Liquidity management by Islamic banks in Pakistan : an econometric analysis

Abstract EN

This paper investigates different liquidity management aspects of Islamic banking industry in Pakistan.

Islamic banking liabilities (deposits) and assets models, with regard to liquidity management, have found the significant role of following variables: (a) returns on deposits, (b) returns on financing, (c) costs of banking operations, and (d) the Interbank rate, here Karachi Interbank Offer Rate (KIBOR).

Islamic banking liquidity reserves model, however, recommends that Islamic banks need to consider following variables, while developing optimum liquidity reserves: (a) total Islamic financing, (b) returns on financing, and (c) KIBOR.

Moreover, the resilience analysis of the Islamic banking industry carried out in the current study suggests that liquid instruments performed well historically in mitigating liquidity run conditions.

Furthermore, forecasts made on the basis of Autoregressive Integrated Moving Average (ARIMA) models for the current study suggest that tier-2 liquid instruments would possibly be performing well in mitigating any future liquidity run conditions (up to 95% of deposits).

However, in case of tier-1 liquid instruments, there is a possibility of liquidity mismatches when liquidity withdrawals exceed the limit of 55% of deposits.

In conclusion, Islamic banking depositors, besides their religious motives of supporting Islamic banks, expect from their banks to earn profits and pay competitive returns on their deposits.

Therefore, Islamic banks need to make prudent portfolio financing so as to pay competitive returns to their depositors.