Abstract
This paper analyzes liquidity management mechanisms of Islamic and Conventional finance from a Shari'ah perspective. It has been found that, IFIs mainly useSukūkfor the liquidity management purposes. Likewise, IFIs provide their excess liquidity to the liquidity-deficit IFIs throughMudārabahandWakālahbased mechanisms. CommodityMurābahah(based onTawarruq)is another widely used liquidity management instrument but it is criticized by someShari'ahscholars because it involves such transactions that are only used as a subterfuge to obtain ready cash. Conventional liquidity management instruments, on the other hand, are debt-based securities, therefore, are notShari'ahcompliant due to the involvement of Islamically prohibitedRibāandBay' al-Dayn.This paper suggests some Shari'ah compliant liquidity management instruments, such as: (i) an IFI can issue NCDs against a portfolio of bank's assets. (ii) any corporation can issue asset-backedSukūk, which can be used by IFIs for liquidity management purposes; (iii) an IFI can provide acceptance financing facility by means of aMurābahahbased transaction; (iv) a central bank can provide emergency liquidity facility to IFIs on the basis ofSalamtransactions; (v) deposit insurance facility can be provided to the Islamic banking depositors on the basis ofTakāfulprinciples.
Highlights
Financial crisis of 2007-2008 exposed conventional banking system’s weaknesses pertaining to the regulatory oversight, poor risk management, and lack of disclosure, 1 Islamic Financial Institutions (IFIs) were more stable, profitable and solvent during the Sheikh Rafiullah, International Islamic University, Islamabad
This paper suggests some Shari’ah compliant liquidity management instruments, such as: (i) an IFI can issue Negotiable Certificates of Deposits (NCDs) against a portfolio of bank’s assets. (ii) any corporation can issue asset-backed Sukūk, which can be used by IFIs for liquidity management purposes; (iii) an IFI can provide acceptance financing facility by means of a Murābahah based transaction; (iv) a central bank can provide emergency liquidity facility to IFIs on the basis of Salam transactions; (v) deposit insurance facility can be provided to the Islamic banking depositors on the basis of Takāful principles
The aim is further broken down into the following three objectives: (i) to analyze the liquidity management mechanisms available to Islamic banks worldwide; (ii) to analyze the Shari’ah legitimacy of the liquidity management mechanisms of conventional finance with an ultimate objective of seeking concepts that could be used in an Islamic context; and (iii) to identify such Islamic financial contracts that have not been fully exploited for their capacity to meet current liquidity management needs of Islamic banks
Summary
Financial crisis of 2007-2008 exposed conventional banking system’s weaknesses pertaining to the regulatory oversight, poor risk management, and lack of disclosure, 1 Islamic Financial Institutions (IFIs) were more stable, profitable and solvent during the Sheikh Rafiullah, International Islamic University, Islamabad. The primary aim of the research paper is to analyze the liquidity management mechanisms—instruments and infrastructures—available to the Islamic banking industry in order to gain an insight of difficulties being faced by the Islamic banks in managing liquidity with the ultimate objective of finding Shari’ah compliant way-outs of such difficulties. The aim is further broken down into the following three objectives: (i) to analyze the liquidity management mechanisms available to Islamic banks worldwide; (ii) to analyze the Shari’ah legitimacy of the liquidity management mechanisms of conventional finance with an ultimate objective of seeking concepts that could be used in an Islamic context; and (iii) to identify such Islamic financial contracts that have not been fully exploited for their capacity to meet current liquidity management needs of Islamic banks.
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