Nexus of liquidity creation, profitability and bank stability with the moderating role of corruption: an empirical analysis

Abstract

Purpose This study aims to investigate the impact of liquidity creation (LC) on the profitability and stability of banks while considering the moderating role of corruption. Design/methodology/approach Panel data from 23 conventional banks and five Islamic banks in Pakistan spanning from 2008 to 2021 were used for analysis. The study used fixed effect and random effect models, along with the generalized method of moments estimation to ensure robustness of the results. Findings The study reveals a negative relationship between LC and banking profitability, but a positive association with banking stability. Additionally, corruption is found to play a moderating role in the relationship between LC, profitability and stability in the banking sector of Pakistan. Research limitations/implications The findings have practical implications for bank managers and investors, emphasizing the negative relationship between LC and profitability in Pakistan. Moreover, the study highlights the significant impact of corruption on bank performance, which can guide policymakers in formulating strategies to strengthen the banking sector and prevent financial turmoil in the future. Originality/value This study makes a significant contribution to the existing literature by examining the moderating role of corruption in the relationship between LC, profitability and stability in both conventional and Islamic banks.