This paper analyzes liquidity management mechanisms of Islamic and Conventional finance from a Shari'ah perspective. It has been found that, IFIs mainly use Sukūk for the liquidity management purposes. Likewise, IFIs provide their excess liquidity to the liquidity-deficit IFIs through Mudārabah and Wakālah based mechanisms. Commodity Murābahah (based on Tawarruq) is another widely used liquidity management instrument but it is criticized by some Shari'ah scholars because it involves such transactions that are only used as a subterfuge to obtain ready cash. Conventional liquidity management instruments, on the other hand, are debt-based securities, therefore, are not Shari'ah compliant due to the involvement of Islamically prohibited Ribā and Bay' al-Dayn. This paper suggests some Shari'ah compliant liquidity management instruments, such as: (i) an IFI can issue NCDs against a portfolio of bank's assets. (ii) any corporation can issue asset-backed Sukūk , which can be used by IFIs for liquidity management purposes; (iii) an IFI can provide acceptance financing facility by means of a Murābahah based transaction; (iv) a central bank can provide emergency liquidity facility to IFIs on the basis of Salam transactions; (v) deposit insurance facility can be provided to the Islamic banking depositors on the basis of Takāful principles
