Smart Liquidity Risk Management and Islamic Banking Institutions of Pakistan: Challenges and Way Forward

Authors

  • Muhammad Noman Khan Institute of Business Administration, Karachi
  • Saqib Sharif Institute of Business Administration, Karachi

Keywords:

Liquidity Risk, Islamic Banking, Risk Management, Asset Liability Management, Sukuk

Abstract

Purpose: What are the challenges faced by the Islamic banking institutions (IBIs) of Pakistan in the management of liquidity risk and what are the possible alternatives adopted to mitigate that risk? This study discusses the challenges faced by IBIs; since Islamic banking has now been deeply rooted as an alternative banking system that offers Sharīʿah-based financial solutions and contributes towards the growth of economy.

Design/Methodology/Approach: To explore the challenges and obstacles encountered by IBIs, semi-structured interviews with bank professionals from Risk Management Department, Treasury Front Office and Shariah Advisors are conducted.

Findings: Based on the insights gained from experts through interviews, this study suggests that IBIs are at a disadvantage compared to conventional banks when it comes to managing the liquidity risk. Besides, interviewees opined what needs to be done so that IBIs can effectively manage their liquidity risk when faced with either excess liquidity or shortages thereof.

Originality / Significance: No detailed prior work available for the challenges faced by Islamic Banking Sector during the two-year period of 2019-2020 specifically and afterwards, where Islamic banking institutions faced the high liquid asset crunch due to non-availability of Government Ijara Sukuk or other investment avenues and thus IBIs are forced to place their assets in the form of Cash in hand / Balances with Central Bank or alternatively placements with other banks.

Research Limitations/Implications: This study explores alternative options for IBIs to manage their excess liquidity without impacting the bottom line. Thus, provides insights for banking regulator and management of IBIs.

Author Biography

Muhammad Noman Khan, Institute of Business Administration, Karachi

Noman is a Risk Management professional with 4 years of Banking and 2 years of Advisory exposure on Liquidity Risk Management (LRM), Market Risk Management, Asset Liability Management (ALM) and Funds Transfer Pricing (FTP).

Noman is currently associated with Advanced Financial Solutions (AFS) based in Bahrain as Consultant - Risk and Finance Solution and engaged with multiple banks of Middle East and North Africa (MENA) region. Prior to joining AFS, Noman has previously been employed with Bank Alfalah Limited as Manager – Market and Liquidity Risk in Pakistan.

Noman holds a bachelor’s degree in computational finance from NED University, Pakistan, and Post-graduate (MS-IBF) from IBA Karachi in Islamic Banking & Finance.

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Published

2026-01-02

Issue

Vol. 15 No. 02 (2025): Journal of Islamic Business and Management

Section

Research Articles