Liquidity management in the Islamic finance industry

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Sharjah: Giving a boost to the Islamic finance industry. Image courtesy of Shutterstock.

Liquidity is a financial institution’s capacity to readily meet its cash and collateral obligations at a reasonable cost. When it comes to managing their liquidity, conventional credit institutions have at their disposal well-developed interbank markets that can be tapped for short-term funding, as well as a plethora of instruments.

Islamic financial institutions (IFIs) face great difficulties in managing their liquidity. The dearth of financial instruments at the disposal of IFIs makes for less efficient liquidity management, as more than necessary cash is held, thereby reducing their profitability.

Some of the avenues of effective liquidity management (LM) at the di...