Short Term Liquidity Management: The Need for Shari?ah Compatible Financial Instruments

Abstract

There cannot be any contradictory argument about the importance of money market for any financial institution and Islamic Financial Institutions (IFIs) are no exception to this. Short term liquidity is always managed through short term financial instruments which are traded through money markets. IFIs cannot have resort to conventional money market and its short term financial instruments due to Shar??ah issues. Islamic money market and Shar??ah compatible instrument for short term liquidity management are lacking in Pakistan. In the absence of an organized Islamic Money Market (IMM), different IFIs have adopted instruments for short term liquidity management approved from their own Shar??ah Boards which vary from bank to bank and lack Shar??ah compatibility. The study documents the need for an organized IMM and development of Shariah compatible financial instruments in Pakistan. The research undertakes to analyze the Islamic Money Markets of Malaysia and its Islamic financial instruments for short term liquidity management. The researchers submit that owing to the jurisprudential differences the Islamic financial instruments of Malaysian Islamic Money Market cannot be resorted as a model for Pakistan because most of them are replicating the conventional instrument and are developed under the concept of ??nah and sale of debt hence can be categorized as ??yla. The researchers further submit that the practices for short term liquidity management in Pakistan are also doubtful from Shar??ah perspective and there is a dire need for the development of Shar??ah compatible financial instrument for short term liquidity management.