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

o Conventional Finance: Interbank market

o Islamic Finance: Placement of funds under
Commodity Murabaha
o Details of the Commodity Murabaha transaction.
o Lack of liquidity in such placements.
o Reciprocal arrangements through reverse
Murabaha.
o Credit risks similar to conventional,: lines to be
setup between counter parties.
o
Management of the liquidity
o Islamic institutions can deal with conventional
banks.
o Other instruments like Sukuk: problems of
longer duration, price risk, lack of liquidity, etc.
o 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 In order to meet disbursement requirements of

the institution, placement of funds should
ideally match the liability profile.
o Techniques used for matching assets and
liability by size as well as maturity.
o Need to have active lines with other financial
institutions to raise short-term funds as and
when needed.
o 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 Lender of last resort role

o Lack of Shairha compatible financial
instruments to intervene in the market for
Islamic institutions.
o 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.
o 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 Short-term: Reverse Murabaha upto 1 year,

mostly upto 3 months, Price risk.
o 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 For profit rate swap: fixed vs. floating and vice

versa
o Currency swap