 0.07 -0.13 0.02 0.29 0.15
Other_Ait
(<0.01) (<0.01) (0.24) (0.04) (0.77) (<0.01) (0.01)
-0.10 -0.08 0.05 -0.18 0.12 0.01 0.33
Fixed_Ait
(0.10) (0.20) (0.46) (<0.01) (0.06) (0.87) (<0.01)
Notes: Table 4 presents the Pearson correlation coefficients of variables for the overall sample of Islamic banks
listed in the MENA region for the period 2002-2012 (For the list of variables and their description, see table 1).
P-values are in parentheses.
21
Table 5: Canonical Correlation Analysis Results – Islamic Banks (2002-2012)
Panel A: total sample
Canonical Canonical Canonical Eigen Proportion Cumulative F Stat. Pr.
Function Correlation R2 Value
1 0.88 0.78 3.60 0.43 0.43 15.19*** < 0.01
2 0.86 0.75 2.96 0.35 0.78 11.51*** < 0.01
3 0.70 0.49 0.97 0.12 0.90 6.96*** < 0.01
4 0.62 0.39 0.63 0.08 0.98 4.80*** < 0.01
5 0.31 0.09 0.10 0.01 0.99 2.08*** 0.01
6 0.28 0.08 0.08 0.01 1.00 1.94** 0.05
7 0.14 0.02 0.02 0.00 1.00 1.03 0.38
Multivariate Tests of Significance
Statistic Value Approx. Pr.
F Stat.
Wilk’s Lamda 0.01 15.19*** < 0.01
Pillai’s Trace 2.60 10.15*** < 0.01
Hotelling-Lawley Trace 8.36 19.58*** < 0.01
Roy’s Greatest Root† 3.60 61.98*** < 0.01
Panel B: large size subsample (≥ mean sample asset size)

1 0.92 0.84 5.21 0.46 0.46 9.57*** < 0.01

2 0.90 0.81 4.14 0.36 0.82 7.05*** < 0.01
3 0.71 0.51 1.03 0.09 0.91 4.12*** < 0.01
4 0.64 0.41 0.69 0.06 0.97 3.12*** < 0.01
5 0.43 0.18 0.22 0.02 0.99 1.86** 0.03
6 0.32 0.10 0.12 0.01 1.00 1.40** 0.02
7 0.17 0.03 0.03 0.00 1.00 0.77** 0.05
F Stat.
Wilk’s Lamda 0.01 9.57*** < 0.01
Pillai’s Trace 2.87 6.12*** < 0.01
Panel C: small size subsample (< mean sample asset size)

1 0.91 0.83 4.99 0.46 0.46 8.09*** < 0.01
2 0.86 0.75 2.95 0.28 0.74 6.13*** < 0.01
3 0.77 0.60 1.47 0.14 0.88 4.45*** < 0.01
4 0.67 0.45 0.82 0.08 0.96 3.24*** < 0.01
5 0.46 0.21 0.26 0.02 0.98 2.10*** 0.01
6 0.43 0.18 0.22 0.02 1.00 1.86* 0.07
7 0.13 0.02 0.02 0.00 1.00 0.39 0.76
F Stat.
Wilk’s Lamda 0.01 8.09*** < 0.01
Pillai’s Trace 3.03 5.61*** < 0.01
† F stat. for Roy’s Greatest Root is an upper bound.
22
Table 6: Canonical Redundancy Analysis Results – Islamic Banks (2002-2012)
Canonical (a) Total Sample (b) Large Size Subsample (c) Small Size Subsample
Function ( ≥ sample mean asset size) ( < sample mean asset size)
Redundancy Redundancy Redundancy Redundancy Redundancy Redundancy
Coefficients of Coefficients of Coefficients of Coefficients of Coefficients of Coefficients of
Asset Liabilities- Asset Liabilities- Asset Liabilities-
Variables Equity Variables Equity Variables Equity
Variance Variables Variance Variables Variance Variables
Explained By Variance Explained By Variance Explained By Variance
Liabilities- Explained By Liabilities- Explained By Liabilities- Explained By
Equity Assets Equity Assets Equity Assets
Canonical Canonical Canonical Canonical Canonical Canonical
Variables Variables Variables Variables Variables Variables
1 0.19 0.17 0.21 0.19 0.16 0.16
2 0.09 0.11 0.09 0.07 0.14 0.19
3 0.04 0.08 0.04 0.10 0.05 0.08
4 0.05 0.07 0.05 0.07 0.05 0.08
5 0.01 0.01 0.01 0.02 0.02 0.02
6 0.01 0.01 0.01 0.01 0.02 0.02
7 0.01 0.01 0.01 0.01 0.01 0.01
Redundancy
Index 0.40 0.46 0.42 0.47 0.45 0.56
Notes: Table 6 presents the redundancy coefficients of variables. Columns (a), (b), and (c) present the
coefficients for the canonical functions for the overall sample, the large banks, and the small banks respectively.
Table 7: T-test for Equality between Means: Large Size and Small Size Subsamples –
Islamic Banks (2002-2012)
Large Size Small Size t-stat. Large Size Small Size t-stat.
Variable Subsample Subsample Variable Subsample Subsample
Mean Mean Mean Mean
Cash it 0.10 0.15 -0.51 Cust_accit 0.37 0.34 -0.99*
Murabit 0.10 0.13 1.76** Due_banksit 0.13 0.11 1.29*
Mudarit 0.10 0.11 0.96* Murab_payit 0.11 0.08 1.55*
Musharit 0.06 0.05 -0.99* Mudar_payit 0.11 0.09 0.97*
Sukukit 0.11 0.10 -0.98* Sukuk_payit 0.08 0.07 1.57*
Qardit 0.25 0.21 -1.47* Other_Lit 0.09 0.12 -0.98*
Secit 0.12 0.14 1.31* Total_Eqit 0.11 0.19 0.97*
Other_Ait 0.15 0.10 0.96*
Fixed_Ait 0.01 0.01 0.54
Notes: Table 7 shows the t-statistics to test the equality of means between the large size and small size
subsamples. *, **, and *** represent significance at the 10%, 5%, and 1% level, respectively (significance is
two-tailed).
23
Table 8: Summary of Redundancy Index Results in Prior Studies and the Current
Study
Studies Sector Redundancy Coefficients of Redundancy Coefficients of

Asset Variables Variance Liabilities-Equity Variables
Explained By Liabilities- Variance Explained By
Equity Canonical Variables Assets Canonical Variables
Stowe et al. (1980) Non-financial 0.32 0.25
institutions
Simonson et al. (1983) Commercial banks 0.32 0.37
Jang and Ryu (2006) Restaurants 0.15 0.17
Deyoung and Yom (2008) Commercial banks 0.07 0.12
Results of this study Islamic banks 0.40 0.46
Table 9: Correlations from the First Canonical Loadings: Integration between Accounts
(a) Total (b) Large (c) Small (a) Total (b) Large (c) Small
Loadings Loadings
Sample Banks Banks Sample Banks Banks
Cash it 0.54 0.38 0.59 Cust_accit -0.80 -0.86 -0.52
Murabit 0.06 0.36 0.13 Due_banksit -0.09 0.18 -0.49
Mudarit 0.41 0.45 0.22 Murab_payit -0.08 -0.01 -0.21
Sukukit 0.79 0.57 0.77 Sukuk_payit 0.38 0.56 -0.17

Qardit -0.57 -0.73 -0.34 Other_Lit 0.30 0.22 0.42
Secit -0.50 -0.25 -0.65 Total_Eqit 0.47 0.28 0.50
Other_Ait -0.42 -0.43 -0.27
Fixed_Ait 0.08 0.02 0.01
Notes: Table 9 presents the Correlations from the first canonical loadings. The left-hand side of the table
displays correlations between actual asset accounts and the asset canonical variables. The right-hand side of the
table displays correlations between actual liability/equity accounts and the liability/equity canonical variables.
Column (a) provides results for the overall sample, whereas columns (b) and (c) provide results for the
subsamples above and below sample mean asset size, respectively.
24
Table 10: Canonical Correlation Analysis Results: Boom Period (2002-2006), Financial
Crisis Period (2007-2009), and After-crisis Period (2010-2012)
Panel A: Pre-crisis boom period (n = 205)
1 0.99 0.98 17.50 0.76 0.76 14.58*** < 0.01
2 0.97 0.93 13.89 0.18 0.94 7.36*** < 0.01
3 0.86 0.75 2.93 0.04 0.98 3.50*** < 0.01
4 0.66 0.44 0.77 0.01 0.99 1.62* 0.06
5 0.31 0.09 0.10 0.01 1.00 0.59* 0.09
6 0.23 0.06 0.06 0.00 1.00 0.50 0.30
7 0.10 0.02 0.02 0.00 1.00 0.31 0.73
F Stat.
Wilk’s Lamda 0.01 14.58*** < 0.01
Pillai’s Trace 3.25 4.85*** < 0.01
Panel B: Financial crisis period 2007-2009 (n = 131)

1 0.88 0.77 3.47 0.43 0.43 10.12*** < 0.01
2 0.85 0.73 2.66 0.33 0.76 7.69*** < 0.01
3 0.73 0.53 1.12 0.14 0.90 4.87*** < 0.01
4 0.60 0.36 0.56 0.07 0.97 2.99*** < 0.01
5 0.29 0.08 0.09 0.01 0.98 1.32* 0.09
6 0.23 0.05 0.06 0.01 0.99 1.28 0.25
7 0.19 0.04 0.03 0.00 1.00 1.42 0.20
F Stat.
Wilk’s Lamda 0.02 10.12*** < 0.01
Pillai’s Trace 2.57 6.94*** < 0.01
† F stat. for Roy’s Greatest Root is an upper bound
Panel C: After-crisis period (n = 155)

1 0.91 0.84 5.22 0.46 0.46 8.21*** < 0.01
2 0.90 0.81 4.14 0.35 0.81 7.00*** < 0.01
3 0.71 0.51 1.03 0.09 0.90 4.08*** < 0.01
4 0.64 0.41 0.69 0.06 0.96 3.29*** < 0.01
5 0.43 0.18 0.22 0.03 0.99 1.87** 0.03
6 0.32 0.10 0.12 0.01 1.00 0.45 0.22
7 0.17 0.03 0.03 0.00 1.00 0.47 0.15
F Stat.
Wilk’s Lamda 0.02 10.12*** < 0.01
Pillai’s Trace 2.57 6.94*** < 0.01
† F stat. for Roy’s Greatest Root is an upper bound
25
Table 11: Canonical Redundancy Analysis Results: Pre-crisis Boom Period (2002-2006),
Financial Crisis Period (2007-2009), and After-crisis Period (2010-2012)
Canonical (a) Boom Period (b) Financial Crisis Period (b) After-crisis Period
Function (2002-2006) (2007-2009) (2009-2012)
Redundancy Redundancy Redundancy Redundancy Redundancy Redundancy
Coefficients of Coefficients of Coefficients of Coefficients of Coefficients of Coefficients of
Asset Variables Liabilities-Equity Asset Variables Liabilities-Equity Asset Variables Liabilities-Equity
Variance Variables Variance Variables Variance Variables
Explained By Variance Explained By Variance Explained By Variance
Liabilities-Equity Explained By Liabilities-Equity Explained By Liabilities-Equity Explained By
Canonical Assets Canonical Canonical Assets Canonical Canonical Assets Canonical
Variables Variables Variables Variables Variables Variables
1 0.32 0.31 0.13 0.11 0.10 0.09
2 0.14 0.26 0.17 0.14 0.16 0.15
3 0.08 0.12 0.06 0.11 0.05 0.09
4 0.03 0.03 0.05 0.08 0.05 0.07
5 0.01 0.01 0.01 0.01 0.01 0.01
6 0.01 0.01 0.01 0.01 0.01 0.01
7 0.01 0.01 0.01 0.01 0.01 0.01
Redundancy
Index 0.60 0.76 0.44 0.47 0.39 0.43
Notes: Table 11 presents the redundancy coefficients of variables. Columns (a) and (b) present the coefficients
for the canonical functions for the pre-crisis boom period and the financial crisis period subsamples,
respectively. The F statistics for all variables from the ANOVA tests are significant at conventional levels.
Table 12: Correlations from the First Canonical Loadings: Integration between
Accounts Pre-crisis Boom (2002-2006), Financial Crisis (2007-2009), and After-crisis
Period (2010-2012)
(a) (b) (c) (a) (b) (c)
Loadings Before Financial After Loadings Before Financial After
Crisis Crisis Crisis Crisis Crisis Crisis
Cash it 0.01 -0.22 -0.03 Cust_accit 0.73 -0.24 -0.19
Murabit -0.85 0.73 0.52 Due_banksit 0.11 0.26 0.21
Mudarit -0.48 -0.07 -0.03 Murab_payit -0.69 0.22 0.23
Musharit -0.96 0.46 0.31 Mudar_payit 0.41 -0.25 -0.28
Sukukit 0.76 -0.32 -0.28 Sukuk_payit -0.81 0.77 0.73
Qardit 0.49 -0.22 -0.21 Other_Lit 0.16 0.01 0.01
Secit 0.34 0.49 0.40 Total_Eqit -0.60 0.15 0.09
Other_Ait -0.10 -0.12 -0.09
Fixed_Ait 0.40 -0.01 -0.01
Notes: Table 12 presents the Correlations from the first canonical loadings. The left-hand side of the table
displays correlations between actual asset accounts and the asset canonical variables. The right-hand side of the
table displays correlations between actual liability/equity accounts and the liability/equity canonical variables.
Columns (a) and (b) provide results for pre-crisis period (2002-2006), the financial crisis period (2007-2009),
and after-crisis period (2010-2012), respectively.
26

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Pacific Accounting Review

Asset-Liability Management in Islamic Banks: Evidence from Emerging Markets

About Emerald www.emeraldinsight.com

*Related content and download information correct at time of download.

Design/Methodology/Approach: We collect data from the financial statements of Islamic

Practical Implications: This paper contributes to research on an under-researched, globally

JEL classification: G32 G21 G11 M41 G01

The remainder of the paper is organized as follows. Section 2 discusses background

2.1. The Unique Nature of Islamic Banking and Finance

2.2. Prior Research on Asset-Liability Management

According to prior studies, ALM is motivated by: 1) managerial self-interest in

4.1. Definition of Variables

Nine asset categories and seven liability/equity categories are expressed as a

4.1.1. Asset items (Dependent variables)

mark-up rather than an interest payment.

4.1.2. Liability-equity Side Items (Independent Variables)

4.2. Canonical Correlation Analysis

has not been used extensively in examining asset-liability structure in banks, it is an

4.3. The Model

We express the liability-equity (independent) variables as X = [X1,X2,…,Xm] and

The linear combinations of X and Y can be constructed as follows:

=∝  =∝  +∝  + ⋯ +∝

Where ∝´ = [∝ 1, ∝ 2,…, ∝ n] and ´ = [ 1, 2,…, m] are vectors of scalars to be

 (#$%%&'( ,) *)

5. Data and Sample

6.1. Descriptive Statistics

6.2. Findings of the Interdependencies between Assets and Liability Accounts

As to the subsample analysis, we find different results in large banks.5 There is a

7. Conclusion and Further Implications

Asset-liability management (ALM) focuses on matching the maturities of the two

Dash, M. and Pathak, R. (2016), “Canonical correlation analysis of asset–liability

______ and Ryu, K. (2006), “Cross-Balance sheet interdependencies of restaurant firms: a

Karthigeyan, A., Mariappan, V., and Rangaiah, B. (2013), “Assets-Liabilities management in

2007. Available at http://www.bis.org/speeches/sp071210.htm [accessed 10/8/2016].

Obben, J. (1992), “Performance of the Ghanaian rural banks: a canonical correlation

Shanmugam, B. and Zahari, R. (2009), “A Primer on Islamic Finance”, Research Foundation

Singh, K. (2013), “Assets-liability management in banks: a dynamic approach”, AIMA

the ratio of Qard

Table 2: Sample Distribution

Panel A: overall sample (n = 491)

Panel B: large-size § Islamic banks (above sample mean n = 271)

Qardit 0.24 0.14 0.24 Other_Lit 0.09 0.04 0.16

Panel C: small-size § Islamic banks (below sample mean n = 220)

Variables Cust_accit Due_banksit Murab_payit Mudar_payit Sukuk_payit Other_Lit Total_Eqit

Panel B: large size subsample (≥ mean sample asset size)

1 0.92 0.84 5.21 0.46 0.46 9.57*** < 0.01

Panel C: small size subsample (< mean sample asset size)

Studies Sector Redundancy Coefficients of Redundancy Coefficients of

Sukukit 0.79 0.57 0.77 Sukuk_payit 0.38 0.56 -0.17

Function Correlation R2 Value

Panel C: After-crisis period (n = 155)

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=∝ =∝ +∝ + ⋯ +∝

(#$%%&'( ,) *)