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Liquidity risk of Islamic banks is an essential part of risk management because Islamic banks have limited tools to manage liquidity risk due to avoidance of Riba. This study aims to investigate Firm-level factors and its impact on Liquidity risk of Islamic banking system of Pakistan. Firm-level factors are those internal or external factors which can influence the performance of a bank. Independent variables of the study include; non-performing loans, size of banks, capital adequacy ratio, assets management ratio & profitability ratio. The sample of the study comprises all five full-fledged Islamic banks with annual data ranging from 2010 to 2019, on the basis of the Purposive sampling technique. The panel diagnosis shows that random effect model is best to analyze the impact of firm-level factors on liquidity risk of Islamic banks. The empirical analysis suggested that all the explanatory variables were found significant with the dependent variable. Results further suggest that Size of bank, Non-performing loans, and assets management have an inverse relationship with liquidity risk of Islamic banks while Capital adequacy ratio and return on equity was found to have a positive relationship with liquidity risk. Additionally, it was observed that all the firm’s level factors have a significant relationship with liquidity risk; therefore, focus should be given to these factors to control the problems of liquidity risk management in Islamic banking system of Pakistan.

Keywords: Liquidity Risk, Non-Performing Loans, Capital Adequacy Ratio, Return on Equity, Assets Management, Firm’s Level Factors.