Assessment of liquidity management in Islamic banking industry

Abstract

Purpose

The purpose of this paper is to assess liquidity risk management (LRM) practices in Indonesian Islamic banking industry during the period 2000‐2007.

Design/methodology/approach

The paper constructs the LRM index (100 scale) which is composed of individual index of asset side; liability side; LRM policies; and the overall LRM index.

Findings

The index produces a “good” grade for the liquidity management practices in the Indonesian Islamic banking industry, represented by three Islamic banks which capture 82 percent of the total market share of the industry. However, the breakdown of the index of every Islamic bank suggests various achievements.

Research limitations/implications

It is found that the practices of LRM are not optimal yet based on some considerations explained in this paper. Further progressive actions have to be taken by the regulators and all industry's players to improve the LRM practices.

Originality/value

To the best of the author's knowledge, this is the first paper trying to assess how good the LRM in Indonesian Islamic banking is.

Citation

Ismal, R. (2010), "Assessment of liquidity management in Islamic banking industry", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 No. 2, pp. 147-167. https://doi.org/10.1108/17538391011054381