The Impact of Liquidity Risks on Financial Performance: A Case Study of Islamic Banks in Africa

Islamic banks in Africa have operated for over two decades in an effort to expand and compete with conventional financial institutions, particularly in a region with a significant Muslim population. Despite this potential, the growth of Islamic banking across the continent has been shaped by unique structural and economic challenges that influence how these banks manage financial risks. Among these risks, liquidity risk remains a critical factor affecting the stability and profitability of Islamic banks. This study investigates the impact of liquidity risk on the financial performance of Islamic banks in Africa from 2014 to 2019. Using panel data from 34 Islamic banks across 11 African countries, the research applies a fixed effects regression model to analyze the relationship between liquidity risk and key financial performance indicators. The findings reveal that liquidity risk, measured through the liquidity ratio, has a significant positive relationship with the financial performance of Islamic banks. This suggests that maintaining adequate liquidity enhances banks’ profitability and resilience in the face of regional economic volatility. The study concludes that effective liquidity risk management is essential for improving the financial performance of Islamic banks in Africa. It recommends that policymakers and bank managers adopt stronger liquidity monitoring frameworks and regulatory support mechanisms to ensure sustainable growth and competitiveness within the African financial sector.