Liquidity is the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments (both on- and off-balance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution’s capacity to borrow. Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Customer’s confidence is mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a direct link to customers a bank must emphasize on this. Islamic banks are treated in different way from other conventional banks because of their lucrative contribution in economy. For this, a planned way is necessary to manage the liquidity section. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management.
Islamic banks always try to stand on a standard queue to provide satisfactory services to the customers. For this study, I have chosen two conventional banks and two Islamic banks. I have chosen these banks based on their establishment date. I compared Islami Bank Bangladesh Limited (IBBL) with AB Bank Limited (ABBL) in respect of establishment date. I also compare Prime bank limited (established in 1995) with Al-Arafa Islami Bank (established in 1995). In my analysis part first of all I show the financial performance of my selected banks. After that I calculated the net liquidity gaps for all the banks for the period 2005-2010. To calculate net liquidity gap, I have collected maturity-wise information of both assets and liabilities. I have calculated the net liquidity gap for each maturity bucket from 2005 to 2010 by adding all the assets falling under that bucket and then subtracting all the liabilities falling under that bucket from the assets of the same maturity bucket. Positive net liquidity gap implies that the bank has sufficient assets to satisfy the liabilities of the same maturity bucket and negative net liquidity gap implies that the liabilities exceed the assets for that particular maturity bucket. I have also calculated percentage of short-term and long-term assets and liabilities for each of the year under discussion. This provides a direction of liquidity situation of the concerned banks for the years under discussion. I also measured the extent of volatility in the liquidity position of these four banks. In case of calculating volatility, I used coefficient of variation (CV) analysis of both assets and liabilities. Throughout the report it is seen that liquidity management position of PBL, IBBL are so strong and satisfactory. For liquidity management perspective IBBL maintains huge SLR in excess of requirement. It should more careful about its investment opportunity. This can increase its earning in a dynamic way because IBBL is the collector of highest deposit. So IBBL can play a strong role here. As we know that Islamic banks have the restriction of taking riba (Interest), these banks can’t invest in T-bill and bond. So like others commercial bank Govt. should consider to establish more accurate Islamic law and principles for the welfare of the economy which supports the Islamic Shariah.
Liquidity means the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments. Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Customer’s confidence is mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a direct link to customers a bank must emphasize on this. Islamic banks are treated in different way from other conventional banks because of their lucrative contribution in economy. For this, a planned way is necessary to manage the liquidity section. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. Islamic banks always try to stand on a standard queue to provide satisfactory services to the customers. But for posing some new challenges it is time to change itself in a competitive structure which will help to sustain in the competitive edge. So Islamic banks are trying to be customer oriented in every sphere of wing services. Here how Islamic banks and conventional banks are handling their liquidity management as a part of treasury management is clarified from different perspective. From this report it can be realized about the components of liquidity management and the present conditions of the components of liquidity of two types of banks from year 2005-2010 and also how rules and regulations given by Bangladesh Bank affect the liquidity policy of conventional and Islamic banks are indicated here.
1.1 Problem Statement:
Maintaining liquidity to a minimum level is desirable. High liquidity reduce the overall profitability but in contrast maintaining low level liquidity reduce the customer demand, as a result customer switch become the common phenomena. In long run these situation create risk exposure to the assessed policy.
1.2 Objectives of the Study:
This report is prepared to reflect my knowledge about liquidity management. The study will be undertaken with the following objectives:
To analyze and compare the liquidity position of an Islamic bank with a conventional.
To know the liquidity management process of different banks in Bangladesh.
1.3 Scope of the Report
This report provides some important evaluations and present scenario of liquidity position of Islamic Banks and Conventional banks in Bangladesh. Here two points are given below:
· Scenario of liquidity position of conventional banks compared to Islamic Banks.
· Different problems and solutions regarding liquidity management
1.4 Methodology:
For this study, I have chosen two conventional banks and two Islamic banks. I have chosen these banks based on their establishment date. I compared Islami Bank Bangladesh Limited (IBBL) with AB Bank Limited (ABBL) in respect of establishment date. .Islami Bank Bangladesh Limited was established in 1983 and started functioning with effect from March 30, 1983. AB Bank Limited, on the other hand, was incorporated in Bangladesh on December 31, 1981 as the first private sector Bank under Joint Venture with Dubai Bank Limited, UAE, and started its operation from April 12, 1982. I also compare Prime bank limited (established in 1995) with Al-Arafa Islami Bank (established in 1995). In my analysis part first of all I show the financial performance of my selected banks. After that I calculated the net liquidity gaps for all the banks for the period 2005-2010. To calculate net liquidity gap, I have collected maturity-wise information of both assets and liabilities, which is segmented according to the following maturity buckets:
i. Up to 1 month maturity
ii. 1-3 month’s maturity
iii . 3-12 months maturity
iv. 1-5 years maturity
v. More than 5 year’s maturity
I have calculated the net liquidity gap for each maturity bucket from 2005 to 2010 by adding all the assets falling under that bucket and then subtracting all the liabilities falling under that bucket from the assets of the same maturity bucket. Positive net liquidity gap implies that the bank has sufficient assets to satisfy the liabilities of the same maturity bucket and negative net liquidity gap implies that the liabilities exceed the assets for that particular maturity bucket. I found the percentage of assets and liabilities held for each maturity bucket in respect of total assets for the particular year. I have also calculated percentage of short-term and long-term assets and liabilities for each of the year under discussion. This provides a direction of liquidity situation of the concerned banks for the years under discussion. I also measured the extent of volatility in the liquidity position of these four banks. In case of calculating volatility, I used coefficient of variation (CV) analysis of both assets and liabilities. By measuring volatility we concluded the liquidity analysis part of my study. In the next part, I analyzed the ratio for the liquidity position of these four banks. After that I tried to show the trend of the liquidity position of my selected banks. I also used some statistical tools like, regression analysis to show the relationship among the liquidity, loan/advance/investment and deposit.
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