Skip to main content
Article thumbnail
Location of Repository

THE MANAGEMENT OF LIQUIDITY RISK IN ISLAMIC BANKS: THE CASE OF INDONESIA\ud

By RIFKI ISMAL

Abstract

Islamic banking and finance has shown progressive development all over the world since its inception as a commercial banking model in mid-1970s. Indonesia, as the largest Moslem nation in the world, has initiated some policies to expand the Islamic banking industry in the country. \ud Similar to conventional banks, Islamic banks face a number of risk areas, which may affect their performance and operations. One of such risk areas is liquidity risk, which shows additional features in the case of Islamic banks. Both the international banking standards and the Sharia guidance suggest that banks should have: robust liquidity risk management policies, a responsive asset and liability committee, effective information and internal control systems and, methods for managing deposits to reduce on-demand liquidity, to manage liquidity risk. The aim of this research, hence, is to analyze the management of liquidity risk in Islamic banks through balancing assets and liabilities with the ultimate objective to recommend policies to improve the management of liquidity risk. This aim is fulfilled in the case of Indonesian Islamic banking industry.\ud The data collection and analysis method in this research involve triangulation method with a combination of quantitative and qualitative methods to achieve such aim and objective. Particularly, both the performance analysis of the industry and the econometric time series analysis were conducted to analyze the liquidity risk and its management for Islamic banking, which includes the liquidity behavior of banking depositors and Islamic banks. In addition, the primary data through questionnaire survey was also assembled with the aim of knowing the actual practices and problems of managing liquidity risk. It was investigated from the perceptions of Islamic banking depositors and Islamic bankers to shed further lights on the liquidity risk issues, which were not captured in the time-series analysis. \ud The empirical analyses conducted in this research demonstrate: (i) the non optimal organizational structure of Islamic banks to manage liquidity, (ii) the significant demand for liquidity withdrawals from depositors and fragility of Islamic banks to mitigate certain scenarios of liquidity withdrawals, (iii) critical factors explaining liquidity behavior of banking depositors and Islamic banks, (iv) reasons for depositors to withdraw funds from Islamic banks and the non ideal management of funds by Islamic banks and, (v) the limited Islamic money market instruments to manage the demand for liquidity from depositors. \ud Based on these findings, the research then constructs an integrated and comprehensive program to manage liquidity risk, which consists of three elements: (i) institutional deepening, (ii) restructuring the management of liquidity on the asset and liability sides and, (iii) revitalizing the usage of Islamic liquid instruments. This integrated and comprehensive program of liquidity risk management recommends a better way of managing liquidity risk based on Sharia compliant instruments and international standard banking practices\u

Topics: Liquidity risk, ALCO, Sharia, BUS, UUS
Year: 2010
OAI identifier: oai:etheses.dur.ac.uk:550
Provided by: Durham e-Theses

Suggested articles

Citations

  1. (1986). A General Model of the Banking Firm under Conditions of Monopoly, Uncertainty and Recourse. doi
  2. (2009). A Global Bank’s View of the Evolution of Islamic Finance.
  3. (1971). A Theory of the Banking Firm. doi
  4. (2005). Amendment to Bank Indonesia Regulation Number 5/3/PBI/2003 Concerning The Short-Term Financing Facility for Sharia Banks. Bank Indonesia Regulation Number
  5. (2007). An Introduction to Islamic Finance: Theory and Practices. Singapore: doi
  6. (2006). Analisis Deret Waktu Satu Ragam.
  7. (2004). Annual Report: Liquidity Risk Management. Retrieved on May nd,
  8. (2007). Annual Report. Indonesian Islamic Banking
  9. (1995). Applied Econometric Time Series. doi
  10. (2010). Assessment of Liquidity Risk Management in Islamic Banking Industry. doi
  11. (2008). Asset and Liability Management- A Modern Perspective on Interest Rate and Liquidity Risk Management. doi
  12. (2008). Bank Indonesia Sharia Certificate. Bank Indonesia Regulation Number 10/11/PBI/2008, doi
  13. (2004). Bank Indonesia Wadiah Certificate. Bank Indonesia Regulation Number 6/7/PBI/2004, doi
  14. (1994). Bank Management: Text and Cases.
  15. (1997). Bank Risk Management: Theory. Working Paper RPF (Research Program in Finance) No.
  16. (2000). Bank Runs, Deposit Insurance, and Liquidity. Federal Reserve Bank of doi
  17. (2001). Bank Runs, Welfare and Policy Implications. Bank for International Settlement Working Paper no 107, doi
  18. (2007). Banks and Liquidity Creation: A Simple Exposition of The Diamond-Dybvig Model. Federal Reserve Bank of
  19. (2001). Banks, Maturity Mismatches and Liquidity Crises: A Simple Model. doi
  20. (2004). Basic Econometrics. America: The McGraw- Hill Companies, 4 th Edition.
  21. (2006). Blue Print of Indonesian Islamic Banking Development. Jakarta: Islamic Banking Directorate of Bank Indonesia,
  22. (2007). Citigroup Funding Flows. Retrieved on doi
  23. (2006). Corporate Governance and Stakeholders Financial Interest in Institutions Offering Financial Services. World Bank Policy Research Working Paper Series No. 4053, Washington DC. doi
  24. (2003). Cost, Profit and X-Efficiency of Islamic Banks in Pakistan, Iran and Sudan.
  25. (2005). Critical Issues on Islamic Banking and Financial Market: Islamic Economics, Banking and Finance, Investments, Takaful and Financial Planning. United Kingdom:
  26. (2008). Current Financial Crisis and Islamic Economics. Lecture paper in the long distance IDB courses in Islamic Banking and Finance.
  27. (2009). Current Issues Lembaga Keuangan Syariah,
  28. (2000). Doing Qualitative Research: A Practical Handbook. doi
  29. (2004). Doing Quantitative Research in Education. doi
  30. (2008). Financial Risk Management for Islamic Banking and Finance. doi
  31. (2002). Financial Stability and Crisis Resolution. Bank Indonesia Internal Unpublished Paper,
  32. (2008). Formulating Withdrawal Risk and Bankruptcy Risk in Islamic Banking. doi
  33. (2008). Grand Strategy Development of Indonesian Islamic Banking Industry. Jakarta: Islamic Banking Directorate of Bank Indonesia.
  34. (2005). Guiding Principles of Risk Management for Institutions (Other than Insurance Institutions) Offering only Islamic Financial Services.
  35. (2005). How Do Banks Manage Liquidity Risk? Federal Reserve Bank of New York Working Paper. doi
  36. (2008). Income Ratio, Risk Sharing and the Optimality of Mudarabah. doi
  37. (2006). Indonesian Bond Market : Redemption in August –
  38. (2010). Indonesian Islamic Banks to Expand Further in 2010. Retrieved on
  39. (2006). Islamic Bank: Fiqh Analysis and Finance. Jakarta: Raja Grafindo Perkasa, PT, 3 rd Edition.
  40. (2008). Islamic Banking Act. doi
  41. (2008). Islamic Banking Characteristics, Economic Condition and Liquidity Risk Problem.
  42. (2004). Islamic Banks Agree to Cooperate.
  43. (2001). Islamic Financial Instruments to Manage Short Term Excess Liquidity.
  44. (2005). Islamic Financial Services. Paper of the Islamic Economic and Research Center, King Abdul Aziz,
  45. (2000). Islamic Money Market. Bank Indonesia Regulation Number 2/8/PBI/2000,
  46. (2002). Islamic Money Market. Indonesian Moslem Scholars Council (MUI) Verdict Number 37/DSN-MUI/X/2002,
  47. (2004). Issues in Accounting Standard for Islamic Financial Institutions.
  48. (1994). Issues in Islamic Banking. Selected Papers in Islamic Economics Series No 4. Leicester, United Kingdom: The Islamic Foundation, doi
  49. (2005). Liquidity Risk and Contagion. Bank of England Working doi
  50. (2007). Liquidity Risk Management. Retrieved on May 20 th,
  51. (2008). Liquidity Risk: Management and Supervisory Challenges. Bank for International Settlement Paper, Basel Committee on Banking Supervision,
  52. (2000). Liquidity Risk. The Professional Handbook of Financial Risk Management, doi
  53. (2007). Looking for New Steps in Islamic Finance. Islamic Finance Review, Euromoney Year Books,
  54. (2005). Maturity Mismatch and Financial Crisis: Evidence from Emerging Market Corporation, Federal Reserve Bank of San Francisco.
  55. (1999). Microeconomics of Banking.
  56. (2009). Model of Central Banking Liquidity Management in Islamic Banking. doi
  57. (2001). Modern Banking in Theory and Practices.
  58. (2010). Money, Islamic Banks and the Real Economy. Singapore: Cengage Learning Asia Pte.
  59. (2002). Money, The Financial System, and the Economy.
  60. (2002). Monthly Statistics Report. Indonesian Islamic Banking Statistics.
  61. (2009). New Issues in Islamic Finance and Economics: Progress and Challenges. Singapore: doi
  62. (2006). Opening Speech. The 3 rd Seminar on Challenges Facing Islamic Financial Services Industry,
  63. (2008). PhD-Research Support Workshop Programme: Research Methodology. Lecture Paper,
  64. (2001). Practical Research: Planning and Design. doi
  65. (1994). Research Design: Qualitative and Quantitative Approaches. California: Thousand Oak, Sage Publication.
  66. (2003). Research Design: Qualitative, Quantitative and Mixed Methods Approaches. doi
  67. (1989). Research Methods for Public Administrators. America: Longman/Prentice Hall.
  68. (2007). Research Methods. doi
  69. (2008). Risk Analysis for Islamic Banks. Washington DC: doi
  70. (2007). Risk Management in Islamic Banking (chapter 10) in Handbook of Islamic Banking. United Kingdom: Edward Elgar Publishing Inc, edited by doi
  71. (2002). Risk Management Islamic Financial Policies: Islamic Banking and Its Potential Impact. A Case Study Paper, Nathan Associate,
  72. (2007). Risk Management Issues in Islamic Banking. doi
  73. (2002). Risk Management of Contingent Liabilities Within a Sovereign Asset Liability Framework. World Bank Working
  74. (2007). Risk Management: Guideline for Commercial Bank and DFIs.
  75. (1999). Sharia Bank for Bankers and Practitioners.
  76. (2007). Shariah Finance – Questions and Answers. Islamic Finance Review, Euromoney Year Books,
  77. (1999). Social Experimentation. London: Sage Publication.
  78. (1997). Sociology’s asocialogical core. An Examination of text book sociology in light of the sociology of scientific knowledge. doi
  79. (2004). Some Aspects of Liquidity in Islamic Banks: A Case Study of Selected Banks in the MENA Region.
  80. (2000). Sound Practices for Managing Liquidity in Banking Organization. Bank for International Settlement Paper,
  81. (2004). Statutory Reserves in Rupiahs and Foreign Currency for Commercial Banks Conducting Business Based on Sharia Principles. Bank Indonesia Regulation Number
  82. (2007). Stock Liquidity Requirement and the Insurance Aspect of the Lender of Last Resort. doi
  83. (2000). Studies of Potency, Preference and People Behaviors Towards Islamic Banks. A joint Paper (studies) between Bank Indonesia and
  84. (2008). Technical Note on Issues in Strengthening Liquidity Management of Institutions Offering Islamic Financial Services: The Development of Islamic Money Market. Retrieved on September 15 th, doi
  85. (2008). The Accelerated Polices to Develop the Islamic Banking Industry.
  86. (2006). The Changing Nature of Risk Facing Banks? Bank for International Settlement Working Paper No 28,
  87. (1999). The Economics of Money, Banking and Finance, a European Text. Essex CM20 2JE,
  88. (2007). The Evolution of Islamic Financial System. Academic Paper,
  89. (2008). The Global Financial Crisis: Can Islamic Finance Help Minimize the Severity and Frequency of Such a Crisis in the Future? Forum on the Global Financial Crisis, Islamic Development Bank. doi
  90. (2005). The Holy Al-Qur’an.
  91. (2005). The Intraday Liquidity Facility for Commercial Banks Based on Sharia Principles. Bank Indonesia Regulation Number 7/24/PBI/2005,
  92. (1997). The Language of Qualitative Method. doi
  93. (2006). The Management of Liquidity Risk in Financial Groups. Bank for International Settlement Joint Paper, The Joint Forum Basel Committee on Banking Supervision,
  94. (2007). The Research Imagination: An Introduction to Quantitative and Qualitative Method. United Kingdom: doi
  95. (2008). The Study of the Market and Islamic Banking Depositors Behaviors
  96. (2007). The Value System of the Healthy Banking based on Sharia Principles.
  97. (1985). Toward Just a Monetary System. Leicester: The Islamic Foundation.
  98. (2004). Towards the Foundation of Islamic Macroeconomics.
  99. (2000). Treatment of Excess Liquidity in the Arab Gambian Islamic Bank.
  100. (2007). Understanding Islamic Finance.
  101. (2005). Using Econometrics: A Pratical Guide. United Kingdom: Person
  102. (2010). Volatility of the Returns and Expected Losses of Islamic Bank Financing. doi
  103. (2007). What Does Excess Bank Liquidity about the Loan Market in Less Developed Countries?. Desa Working Paper number 60. Department of Economics and Social Affairs, United Nations, doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.