Liquidity Management in Islamic Banks

Liquidity management focuses on ensuring a bank’s ability to finance the growth of its assets and to meet its cash obligations on time without incurring unusual costs. Conventional banking has developed a contractual structure, legislative framework, and a set of financial instruments that enable commercial banks to achieve this objective with relative ease. The challenge for Islamic banking lies in the divergence of its contractual structure, the shortage of Shariah-compliant financial instruments suitable for liquidity management, and the frequent inconsistency of its operations with the prevailing legislative environment. This paper reviews the existing mechanisms and tools of liquidity management, assessing both their Shariah legitimacy and practical effectiveness. It further evaluates the prospects for improving liquidity management within the current institutional framework on the one hand, and under an alternative vision on the other—one that calls for restructuring the banking system and moving both institutions and clients away from a culture of debt, guaranteed returns, and risk transfer toward a culture of equity participation, shared risks, and supportive institutions.