Abstract
PurposeThis paper aims to critically investigate the liquidity risk management of Islamic banks and develop an alternative regulatory framework appropriate for liquidity management of these banks.Design/methodology/approachThe specific risk profile of an Islamic bank requires developing a new and more efficient regulatory framework, which relies on risk- sharing and symmetric information among parties. The paper makes a differentiation between small local banks and internationally active Islamic banks and proposes to apply liquidity requirements only for internationally active Islamic banks.FindingsA new proposal for the liquidity coverage ratio (LCR) of Islamic banks is developed in this paper towards mitigating risks and concurrently protecting the interests of investment account holders. Minimum and maximum thresholds are proposed for each liquid asset in this new LCR framework. An alternative liquidity approach is discussed to complement the proposal and several policy options are suggested.Originality/valueAs participation banks are exposed to market liquidity and market risks, more high-quality liquid instruments within a risk-sharing regulatory framework may provide the inner adjustment process through which any mismatch regarding maturity, risk, value or linkage with the real economy is corrected systematically. It offers policy implications for regulators, supervisors and international organizations.
Highlights
The contemporary banking system is more complex than 10 years ago because of the introduction of many regulations including liquidity coverage ratio (LCR) by the Basel Committee on Banking Supervision (BCBS), which is one of the global standard setters working on the prudential regulation of banks
As our study shows that liquidity risk management poses particular challenges to Islamic banks, this paper proposes to exempt small banks from the LCR requirements
Designing a new liquidity coverage ratio The results found by Aldasoro and Faia (2016) provide strong evidence for differentiating the LCR requirements for different banks
Summary
Provided in Cooperation with: International Shari'ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur. Suggested Citation: Dolgun, Muhammed Habib; Mirakhor, Abbas; Ng, Adam (2019) : A proposal designed for calibrating the liquidity coverage ratio for Islamic banks, ISRA International Journal of Islamic Finance, ISSN 2289-4365, Emerald, Bingley, Vol 11, Iss. 1, pp. Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. A proposal designed for calibrating the liquidity coverage ratio for Islamic banks Muhammed Habib Dolgun
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