Managing Risks and Liquidity in an Interest Free Banking Framework: The Case of the Islamic Banks

Risk and liquidity management are not just an interesting topic in Islamic Banking, it is a huge issue for all banks whether Islamic or not and for those who supervise these banks. Good risk management practices and processes do not have a religion or a colour or a country. There are plenty of good risk takers in Islamic Banks and some bad ones. It is the same in the conventional banking sector. Islamic banks have brought a new innovation in the banking industry whereby transactions must pass through owning real physical assets. Risk and liquidity management are of crucial importance in the overall banking environment, and they have clear relevance also to the specific environment of Islamic banking. In itself, Islamic banks are growing rapidly and have their own particular techniques on these issues, as elaborated on in this article. The use of profit-sharing modes in Islamic banks changes the nature of risks faced by these institutions. In this paper we give a brief description of how an Islamic bank performs. We then try to clarify the risks that the Islamic banks are exposed to. We attempt after that to identify the practices of these banks for mitigating it with an emphasize on the liquidity risk and its challenges