Liquidization In Islamic Banking
2. Banks can increase its interest rates so that they can uphold these at the time of difficulty and attractive liability management can be used to solve the liquidity problem. But there is a similar problem that all banks face that is their liabilities mature faster than their assets and this can be overcome by the third option.
3. Debt monetization where banks sell their slow maturing assets to the central bank to raise cash for the fast maturing liabilities. This option is not essential without a cost and banks may set in motion a vicious circle with its own momentum.
According to (Syed, 2009), in case of Islamic finance system, the system is more stable as there is inherent in the matching of assets and liabilities. As we can see the arrangement of assets and liabilities are matched through profit sharing. The liabilities of economic units are fully repaid with an underlying income. The payments of the banks and financial institutions are in the form of dividend which has to be …show more content…
There is no money creating in this system hence the credit multiplier effect is zero in this system. Savings for investment banks are accepted in the form of deposits and the banks use this saving to invest in the purchase of equity shares. Thus there is no money creation through credit and the investments made by the banks are fully backed by the saving. Unlike conventional banking the amount deposit to bank is determined by the real saving and not by credit multiplier. New cash to Islamic banks are created from the new saving not from loans transferred made from one bank to another. Thus there is a wealth creation activity that generates new cash flows in this system. This can further be elaborated with an