Liquidity Risk Management in Islamic Banks: A Survey

One of the most important functions of banks is the transformation of maturities, i.e. the ability to obtain funding from short term deposits so as to finance loans over a longer term. As a result of such behaviour, banks are exposed to liquidity risk. Liquidity risk occurs when a bank is unable to cover its financial obligation when it is due without bearing any costs. Hence, liquidity risk management can be defined as a regular process to guarantee that the expected and unexpected cash needs can be met at reasonable costs. While, on the liability side, liquidity risk arises when depositors withdraw their money at once or in large amounts, on the asset side, banks are vulnerable to liquidity risk if the demand in loans increases. Hence, this research provides an overview of the authentic principles of the Shari’ah and the main guidelines of Islamic finance with relation to liquidity risk. In addition, attention is focused on the undertaking of specific techniques and policies as well as the initiation special types of supervision to provide high-quality services so as to satisfy the spiritual and objectives of Islamic finance and subsequently to develop a better understanding of liquidity risk management