Internal and external determinants of the liquidity risk for commercial banks in the emerging market: A context of strategy

Given the significance of the banking sector in the economy, understanding the determinants of liquidity risk is crucial for the stability of the banking sector is vital to guaranteeing the ‍stability of banks by formulating preventive policies and frameworks to mitigate such risks. Using data from Iraqi commercial banks (2014–2024), the current study discovers the factors influencing liquidity risk, as measured by the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). The research employs generalized least squares (GLS) methodology to analyze the impact of banking characteristics, macroeconomic indicators, and governance indicators. The results reveal that factors such as a high deposit-to-assets ratio, capital adequacy ratio (CAR), and deposit growth increase banks’ exposure to liquidity pressures. Conversely, strong mitigating factors were identified, including higher profitability (return on assets, ROA), larger bank size, and, importantly, government effectiveness as a governance indicator, which significantly reduces these risks. The study’s findings derive from a fragile post-conflict environment, underscoring that improving internal ‍risk management, strengthening capital, maintaining macroeconomic stability, and enhancing the effectiveness of government institutions are vital measures to mitigate liquidity risk in Iraqi banks. The findings will serve as a strategic guidance tool for banking regulators, managers, and decision-makers to support the stability and resilience of banking sector in the future.