Development of Liquidity Management Instruments:

Only available on StudyMode
  • Topic: Islamic banking, Bank, Financial market
  • Pages : 22 (4852 words )
  • Download(s) : 482
  • Published : May 16, 2012
Open Document
Text Preview
International Conference on Islamic Banking: Risk Management, Regulation and Supervision - 2003

DEVELOPMENT OF LIQUIDITY MANAGEMENT INSTRUMENTS: CHALLENGES AND OPPORTUNITIES

By Abdul Rais Abdul Majid Chief Executive Officer International Islamic Financial Market (IIFM)

International Conference on Islamic Banking: Risk Management, Regulation and Supervision Jakarta –Indonesia Sept 30- to October 3, 2003 ( 1 of 24 Pages )

International Conference on Islamic Banking: Risk Management, Regulation and Supervision - 2003

1.0

Introduction

Liquidity management is part of the larger risk management framework of the financial services industry, which concerns all financial institutions whether they are conventional or Islamic. Studying liquidity management issues is a critical but complex subject. Failure to address the issue may lead to dire consequences, including banking collapse, and by extension, the stability of the financial system. In fact, most bank failures are due to difficulties managing their liquidity problems.1 This is also the reason why regulators are very concerned with the liquidity position of financial institutions and current thinking of regulators centre around the strengthening of liquidity framework.

For Islamic financial institutions, liquidity management is more unique due to the fact that most available conventional instruments used for liquidity management are interestbased, therefore, not sharia‟a compatible. It follows, then, that in the absence of shariah compatible instruments, there can only be limited development of the Islamic interbank money market. The money market is an important component of the liquidity management framework as it is the first avenue to place or borrow short term funds. This gives more reason why addressing liquidity management is very critical to Islamic banks since IFI faces bigger challenges due to sharia‟a considerations and the nature of their operations.

1

Mark Largan Banking Operation 2nd edition Chartered Institute of Bankers, United Kingdom, 2000 p.28.

( 2 of 24 Pages )

International Conference on Islamic Banking: Risk Management, Regulation and Supervision - 2003

Traditionally, many Islamic banks rely heavily on commodity murabahah for short-term investment and liquidity management. However, the technique, while providing IFI‟s with a window to invest their short term funds, leads to an inefficient use of funds due to its low returns. Therefore, the challenge is to look for alternative instruments and solutions.

Recently, several new sharia‟a compatible instruments have been introduced to the market e.g. several applications of the sukuk structure. In other developments, several Islamic alternatives to the conventional inter-bank market have been advanced by Muslim scholars which can be explored further for future implementation. The legal and institutional infrastructure for the development of an Islamic secondary market, with liquidity management top in agenda, have been strengthen by the establishment of the International Islamic Financial Market (IIFM) which has been given the functions of developing an active secondary market in sharia‟a compatible instruments with a view of facilitating the liquidity management functions of the IFI‟s.

This paper will try to address the above issues, the main aspects of liquidity management in Islamic banks nowadays, and the way forward.

( 3 of 24 Pages )

International Conference on Islamic Banking: Risk Management, Regulation and Supervision - 2003

2. 0

Definition and Concept of Liquidity Management

Definition The concept of liquidity risk revolves around the ability of a bank to maintain sufficient funds to meet its commitments, which may, in turn, be related to its ability to attract deposits. It is about the ability of matching the maturity of assets and liabilities daily and coping with any short-term pressures that may arise in the process of ensuring the assets...
tracking img