LITERARY PERSPECTIVE: LIQUIDITY RISK AND ITS MITIGATION IN ISLAMIC BANKS OF PAKISTAN

Abstract

Liquidity is an important aspect of Pakistani Islamic banking system. In liquidity management system, depositors and Islamic bankers are involved. There are dual purpose of conducting this research. One is to analyze the liquidity behavior of depositors of Islamic banks of Pakistan. Second is to examine the Islamic bank’s liquidity management system and organizational structure to identify the factors that influence liquidity of Islamic banks. The findings of the study indicate that both investment and deposit sides are managed whereby the deposit side is mostly managed by attracting more depositors. The theoretical implications are; firstly the concept of institutional deepening and restructuring of assets and liabilities side for liquidity management in Pakistani context and secondly the factors affecting liquidity risk will contribute in the existing literature i.e., factors relating to asset, liability and liquidity reserve models. The practical implications are that this study will help SBP to develop liquidity management framework including development of Islamic interbank market. In addition, practically Islamic Banking Institutions need to identify any future shortfalls in liquidity by constructing maturity ladders based on appropriate time bands so this study will provide different factors that affect the liquidity short falls like asset, liability and liquidity reserve model variables. Last but not the least, this study will help Islamic banking institutions that how to attract more customers by studying their intentions for investments