Institute of Islamic Banking

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Browsing Institute of Islamic Banking by Author "Amir Islam"

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    Liquidity management in Islamic banks
    (University of Management and Technology, 2013) Amir Islam
    Liquidity Management, undoubtedly, is among the most imperative areas for any bank. Its importance multiplies manifold in an Islamic Bank (IB) as compared to a Conventional Bank, based on the fact that an Islamic Bank is conditioned to invest just in real assets. Thus, continuous creation of assets is vital for an IB. Moreover, IBs suffer from the absence of a mechanism programmed to divert surplus liquidity towards an IB faced with a liquidity crunch. Consequently, surplus funds in an IB multiply expense and liability until and unless these funds are put to investment. As an outcome, there may also be a compromise on Shariah guidelines, like investment in products such as Commodity Murabah which do not enjoy consensus of varied Islamic schools of thought. At the same time, an IB undergoing a liquidity crunch has to enhance profit rates to attract more deposit or to present a call option for adjustment of financing, in order to maintain balance in assets and liabilities. Resultantly, whichever of the two situations is being faced, bank profitability suffers a negative impact. A clearly defined mechanism among Islamic Banks, seemingly absent, can be helpful for a bank to manage liquidity crunch and aid another one in handling surplus liquidity, so that shortfall and surplus within the banking industry may be adjusted. There is also a dearth of money market instruments in the market, complying with the Shariah standards, to absorb excess liquidity of an Islamic bank. Similarly, there is an apparent paucity of money market tools or mechanism to bail the bank out of a liquidity crunch. The research analyzes the position of Islamic banks in Pakistan with regards to liquidity management and puts forth proposals for multiple systems of Liquidity Management with the intention that surplus liquidity may be adjusted to compensate shortfall in liquidity within the Islamic Banking Industry.