Professional Documents
Culture Documents
LIQUIDITY MANAGEMENT
in Islamic banks
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In practice, Islamic
Banks have fixed
income assets but
have profit sharing on
liability side.
The IBs therefore, are
still more stable than
conventional banks.
Solvent
Asset tied finance
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While majority of Islamic banks
experience excess liquidity
Some have also faced liquidity crisis
Many different risks culminate in
liquidity risk
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Liquidity crunch can be a real
problem
Example of Financial Crisis in Turkey
2000-2001
Islamic financial institutions there
faced sever liquidity problems
One Islamic institution Ihlas Finans
was closed during the crisis
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LIQUIDITY RISK: Definition
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Investment Firm’s Definition
“liquidity risk includes both the risk of
being unable to fund [its] portfolio of
assets at appropriate maturities and
rates and the risk of being unable to
liquidate a position in a timely manner
at reasonable prices.” *
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Resale not permitted
Resale permitted but non-existent
market
Market exists but not active
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Example of LR in Murabaha
Primary LR Secondary LR
Receivables are debt Involves buying of
cannot be sold commodity then selling
on deferred payment
This brings in many
operational, credit,
dispute, and legal risks
that can affect
realization of
receivables 15
Analysis and Diagnosis
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Liquidity Surplus Problem
Excess Liquidity is the current norm with
Islamic banks
Where to park for short-term?
Use of most Islamic modes requires longer tenor
investment, murabaha leads to illiquidity
(liquidity risk). This induces banks to hold more
liquidity, but this is costly. This leads to very
short-term murabaha low earnings.
Excess liquidity Use of commodity murabaha
Absence of LoLR facility is also a reason
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Examples of Problems with
Commodity Murabaha
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High Proportion of Short-Term Int’l
Murabaha in Total Murabaha,Bank-A (2002)
26.3 %
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High Proportion of Short-Term Int’l
Murabaha inTotal Murabaha (Bank-B)
2002 2004
50.4% 43.7%
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Low Income from Short Term
Murabaha (Bank-B)
2002
2004
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Approaches to Liquidity
Management
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New Ideas: Going Forward
Mutual funds
Mutual fund of sukuk (LMC)
IBs’ local club for mutual cooperation
Development of secondary market in
sukuk (issues involved: increasing the
float, shorter term)
Sequence of Funds instead of Demand
Deposits
IFSB Guidelines for risk management
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Existing Maturity Structure of Sukuk
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Maturity Transformation through Pooled
Sukuk
Long-term Sukuk with
different time remaining to
maturity Investor
Sukuk-A
Investor
Issue Pooled
Sukuk of Shorter-
Term
Sukuk-B
SPV- 2
Investor
Mutual
Sukuk-C Fund of
Sukuk
Investor
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LMC’s Short Term Sukuk Program
Repackages longer instruments into monthly
maturity certificates
–Guaranteed monthly entry and exit dates
–Intra-month entry and exit also available (no
penalties)
–Flexibility of investment amounts
–Fully secured by underlying Sukuk portfolio
–Monthly returns
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Conclusions
What is needed
What can be done
Thank You