IMPACT OF MACROECONOMIC AND BANK SPECIFIC FACTORS ON LIQUIDITY OF COMMERCIAL BANKS IN MALAYSIA

Abstract

This study is to examine the impact and granger causality of bank-specific and macroeconomic factors on Malaysia commercial banks’ liquidity. Secondary sources are used to conduct the hypotheses testing on 18 commercial banks (8 domestic and 10 foreign banks) in Malaysia from the year 2006 until 2016. The regression model, Pooled Ordinary Least Square and Granger Causality Test will be used in the study. Hausman test is used to test whether Random Effect Model (REM) or Fixed Effect model (FEM) is appropriate. Prob. Chi Square shows 1.0000 which higher than significance level of 0.05. Thus, there is sufficient evidence to conclude that REM is better than FEM. The result showed that inflation rate (CPI), government deficit financing (GDF) and asset size (LNSIZE) are positive and insignificant relation in explaining the bank’s liquidity. Capital (CAR) and leverage (LEV) showed negatively and significant relation with bank’s liquidity while foreign exchange rate (EXCR) showed positive and significant relation with bank’s liquidity. Moreover, bidirectional causality was found between CAR and LEV with bank liquidity while EXCR, GDF and LNSIZE shown unidirectional causality with bank liquidity.