Risk and Regulation of Islamic Banking
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Risk and Regulation of Islamic Banking

  • Foundations of Islamic Finance series

Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad

From a single product offering in 1963, the Islamic financial services industry has grown to an estimated $1.6 trillion in assets. Products must comply with profit and risk-sharing criteria and regulations preventing banks from venturing into activities with high risk and excessive uncertainty. This timely volume analyses these matters and considers the range of new products, discussing both conceptual and practical dimensions. It connects Islamic finance to the mainstream theoretical literature on financial intermediation while also exploring its differences. The expert contributors also examine why an ethical foundation is important and why the system requires well-thought-out regulations to ensure outcomes that protect the community’s well-being.
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Chapter 8: A case study of the Liquidity Management Centre in Bahrain

Sat Paul Parashar

Extract

This chapter addresses the concept and challenges of liquidity management in the context of Islamic banks. It is an area that requires novel ideas to improve liquidity in several Islamic banking sectors, so this case is an illustration of how regulatory intervention could help to improve liquidity. It compares the liquidity ratios and short-end liquidity buckets of selected Gulf Cooperation Council (GCC) Islamic and conventional banks to analyse the liquidity management challenges of Islamic banks. We review the short-term liquidity instruments used by Islamic banks in Bahrain. A case study of the Liquidity Management Centre (LMC) of Bahrain is presented to draw out the lessons, if any, for institutions like the International Islamic Liquidity Management Corporation (ILM) that is set up by the Islamic Financial Services Board (IFSB) in order to issue short-term liquidity management instruments compliant with Islamic law. It concludes by highlighting the possibility of short-term deposits including overnight deposits of less than one-month maturity under Unrestricted Investment Accounts (UIA), between Islamic banks, to be rewarded based on UIA’s historical profit rate, as a ready-to-use instrument for Islamic banks for short-term liquidity management.

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