Strengthening and improving the liquidity management in Islamic banking

PurposeThe purpose of this paper is to analyze and evaluate the present liquidity management in the Indonesian Islamic banking industry. It also proposes an integrated and comprehensive program of liquidity risk management which captures and assimilates the whole aspects of the issue and brings the industry into a better way of managing liquidity risk based on sharia principles.Design/methodology/approachThe paper first examines the organizational structure of Islamic banks and Islamic windows in managing liquidity. Second, it investigates the characteristics of the depositors, their investment behaviors and expectations followed by the banks efforts and policies to manage the liquidity. Then, it identifies the potential liquidity problems and Islamic liquid instruments. Finally, it proposes an integrated and comprehensive program for managing liquidity.FindingsThe paper suggests institutional deepening; restructuring the liquidity management on the liability and asset sides; and revitalizing the usage of the Islamic liquid instruments, in the integrated program.Originality/valueThis is believed to be the first paper to propose a liquidity management improvement program in the Indonesian Islamic banking industry.