Liquidity Risk Management in the Islamic Banking: Portfolio of Ijara and Murabaha

Abstract

Liquidity risk management in finance has always been well known as a necessity for conventional finance and Islamic finance. Conventional financing addresses this risk through known means. Unlike Islamic financing, this has few instruments suitable for Shari’a to manage this risk. If this risk accelerates, the Islamic bank faces significant challenges in the face of their depositors and investment projects. The objective of this study is to show that holding an optimal level of liquidity is necessary for Islamic banks to minimize the liquidity risk. In this paper, we also examine the relationship between profitability and liquidity. This importance is explained by the fact that these banks cannot always count on the support of the central bank, or on the Islamic money market. We refer in particular to the work of Ben Jedidia et al. (2013).Unlike Ben Jedidia et al. paper, our model of financial intermediation and liquidity risk management uses two factors: Murabaha and Ijara. Two analysis were used, the first one is static and the second one is dynamic, to determine the optimal amount to be held by an Islamic bank using the optimization method. The study reveals that the factors in the first analysis are: the anticipated penalty costs, the rate of return on financing, the sharing rate between the bank and the depositors. This study also reveals in a second dynamic analysis that the factors are: the expected marginal cost of penalty, the ratio of the change in deposits to the change in funding.