An Application of Generalized Moments Method to Examine the Management Behavior during Peak Season A Study in Islamic Micro Finance Industry

Applied Master of Islamic Banking and Finance, Politeknik Negeri Bandung, Indonesia

^a Corresponding author: ya_nur81@yahoo.com

Abstract

In the current highly competitive finance industry, it is important that any financial institution to develop a proper strategy to compete in the market. More specifically, the finance managers need to have an appropriate liquidity and stability strategy during the peak season where their customers have a high demand of cash. Finding such a strategy is challenging for micro finance institution due to their limited resources, in terms of finance and human resources. This study is aimed to (1) analyze the impact of liquidity risk to the stability of micro finance institutions and to (2) assess the relationship between liquidity risk and credit risk in the period of peak season by using Generalized Moments Method. The focus of this study is Islamic micro finance institutions in West Java for the period 2012-2017. Using monthly data, this study reveals that the risk of liquidity has a negative effect on the level of stability of micro finance institutions at peak season and has a positive influence on the level of stability at off peak season. Further, the study finds that the relationship between liquidity risk and credit risk is significant during the period of peak season and off peak season period. Therefore, it can be concluded that in general credit risk impacts on liquidity risk. The findings of this study provide significant contributions in terms of enlarging our understanding on the management behavior related to institution liquidity and stability during the peak and non-peak season. From managerial perspective, this study helps the Islamic micro finance institution to remain stable and competitive during the peak season.