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Islamic banking and finance that can provide a framework for achieving the objective of sustainable socio-economic growth witnessed a rapid growth over the last two decades. Islamic
finance industry spread over 110 countries, and 50 million customers grew from US$200
billion in 2003 to an estimated US$2 trillion of assets worldwide last year and are expected
to surpass $3 trillion by 2020. Out of the total assets, the Islamic banks had US$1.451 trillion by the end of 2015 (T/R 2016/17).
Responding to the failure of capitalist and socialist systems, Islamic Banking and Finance
(IBF) was initiated with the hope of providing a financial base through which economic
development could be achieved with human well-being and social justice (Asutay, 2007).
Hence, the Islamic Banks and Financial Institutions (IBFIs) belong to the entities whose
social goals are at least (if not more) as important as making a profit (Haniffa & Hudaib,
2007).
Islamic finance promotes risk-sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare. Even the 2030 agenda of the
World Bank for sustainable development that seeks to eradicate poverty in all its forms emphasized Islamic finance to promote responsible and risk sharing-based finance. It is the
recognition of the core principles of Islamic finance providing mechanisms for redistribution to address any imbalances that may occur during wealth production and distribution
cycle (Soliman, 2017).
Islamic finance, however, is losing its meaning and rationale, contends Mabid Al Jarhi,
former Head of IRTI, IDB, Jeddah and currently Professor at the INCEIF. It has crossed
the threshold of convergence to conventional finance, and Shar¯ı‘ah compliance is increasingly becoming a misnomer as conventional finance is being practiced boldly in the name
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2017 Liquidity Management by Islamic Banks - Editorial 2
of Islam. IBF practitioners normally believe and always wish that every conventional product must have an Islamic alternative. As there are some restrictions for the Islamic banks
based on the Islamic principles, bankers complain about the scarcity of liquidity management tools. Accordingly, a shortage of Liquidity Management (LM) tools is considered to
be the most serious issue hampering the growth of Islamic finance.
It is, therefore, high time to take stock of the situation and analyse the performance of
IBFIs in this perspective. We plan here to analyse Islamic banks’ performance, especially
in respect of LM practices and suggest a new approach enabling Islamic finance to serve the
cause of humanity by enhancing socio-economic inclusion. We shall discuss what liquidity
management means, what IBFIs are currently doing in the name of liquidity management,
and what policy changes have to be introduced to evolve a real, stable, and sustainable
Islamic system of finance, and to turn the tables on the conventional system.
Muhammad Ayub. (2017) Liquidity Management by Islamic Banks: An Issue or a Contrivance for Risk-Free Returns, Journal of Islamic Business and Management, Volume 7, Issue 1.
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