Interest Free Liquidity Management Scheme (Time-Weighted Debt Units)

18 Pages Posted: 25 Feb 2013 Last revised: 27 Feb 2019

Date Written: May 1, 2015

Abstract

Purpose: Liquidity is one of the most critical issues that to be considered by the financial management of the business firms in order to meet its financial obligations. It is more vital for banks because of the liquid nature of its assets and liabilities, along with the fact that the confidence in the bank and degree of risk depends heavily on liquidity as an indicator of its wellbeing. Islamic banks look at the liquidity issue from the same side as the traditional banks.

Islamic Banks (IBs) – The most apparent Islamic Financial Institutions - suffered from the problem of not benefiting from the lender-of-last resort (LLR) that Central Banks (CBs) offer to traditional banks because IBs can't borrow from the CBs at interest.

The experience of IFIs IIFS* regarding the establishment of Islamic money markets didn't show a tangible success instead of the early studies done by some scholars.

In spite of the rich experience of some countries in creating new money market instruments or configuration of the interest - based ones according to Islamic Sharī’ah; the designs of these instruments have many limitations in terms of their tradability and flexibility, restricting their use for open market operations by central banks.

Design/methodology/approach: The purpose of calculating the TWDUs is to find the equivalent amount of money that can be borrowed by the lender in the future for a maturity differs from the first credit; it is a swap between an amount of credit for a particular period of time and another amount for another period.

Findings: The current paper represents a blue print of suggested money market instrument (scheme) that is based on the idea of Al Qardh El Hasan (interest-free loan); called Time Weighted Debt Units (TWDUs). This instrument doesn’t promise any revenue for the supplier and no charge for the lender.

Research limitations/implications: Sharī’ah acceptance, as the suggested model not discussed yet in depth by Sharī’ah scholars.

Originality/value: TWDUs is presumed to help IBs and other IFIs IIFS to add more flexibility in liquidity management in the side of risk management (represented by the potential loss to IIFS arising from their inability either to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses); in addition to avoiding the case of hoarding surplus funds in the short term. In addition, the suggested instrument will not be exclusive to IBs or IFIs IIFS; it can be developed to be used in later stage by them as a mean of overdraft between IBs and their clients. Moreover, beside its viability to help in liquidity management for other firms in business sector (non-financial) or government agencies in liquidity management, TWDUs looks for Islamic financial theory as an alternative to the traditional financial theory that is based on interest. Moreover, TWDUs is expected to play an important role in monetary policy in a totally Islamic financial system or even in a mixed one (Islamic and Capitalistic).

Keywords: Liquidity risk management, Institutions offering Islamic financial services, Islamic financial engineering, Islamic banks, Interest-free loan

JEL Classification: F15, F23, F33, F36, G21, O19

Suggested Citation

Al-Ajlouni, Ahmed, Interest Free Liquidity Management Scheme (Time-Weighted Debt Units) (May 1, 2015). Available at SSRN: https://ssrn.com/abstract=2223329 or http://dx.doi.org/10.2139/ssrn.2223329

Ahmed Al-Ajlouni (Contact Author)

Qassim University ( email )

Qassim University, Saudi Arabia
College of Sciences and Arts
Buraydah, 52571
Saudi Arabia

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