Treasury Management in an

Islamic Financial Institution

Mohammed Tariq
Treasurer
Islamic Development Bank
14 April, 2009

Role of Treasury in an Islamic

Financial Institution

Management of the liquidity

Resource mobilization needs

Hedging

Management of the liquidity

What is liquidity?

Availability of funds as and when required.

Hold cash and securities which can be liquefied
at short notice.
Securities or instruments should be such which
have a minimal negative impact on the sale of
such securities, hence, minimum price risk.
Ability to deal in reasonable size or quantity.

Management of the liquidity

Instruments for Management of Liquidity

Conventional Finance: Interbank market

Islamic Finance: Placement of funds under
Commodity Murabaha
Details of the Commodity Murabaha transaction.
Lack of liquidity in such placements.
Reciprocal arrangements through reverse
Murabaha.
Credit risks similar to conventional,: lines to be
setup between counter parties.

o
o
o
o
o
o

Management of the liquidity

o
o
o

Islamic institutions can deal with conventional

banks.
Other instruments like Sukuk: problems of
longer duration, price risk, lack of liquidity, etc.
Sukuk holdings to be held as part of
investment portfolio of the Treasury to earn
higher returns.

Management of the liquidity

Asset Liability Management (ALM)
o

o
o

In order to meet disbursement requirements

of the institution, placement of funds should
ideally match the liability profile.
Techniques used for matching assets and
liability by size as well as maturity.
Need to have active lines with other financial
institutions to raise short-term funds as and
when needed.
Risks involved, if liabilities are much higher
than assets: impact of higher or lower interest
rates in future, credit risks etc.

Management of the liquidity

Role of the Regulators/Central banks
o
o

Lender of last resort role

Lack of Shairha compatible financial
instruments to intervene in the market for
Islamic institutions.
Treasury bills or other such high quality
instruments are not acceptable under Shairah
law.

Resource Mobilization needs

Central to Treasury functions in an Islamic
institution
o

Close involvement of the Treasury with the

operational units of the bank to assess short
and medium-term business plans and
resource needs.
Clear assessment of the cost of funds for
different periods to be provided to the
business units in order for pricing such
products.

Resource Mobilization needs

Instruments for Resource Mobilization
o
o

Short-term: Reverse Murabaha upto 1 year,

mostly upto 3 months, Price risk.
Long-term:
o Sukuk, asset backed (over 51% assets,
rest debts)
o Availability of acceptable assets
o Rollover Commodity Murabaha, upto 3
years, issues of fixed vs. floating rate
o Asset backed Sukuk tradable, others not
so

Hedging
Profit rate and currency swaps for
managing treasury risks
o
o

For profit rate swap: fixed vs. floating and vice

versa
Currency swap