LIQUIDITY MANAGEMENT OF ISLAMIC BANKS IN THE GAMBIA (AGIB)
The money market is a key component of any country’s financial system. If the banking system and capital market are the wheel of a country’s financial system, the gear that moves both of them is the money market. Both Islamic banks and conventional banks are dependent on the money market for liquidity management. Banks depend so much on the money market that oftentimes they are regarded as interbank money markets. Interbank is the process of borrowing or lending in the short-term money usually from overnight to 1 year. Liquidity management is the process of banks being able to match the maturity and liabilities of their assets daily and being able to cope with short-term pressures that may suffice in the process of ensuring that the assets are fully funded. Islamic banks, however, resort to money market for liquidity management usually for two reasons, firstly, when they have liquidity deficits, then they go into the money market for liquidity through Islamic interbank money market; secondly, Islamic bank goes into money market when they have excess cash and do not want to hold it idle in the bank. Since liquidity has been a great concern for both Islamic banks, then Islamic banks must engage in activities that will help manage their liquidity risk. However, this paper will look into how AGIB manages its liquidity needs and what are some of the solutions that can be accorded to Agib to remain liquid.
AGIB being the only Islamic bank in a dual banking system exposes it to various issues in managing its liquidity deficits such as the absence of a secondary market, absence of Islamic interbank money market, slow development of Islamic financial instruments, lack of depositors, and lastly, lack of enough product.
According to the principles of Shariah Islamic banks are not permitted to interbank with conventional banks. This raises questions as to how Agib manages its liquidity needs if they are not permitted to interbank with conventional banks.
In this regard, Agib’s way of mitigating liquidity need is by engaging in interbank transactions with conventional banks. Agib in the event they have excess liquidity or in the event, the conventional bank wants liquidity due to deficit, Agib will provide them cash with a stipulated rate and date of payment, and the borrowing bank pays back the principal amount + the interest. This interest paid to Agib is not placed or registered in the profit and loss sheet but placed in a separate account or off the balance sheet because the money is not halal in other words it’s riba, but still the bank keeps it. However, in the event Agib has a liquidity deficit, they will engage their counterpart bank to solve their liquidity problem. The principal plus interest as stipulated on the contract will be paid to the lending bank at maturity.
However, Agib could use the below argument to justify why they interbank with conventional banks. Firstly, they can argue that they do not pay interest to the lending bank but make payment with the original interest that was received from a conventional bank. Secondly, the potential argument that can emanate from Agib for such activities could be Maslaha and darura (necessity) purpose (to provide their customers the readiness to be able to withdraw anytime they want to. Thirdly, to avoid being closed because of insolvency issues. Lastly, Agib could further argue that the interest that is received from conventional banks is used for Corporate Social Responsibility instead of profit maximization.
Would The Following Arguments Be Valid
The above transaction from the Shariah perspective is against the tenets and principles of Islamic banking. The problem is not only about the interest received, but the principal amount could also be questioned because Agib is aware of the fact that the bank it is transacting with is involved in giving loans to businesses that are completely Shariah non-compliant like, hotels, tobacco, alcohol companies, etc. Knowing all these Agib should be responsible enough for the monies they are receiving. If Agib were only using the money (interest) received from conventional banks for Corporate Social Responsibility and Charity, the argument would have held water, but they were also involved in the transaction of making interest payment, thus this renders it invalid and constitutes riba. This transaction could lead to reputational risk as well as Shariah risk. One of the most important intangible assets a bank has is its credibility. Its credibility signifies the relative success of the bank in meeting the desire of its various stakeholders, therefore keeping a high reputation is most, this is even more important for Islamic banks because of what they represent and portray, which is deemed to be established by the fundamentals of Shariah principle. Any substantial issues that have to do with the operation of Islamic banks, be it Shariah’s non-compliant products, investment, or customer complaints, can cause significant credibility of the bank. Consequently, driving customers, investors, and shareholders away who are shariah conscious. On this ground, Agib is supposed to pay attention to managing reputational risk. The driving away of customers would lead to excessive withdrawals which would translate to a liquidity crisis for Agib bank.
In conclusion, one of the ways this liquidity issue can be solved is by establishing an Islamic interbank Money Market. This is possible because there are quite a several Islamic micro-finance and takaful companies in The Gambia. The Central Bank of the Gambia can come up with guidelines to facilitate the implementation of the Islamic Interbank Money Market since they are the body that has that jurisdiction. These would allow surplus Islamic banks to channel funds to deficit banks or microfinance companies, thereby maintaining the liquidity need of the IFIs and thus promote stability of IFIs. Secondly, Agib instead of borrowing from conventional banks they can borrow from one of the Islamic Microfinance companies or takaful companies in the Gambia using the contract of Mudaraba (profit and loss sharing contract). And lastly, Wadiah Acceptance is a transaction that will be between CBG and the Islamic banking institutions. It refers to a mechanism whereby the Islamic banking institutions placed their surplus fund with CBG based on the concept of Al- Wadiah. Also, if Agib needs liquidity CBG will place funds with Agib based on the same concept of Wadiah. Under this concept, the acceptor of funds is viewed as the custodian for the funds and there is no obligation on the part of the custodian to pay any return on the account. However, if there is any dividend paid by the custodian, is perceived as ‘hibah’ (gift). The Wadiah Acceptance. The above will help Agib manage their liquidity need.
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Editor’s note: The author’s views do not represent the position of the Freedom Newspaper. Thanks for your kind attention.