Liquidity Management of Islami Bank Bangladesh
Subject: Finance | Topics:

In this report there is an overview of Liquidity Position of Islami Bank Bangladesh Limited in general. Here are some other objectives are to find out the components of liquidity management IBBL and analyze the relation among liquidity, loans and deposits. Also focus on the condition between specialized bank and Islamic bank and know the impact of Bangladesh Bank regarding liquidity management.



Liquidity means the availability of funds, or assurance that funds will be available, to hand on 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. IBBL is treated in different way from other conventional banks because of its 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. IBBL always tries to stand on a standard queue to provide satisfactory services to the customers. From this report it can be realized about the components of liquidity management and what are the present conditions of the components from year 2005-2009 and also how rules and regulations given by Bangladesh Bank affect the liquidity policy of IBBL is indicated here.



Collection of data:

Primary data are measurements observed and recorded as part of an original study. When the data required for a particular study can be found neither in the internal records of the enterprise, nor in published sources, it may become necessary to collect original data.

Primary Data:

For the completion of this report, the primary sources of data are-

  • Discussion with officials of the IBBL
  • Experts’ opinion and comments
  • Observations of the officials

Secondary data:

The secondary data, which was used for this research, were the books, working paper, annual report, brochures, and other secondary data which was collected from the web site and also from the Islami Bank Training and Research Association.


The Organization

About Bank

As a Muslim country people of Bangladesh are deeply committed to Islamic way of life and follow the Holy Qur’an and the Sunnah. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.

Corporate Information (As on June 30, 2010)

Date of Incorporation13th March 1983
Inauguration of 1st Branch
(Local office, Dhaka)
30th March 1983
Formal Inauguration12th August 1983
Share of Capital
Local Shareholders41.77%
Foreign Shareholders58.23%
Authorized CapitalTk. 10,000.00 million
Paid-up CapitalTk. 7,413.00 million
DepositsTk. 265,193.00 million
Investments (including Investment in Shares)Tk. 255,178.00 million
Foreign Exchange BusinessTk. 277,739.00 million
Number of Branches212
Number of SME Service Centers20
Number of Shareholders52164



Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.

  • Our goal is to establish and maintain the modern banking techniques, to ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial systems.
  • We will try to encourage savings in the form of direct investment.
  • We will also try to encourage investment particularly in projects which are more to lead to higher employment.


To establish Islamic banking through the introduction of  a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country. To encourage socio economic uplift and financial services to the low-income community particularly in the rural areas.


Products and Services

Local currency Deposit Accounts

  1. Al-Wadeeah Current Account.
  2. Mudaraba Savings Account.
  3. Mudaraba Term Deposit Account.
  4. Mudaraba Special Notice Account.
  5. Mudaraba Special Savings (Pension) Account.
  6. Mudaraba Hajj Savings Account.
  7. Mudaraba Savings Bond.
  8. Mudaraba Waqf Cash Deposit Account.
  9. Mudaraba Monthly Profit Deposit Account.
  10. Mudaraba Muhar Savings Deposit Account.

Foreign  Currency  Deposit  Accounts

  1. Mudaraba Foreign Currency Deposit.
  2. Foreign Currency Deposit (USD, EURO, GPB).
  3. FC Deposit ERQ.

Investment Modes

  1. Bai-Muajjal.
  2. Bai-Murabaha.
  3. Hire Purchase under Shirkatul Melk.
  4. Musharaka Documentary Bills (MDB).
  5. Bai-Salam.
  6. Bai-As-Sarf.

Welfare Oriented Special Investment Schemes

  1. Household Durables Scheme.
  2. Housing Investment Scheme.
  3. Real Estate Investment Scheme.
  4. Transport Investment Scheme.
  5. Car Investment Scheme.
  6. Investment Scheme for Doctors.
  7. Small Business Investment Scheme.
  8. Agriculture Implements Investment Scheme.
  9. Rural Development Scheme.
  10. Micro Industries Investment Scheme.
  11. Women Entrepreneurs Investment Scheme.
  12. Mirpur Silk Weavers Investment Scheme.
  13. Equity and Entrepreneurship Fund of Bangladesh Bank.

Sectors under SME Investments

ATM Services

  1. Cash Withdrawal.
  2. Fund Transfer.
  3. Mini Statement of Accounts.
  4. Balance Enquiry.
  5. Payment of Utility Bills (Electricity, Water, Phone and Gas etc).

Other Banking Value Added Services

  1. The Bank issues Payment Orders.
  2. The Bank co-operates to remit money from one place to another on the basis of commission within the country through Demand Draft (DD) and Telegraphic Transfer (TT).
  3. ATM Service has been introduced in selected Branches.
  4. Locker Service is available in selected Branches to preserve valuable documents and materials.
  5. The Bank gives counseling on different issues.
  6. Online Banking.
  7. SMS Banking.
  8. SWIFT.
  9. REUTER, etc.


Foreign Remittance

There are 16 (sixteen) Foreign Representatives of IBBL in 5 (five) Countries to serve expatriate customers to encourage and enhance Foreign Remittance.

Treasury Activities

Dealing Room Operation.

Special Services through Islami Bank Foundation

  1. Islami Bank Hospital.
  2. Islami Bank Medical College.
  3. Islami Bank Community Hospital.
  4. Islami Bank Nursing Training Institute.
  5. Islami Bank Institute of Health Technology.
  6. Islami Bank Homeopathic Clinic.
  7. Monorom: Islami Bank Crafts & Fashion.
  8. Islami Bank Service Centre.
  9. Islami Bank Institute of Technology.
  10. Islami Bank International School and College.
  11. Islami Bank Model School.
  12. Islami Bank Mohila Madrasah.
  13. Bangladesh Sangskritic Kendra.
  14. Distressed Women Rehabilitation Centre.

Training Services

  1. International: Training to Foreigners on Islamic Banking.
  2. National: Training to others on Islamic Banking.
  3. Islami Banking Diploma.


Conceptual Analysis 

What is Liquidity?

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. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched.

Supply and Demand of liquidity in Islamic Banks

The following sources of liquidity and supply come together to determine each bank’s net liquidity position at any moment of time.

Supply and Demand of liquidity in Islamic Banks


Supplies of liquidity come fromDemand for Banks liquidity arise from
  • Customers deposit
  • Customers Deposit withdrawal
  • Mudaraba Deposits
  • Uses for CRR & SLR
  • Al Wadiah deposit
  • Investment to Customers
  • Sundry deposit
  • Bai Murabaha
  • Bills payable
  • Bai Mujjal
  • Contingent Deposits (security, NRD,NRT)
  • HPSM
  • Revenues from the sale of Non deposit services
  • Musharaka
  • Customers Investment/loan repayments
  • Bai us Sarf
  • Sale of Banks asset
  • Quard – Hasana
  • From Money Market ( through BGIIB)
  • Mudaraba
  • Capital & reserve
  • Bai Salam
  • Bai istisna
  • Ijara
  • Repayment of Non deposit borrowings
  • Operating expenses & tax incurred in producing
  • Payment of Dividends
  • To Money Market(Through BGIIB)


Importance of liquidity management

Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Sound liquidity management involves prudently managing assets and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. This needs to be supported by a process of liquidity planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. Such planning involves identifying known, expected and potential cash outflows and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs.


The objectives of liquidity management are:

  • Honoring all cash outflow commitments (both on- and off-balance sheet) on an ongoing, daily basis
  • Maintaining public confidence on the bank
  • Avoiding raising funds at market premiums or through the forced sale of assets; and
  • Satisfying statutory liquidity and statutory reserve requirements

Sound Practices for Managing Liquidity in Banking

The ability to fund increases in assets and meet obligations as they become due – is crucial to the ongoing viability of any banking organization. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organization can have systemic repercussions. The management of liquidity is therefore among the most important activities conducted at banks. Over time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. 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. In light of these developments, there are some necessary practices for managing liquidity in banks which are indicated below:

  • Developing a structure for managing liquidity
  • Measuring and monitoring net funding requirements
  • Managing market access
  • Contingency planning
  • Foreign currency liquidity management
  • Internal controls for liquidity risk management
  • Role of public disclosure in improving liquidity

Principles for Sound Liquidity Risk Management and Supervision

The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas:

  • Governance and the articulation of a firm-wide liquidity risk tolerance.
  • Liquidity risk measurement, including the capture of off-balance sheet exposures, securitization activities, and other contingent liquidity risks that were not well managed during the financial market turmoil.
  • Aligning the risk-taking incentives of individual business units with the liquidity risk exposures their activities create for the bank.
  • Stress tests that cover a variety of institution-specific and market-wide scenarios, with a link to the development of effective contingency funding plans.
  • Strong management of intraday liquidity risks and collateral positions.
  • Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress.
  • Regular public disclosures, both quantitative and qualitative, of a bank’s liquidity risk profile and management.

The principles also strengthen expectations about the role of supervisors, including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders.



The Board of Directors of each institution is ultimately responsible for the institution’s liquidity. In discharging this responsibility, a Board of Directors usually charges management with developing liquidity and funding policies for the board’s approval and developing and implementing procedures to measure, manage and control liquidity within these policies.

At a minimum, a Board of Directors should:

  • review and approve liquidity and funding policies based on recommendations by the institution’s management
  • review periodically, but at least once a year, the liquidity management program
  • ensure that an internal inspection/audit function reviews the liquidity and funding operations to ensure that the institution’s policies and procedures are appropriate and are being adhered to
  • ensure the selection and appointment of qualified and competent management to administer the liquidity management function



The management of each institution is responsible for managing and controlling the day-to-day liquidity of the institution according to the liquidity management program. Although specific liquidity management responsibilities will vary from one institution to another, management should be responsible for:

  • Developing and recommending liquidity and funding policies for approval by the Board of Directors.
  • Implementing the liquidity and funding policies.
  • Ensuring that liquidity is managed and controlled within the liquidity management and funding management program.
  • Ensuring the development and implementation of appropriate reporting systems with respect to the content, format and frequency of information concerning the institution’s liquidity position, in order to permit the effective analysis and the sound and prudent management and control of existing and potential liquidity needs.
  • Establishing and utilizing a method for accurately measuring the institution’s current and projected future liquidity.
  • Monitoring economic and other operating conditions to forecast potential liquidity needs.
  • Ensuring that an internal inspection/audit function reviews and assesses the liquidity management program.
  • Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process.
  • Reporting comprehensively on the liquidity management program to the Board of Directors at least once a year.


The Liquidity Management Process

Effective liquidity management requires three-steps in which treasury identifies, manages and optimizes liquidity. These steps are interdependent, each requiring the successful implementation of the other two to optimally manage liquidity.

Identifying liquidity is the foundation from which the entire liquidity management process depends. It involves understanding the balances and positions of the institution on an enterprise-wide level. This requires the ability to access and gather information across the institution’s many lines of business, currencies, accounts and often multiple systems. Identifying liquidity is primarily a function of data gathering, and does not include the actual movement or usage of funds.

Managing liquidity within a bank’s corporate treasury involves using the identified liquidity to support the bank’s revenue generating activities. This may include consolidating funds, managing the release of funds to maximize their use, and tasks that “free up” lower-costing funds for lending or investment purposes to maximize their value to the institution.

Optimizing liquidity is an ongoing process with a focus on maximizing the value of the institution’s funds. As the strategic aspect of liquidity management, optimizing liquidity balances requires a strong and detailed understanding of the financial institution’s liquidity positions across all currencies, accounts, business lines and counterparties. With this information, the bank’s treasury is able to map the strategic aspects of the institution into the liquidity management process.

Limited time and resources availability is the biggest challenge in the liquidity management process to treasury. Although treasury groups are staffed with very capable personnel, a large amount of their time is spent on the task-based function of identifying liquidity instead of on the strategic elements necessary to optimize balances. This results in the entire liquidity management process being less efficient and affects the institution’s bottom line.


Guidelines of Liquidity Contingency Plans

Either within its Liquidity Management Policy (LMP) or separately, a bank is expected to have  a liquidity Contingency Plan (LCP) covering the eventuality of it experiencing a liquidity crisis. The LCP should be designed to ensure that adequate liquidity is achieved at such times and should contain a number of key elements:

  • The identification and definition of what constitutes a liquidity crisis.
  • Early warning indicators, including the impact of external events not directly related to the financial condition of the bank.
  • Actions to be taken.
  • Roles and responsibilities.
  • Management coordination and escalation of issues.
  • Channels of communication.
  • Communication with the Commission.
  • Scenario planning and testing of the plan.

Impact of Central Bank Regulation

Bangladesh Bank has the specific guidelines regarding statutory reserve which ensures the minimum liquidity position of the bank and also safeguards the depositors.  Every Islamic bank has to maintain 5.5% CRR with BB and 10.5% SLR. And every scheduled conventional bank must have to keep at least 18.5% statutory liquidity reserve. Under this 5.50% must be kept as CRR and rest of the 13% must be kept as LRR. IBBL always follows BB regulations strictly. We have already observed that IBBL maintains excess amount SLR and CRR beyond the actual requirement.  Here the guideline for conducting the Islamic banks is given below-


Guidelines for Conducting Islamic Banking: November 2009 regarding Maintenance of CRR/SLR, Liquidity management by Bangladesh Bank

Maintenance of CRR/SLR

All Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per rates prescribed by Bangladesh Bank from time to time. Every commercial Bank having Islamic bank branches shall maintain SLR/CRR for its Islamic branches at the same rate as prescribed for the Islamic banks and shall, for the purpose, maintain a separate Current Account for the Islamic branches with Bangladesh Bank.

Addressing of liquidity crisis and utilization of surplus fund of the Islamic Banks:

In case of liquidity surplus and crisis the banks can take recourse to the following:

  1. The excess liquidity of the Islamic banks/ Islamic branches of conventional Scheduled banks may be invested in the ‘Bangladesh Government Islamic Investment Bond’ (Islamic Bond introduced by the Government). In the same way, Islamic banks/branches facing liquidity crisis can tide over the crisis by availing of investment from Islamic Bond fund as per the prescribed rules.
  1. In case Islamic banks/branches have surplus/ enough investment in the Islamic Investment Bond and subsequently faces liquidity crisis then the bank / branch may overcome the crisis by availing of investment facilities from Islamic Bond Fund against lien of their over purchased Islamic Bonds. To meet the crisis, REPO system may also be introduced for the Islamic Bonds.
  1. The Islamic banks/branches having no surplus investment in ‘Bangladesh Govt. Islamic Investment Bond’ at the time of their liquidity crisis, if arises, may availed funds from Bangladesh Bank at a provisional rate on profit on its respective Mudaraba Short Notice Deposit Accounts which will be adjusted after finalization of Accounts and rate of profit of the concerned Islamic banks/branches. But till funds generated from sell of Islamic Investment Bonds remain available for investment such financial support may not be available from Bangladesh Bank.
  1. The Islamic banks/branches may open/ maintain Mudaraba SND accounts with each other and can meet liquidity crisis by receiving deposits in the Mudaraba SND account at MSND rate from those having surplus liquidity.
  1. To meet the liquidity crisis, if any, of the Islamic branches of the conventional commercial bank fund may be collected from sources which follow Islamic Shari’ah.

Asset Liability Management Policy

Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. Banks must have a committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank. The committee, typically called the Asset Liability Committee (ALCO), should meet at least once every month to analysis, review and formulate strategy to manage the balance sheet.


Liquidity Management of IBBL

Liquidity management is the function of treasury department. This is the first priority of this department. Under this, this bank has to deal with sources of fund and how it will be implemented in the appropriate field. The bank has to appropriately manage maturity of both asset and liability. It is so important for a bank because if any liquidity crisis occurs beyond the statutory reserve and other liquidity sources, bank will face disastrous consequence like bank run which reduces the confidence of the client and this ultimately reduces the goodwill of the bank. So it is so crucial for the bank. Obviously IBBL always is in a strong position in maintaining customer confidence though large collection of deposit and investment. Local Office acts as head office of the bank where FAD (Financial Administration Division) is considered as a branch though it is situated in the local office. This FAD operates the “Feeding branch” which is responsible for maintenance of cash requirements, distribution and management among the branches across the country. There are mainly two “Feeding Branch” in Bangladesh which are located in Motijheel, Dhaka and Agra bad, Chittagong. Bangladesh Bank owns 9 branches across the countries which are located in each district and Bogura and these are acted as “Feeding Branch” for the absence of local office. If there are no branches of BB, then Sonali Bank acted as the “Feeding Branch”. So in this way IBBL maintains the cash requirements of its branches across the country. In IBBL liquidity management means having

  • Ability of bank to meet maturating liability.
  • Ability of the bank to attract deposit, meets its commitments.
  • Ability of matching the maturity of assets & liabilities daily .
  • Coping with any short term pressures.
  • To meet liquidity needs and obligations to ensure the smooth running of business.
  • Forecasting cash need and providing for these needs in the most cost-effective way.
  • Reduces the adverse situation developing in the Market.


Components of Liquidity Statement:

Some of the major liquid assets what IBBL maintains are cash in hand and balances with other banks in current accounts, statutory cash reserve with the Bangladesh Bank, money at call and short notice. Here are the clarifications of the above components.



Cash in Hand:

The most liquid asset of a bank is cash in hand which is known as first line defense. The demand of customers is immediately met by the bank with the cash balances with itself. The banker has to be very cautious, prudent and far-sighted in determining the quantum of cash to be maintained. In case he keeps cash balances much above his actual needs, he loses interest on that excess portion. If the cash reserves fall short of its requirements, the bank may find in an embarrassing position. Hence determination of the adequate size of cash balances is an important task faced by a bank. IBBL is also facing this situation. The amount of cash in hand is increasing day by day because of increasing amount of deposits with this bank. Here the amount of cash from the year 2005-09 is given below:

Cash in Hand


Amount of cash1285.561410.152907.143107.362480.77



Cash Reserve Requirement (CRR): 5.50%

Cash Reserve Ratio is calculated and maintained as per section 25 & 33 of the bank companies Act 1991. 5% of total deposits are kept in Bangladesh Bank which varies with the deposits. In case of crisis with cash in hand the bank goes to the central bank to meet the liquidity crisis. With effect from October 01, 2005 CRR is @ 5.00% of total Time & Demand Liabilities daily on bi-weekly average basis; but CRR position should not be less than 4.50% in any day as per BRPD Circular No.01 dated 12 January, 2009. As per guidelines given by Bangladesh Bank IBBL maintained CRR minimum @ 5.00% daily on bi-weekly average basis & CRR was not less than 4.50% in any day throughout the year. The amount of CRR is continuously increasing because of increasing amount of deposit. Now the CRR becomes 5.5%. As we know that CRR is dependent on the deposit collection. Now a chart is given from 2005-09 about balance with Bangladesh Bank:

Required Amount (5%) 5092.136296.858086.489885.9411765.32
Actual Amount held with Bangladesh Bank14922.7020319.459979.9821088.8431126.16
Surplus / (Deficit)9830.5714022.591893.50


Maintained (%)14.65 %16.13%6.17%



Table- CRR


Statutory Liquidity Requirement (SLR): 10.50%

SLR of the Bank is 10.50% as like as other Islamic Banks as per Bangladesh Bank Letter No. BCD (P) 744 (23)/ 5 dated January 03, 1987. Here the components of Statutory Liquidity Ratio (SLR) are cash in hand including Foreign Currency, balance with Bangladesh Bank & its Agent Bank, investment in Shares of Bangladesh Shipping Corporation and Bangladesh Government Islamic Investment Bond. The Bank maintains following SLR requirement throughout the year.



Required Reserve10184.2512593.7016172.9619771.8823530.65
Actual Reserve maintained20546.3925725.3934405.7232784.4545646.30
Surplus / (Deficit)10362.1313131.6918232.76


Maintained (%)20.17%20.43%21.27%16.58%19.40%


Balance with Other Banks:

Besides maintaining the statutory cash reserve with the Bangladesh Bank, IBBL also keeps its cash in other banks to meet up the liquidity crisis. Here cash is kept in different forms which are given below:

Balance with Other Banks

In Current Account217.57442.111069.071242.91949.37
In Mudaraba Savings & MTDR Account with

Other Islamic Banks / Financial Institutions

Sub Total1249.60759.322353.851318.735858.58
Outside Bangladesh525.72569.811658.474304.451819.79
Grand Total1775.321329.134012.325623.187678.37



Deposits and Other Accounts:

All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors. The bank has to be always ready to meet the need of depositors. Here the amount of deposits is increasing significantly in IBBL and this bank has collected huge amount of deposits that six other conventional banks have not collected this huge amount of deposits. Here the amount of deposit from 2005-2009 is given below:

Deposits and Other Accounts


Deposits and Other Accounts107779.42132419.40166325.28200343.41244292.14


Provision and Other Liabilities:

In IBBL there are also some other liabilities which must be backed by the liquid asset portion. Here from 2005 to 2009 the amount of other liabilities is given below:

Provision and Other Liabilities


Provision and Other Liabilities6885.197826.1810195.731 1564.9410739.19


Assessing & Managing Liquidity of IBBL

Sources & uses of funds basis:

  • Net liquidity/Fund Position:

IBBL prepares daily position of funds considering total deposits, total Investments, investment in shares & approved securities, Balance with Bangladesh Bank, CRR, SLR, Balance with Sonali Bank as an agent of Bangladesh Bank, Cash in tills, Balance in FC clearing A/Cs, Deposits with others Banks (Short & term Deposit) etc to work out net surplus/shortage of fund on daily basis to assess the liquidity /Invest able funds of the Bank. All this components are described above.

  • Maturity Profile Mismatch

A key issue that IBBL needs to focus on is the maturity of its assets and liabilities in different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e. borrow/takes deposit short term and lend/investment longer term. However, mismatch is accompanied by liquidity risk and excessive longer tenor Investment against shorter-term deposits would put a bank’s balance sheet in a very critical and risky position. To address this risk and to make sure a bank does not expose itself in excessive mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6 months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. We know that all of the shorter tenor assets and liabilities will not come in or go out of the bank’s balance sheet. As a result, banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current, overdraft etc. are divided into ‘core and non-core’ balances, where core is defined as the portion that is expected to be stable and will stay with the bank; and non-core to be less stable. The distribution of core and non-core is determined through historical trend, customer behavior, statistical forecasts and managerial judgment; the core balance can be put into over 1 year bucket whereas non- core can be in 2-7 days or 3 months bucket.


Liquidity Indicator Approach

Many banks estimate their liquidity needs based on experience and industry averages. This often means using certain financial ratios or liquidity indicators. This ratio means changes in a bank’s liquidity position.

1.Cash Position Indicator:

Cash and deposits due from depository institutions is divided by total assets where a greater proportion of cash implies the bank is in a stronger position to handle immediate cash needs. Here the cash position indicator always shows increasing trend except 2007 and remains consistent.

Cash Position Indicator


Cash Position Indicator16.44%16.53%11.02%16.01%16.23%

Capacity Ratio:

Here net loans and leases are divided by total assets which is really a negative liquidity indicator because loans and leases are often among the most illiquid assets a bank can hold. IBBL disburses majority amount in loans which can increase its income.

Capacity Ratio


Capacity Ratio71.68%71.02%69.96%73.56%72.90%

Core Deposit Ratio:

Here core deposit is divided by total asset where core deposits are defined as small denomination accounts from local customers that are considered unlikely to be withdrawn on short notice and so carry lower liquidity requirements. This ratio is in good condition because at this bank has less possibility of facing liquidity crisis.


Core Deposit Ratio


Core Deposit Ratio77.04%78.21%75.98%77.56%78.31%


Data Analysis & Findings

Ratio Analysis:

Liquidity Ratio:

This measures the short term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. Short term creditors such as bankers are particularly interested in assessing liquidity. The ratios that can be used to determine the enterprise’s short term debt paying ability are the current ratio and liquid assets to deposit liabilities.

Loan to Deposit Ratio:

Such ratio provides a simplified indication of the extent to which a bank is funding illiquid assets by stable liabilities. In Bangladesh BB sets rules that every bank can disburse maximum 82% of total deposit in loans and investments. IBBL is not moving in aggressive way to grant investment what we can realize from SLR and CRR percentage.


Loan to Deposit Ratio


Loan to Deposit Ratio81.72%80.58%80.49%84.03%83.05%


Liquid Assets to Deposit Liabilities Ratio:

This indicates that how much liquid assets are available to meet up the immediate necessity of the depositors. This ensures the confidence of the depositors about the bank. In 2005, this ratio was highest because of lower investment opportunity. But from 2006-2009 the ratio is satisfactorily constant. This is a good sign for the bank because management has been able to hold the ratio constant which is a success of the bank. This ultimately helps to hold the customer confidence.

Liquid Assets to Deposit Liabilities Ratio


Liquid Assets to Deposit Liabilities97.4662.9957.3867.0462.99


Loan to Adjusted Deposit Ratio:

The ratio incorporates the extent to which loans are being financed by medium and long-term debt and by shareholders funds less investments in subsidiaries, affiliates and fixed assets. These additional aspects are included in the denominator of the ratio. Such ratio takes into account the deficiencies in the loan to deposit ratio by considering the extent to which the majority portion of the institution’s business is funded by medium and long-term debt and free capital.


Loan to Adjusted Deposit Ratio


Loan to Adjusted Deposit Ratio82.72%84.51%84.35%82.82%96.16%


Liquid Assets to Total Assets Ratio:

Liquid assets to total deposits must be calculated at month end on liquid asset holdings and total assets. How much assets are maintained in liquid form within the total assets that can be understood. So from this it can be easily realized that IBBL is slightly emphasizing more on maintaining liquid assets rather maintaining other long term assets.

Liquid Assets to Total Assets Ratio


Liquid Assets to Total Assets Ratio   69.67%69.54%49.87% 58.17%55.29%


Legal reserve requirement:

Islamic banks in Bangladesh have to keep 10% of its total deposits as liquidity. Of this, 5% is required to be kept in cash with Bangladesh Bank and the rest 5% is to be kept either in approved securities or in cash (in case of problem with securities) with Bangladesh Bank. Legal reserve requirement for conventional banks is 18%. They have to keep 5% in cash with Bangladesh Bank and the rest 13% is invested in Bangladesh Bank approved securities. Traditional banks can earn interest on their deposits with Bangladesh Bank but Islamic banks can not since they cannot receive interest as earning. Compared to interest-based traditional banking, Islamic banks, in this case, are in disadvantageous position. However, Islami Bank Bangladesh Limited has been receiving interest against its deposit with Bangladesh Bank and crediting it to its Sadaqa fund (Islami Bank Foundation). It should be noted that the interest earning are not considered as bank income and added to profit. The proceeds are spent on welfare activities.


Lack of opportunity for profitable use of surplus funds:

The bank can invest their excess liquid amount in approved securities and or in other bank in crisis. Islamic banks cannot take this opportunity due to the existence of interest element in the transaction process.

Apprehension of liquidity crisis and possibility of liquidity surplus:

Islamic banks have always left with a sizeable amount of cash as liquidity surplus. Conventional banks can borrow in the form of call money among themselves even at an exorbitant rate of interest.


Capital market investment:

Conventional banks can invest 30% of their total deposits in shares and securities. Islamic banks have their problem in this case as they avoid any transaction based on interest. Following examples may be cited for illustration. (a) Islamic banks do not purchase shares of companies undertaking interest-based business; (b) Shares of companies taking loan from commercial banks on interest are not also purchased by Islamic banks; and, (c) Islamic banks cannot purchase shares of companies involved in businesses not approved by Shari’ah. The above restrictive environment in the capital market of Bangladesh has limited substantially the investment opportunities for Islamic banks and hence the avenues of lawful earning. In the absence of Islamic money and capital market these banks cannot obtain funds from capital market at times of need.


Absence of inter-bank money market:

In spite of five Islamic banks have been functioning in Bangladesh, inter-bank money market within Islamic banks has not yet taken place. These banks can take initiative to form a money market among them. This may help minimizing particularly the call money problem they are suffering from beginnings.


Predominance of Murabaha financing:

Predominance of Murabaha financing in the portfolio management of investment funds by the present day Islamic banks of Bangladesh has been a hot agenda of debate. One study shows that Islami Bank Bangladesh Limited, Al Arafah Bank and Social Investment Bank Limited have used 54%, 76% and 65% respectively of their investment funds by resorting to Murabaha mode (Hoque 1996, p.9). Murabaha though considered as a Shariah approved mode, the Islamic economists have traditionally prescribed for its limited application. Due to legacy of traditional banking, lack of appropriate legal protection and standard accounting practice in business, Islamic banks in Bangladesh find Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply.


Depression of Profit:

Traditional banks can meet up loss arising from delay in repayment by the clients through charging compound interest. Islamic banks cannot do that. What it does it realises compensation at the rate of profit. But the compensation so realised is not added to the profit income rather credited to Sadaqa account i.e., amount meant for social welfare activities. This depresses profits of Islamic banks. This may place Islamic banks relatively in weaker position in terms of profitability compared to conventional banks Moreover, Islamic banks are to make a compulsory levy equivalent to 2.5% of its profit earned each year and credited to Sadaqa account, which also depresses banks’ profitability. This is unlikely the case with conventional banks.


Absence of legal framework:

Amendment of old laws and promulgation of new laws conducive to efficient operation of Islamic banks are sin qua non for its healthy growth. Countries introducing Islamic banking should create an enabling environment for Islamic banks by modifying existing laws and regulations. Islamic banks in Iran and Pakistan have their legal supports. Pakistan has provided legal support to float Participation Term Certificate and conduct Mudaraba transaction by replacing “The legal Framework of Pakistan’s Financial and Co-operative System” on June 26, 1980. The Banking Tribunal Ordinance and The Banking and Financial Services (Amendment of Law) Ordinance were passed in 1985 by amending seven Acts such as the Partnership Act, The Banking Companies Ordinance, the Wealth Tax Act, the Federal Bank Co-operation Act, the Income Tax Ordinance, The Registration Act and Capital Issues, 1974.


Maintenance of Rules and Restriction by IBBL

CAMELS Rating:

CAMELS rating are the supervisory rating of the bank’s overall condition. The CAMEL ratings system is made up of five components: capital adequacy, asset quality, management competence, earnings, and liquidity with the associated acronym. CAMEL ratings generally assess overall soundness of the banks, and identify and/or predict different risk factors that may contribute to turn the bank into a problem or failed bank. To bring and ensure the healthy conditions of the banks or to check the ‘bank run’ originated from a failure of a single bank, authorities review the different aspects of the banks. In Bangladesh, since the early nineties, the same 5 components of CAMEL have been used for evaluating the five crucial dimensions of a bank’s operations that reflect in a comprehensive fashion an institution’s financial condition, compliance with banking regulations and statutes and overall operating soundness. Recently, Bangladesh Bank has upgraded the CAMEL into CAMELS effective from June, 2006. After inserting ‘S’ or ‘sensitivity to market risk’, it is presumed that this off-site supervision technique of central bank would make it a more effective tool in rating banks. The CAMELS rating components, usually taken into consideration by the monetary authorities have the following weights: capital adequacy 20%, asset quality 20%, management 25%, earnings 15%, liquidity 10% and sensitivity to market risk 10%. Following is a description of the graduations of rating:

In the standard CAMELS framework, liquidity is assessed according to: volatility of deposits; reliance on interest-sensitive funds; technical competence relative to structure of liabilities; availability of assets readily convertible into cash; and access to inter-bank markets or other sources of cash, including lender-of-last-resort (LOLR) facilities at the central bank. At present, conventional commercial banks’ deposits are subject to a statutory liquidity requirement (SLR) of 18.5 percent inclusive of 5.5 percent cash reserve requirement (CRR). The CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secured assets under the SLR, either in cash or in government securities. Till date, SLR for the banks operating under the Islamic Shari’ah is 10.5 percent. Liquidity indicators measured as percentage of demand and time liabilities (excluding inter-bank items) of the banks indicate whether the banks have excess or shortfall in maintenance of liquidity requirements. The basic indicators of sound liquidity position are: deposits are readily available to meet the bank’s liquidity needs; assets are easily convertible into cash; compliance with SLR; and easy access to money markets etc.

CAMELS rating system has been viewed in light of the principles and practices of Islamic banking. Though all features of CAMELS are not repugnant or contradictory to the Shari’ah stance, there should be some separate provisions to make it conducive and proper to analyze the whole operation of the Islamic banks. Definitely, it should also assess the Shari’ah implementation status of the Islamic banks as well. But for BB restriction IBBL has adopted CAMELS rating procedure and it acquires strong position for many times where no supervisory response required.

Basel Ι:

The Basel Accord Ι was published in 1988 and is being followed by banks long time. But in Bangladesh Basel Capital Accord (Basel Ι) was adopted from 1996. Under this first Basel accord every bank must maintain minimum capital requirements. IBBL has adopted Basel Ι from the very first of establishment of this regulation in Bangladesh. IBBL always maintains significant amount of statutory reserve beyond the Bib’s requirements. This statutory reserve is included under core capital (Tier-1) according to the first Basel Accord. According to the following chart consistently statutory reserve is increasing as the amount of deposits is increasing day by day.

Required Reserve10184.2512593.7016172.9619771.8823530.65
Actual Reserve maintained20546.3925725.3934405.7232784.4545646.30
Maintained (%)20.17%20.43%21.27%16.58%19.40%


Basel ΙΙ:

The revised Basel framework (Basel- ΙΙ) was finalized in June 2004 which is popularly known as Basel ΙΙ. Subsequently the framework has revised up to June, 2006. The framework endorsed the adoption of capital allocation for operational risk in addition to market & credit risks and introduced comprehensive risk management practices by banks along with supervision and disclosure requirements. Bangladesh has provided a policy & guideline for implementing Basel Accord ΙΙ by the year 2008. Credit risk and market risk both are involved with liquidity risk because potential loss due to probability of violation of commitment by an obligor increases the possibility of liquidity crisis and market risk factors like stock prices, interest rates, foreign exchange rates, and commodity prices affect the liquidity condition of the bank because when the interest rate of the deposit falls depositors try to withdraw money to invest in better investment opportunity. Then liquidity crisis may occur. In IBBL Basel ΙΙ is implemented by a unit which is headed by 15 members for implementation of New Capital Accord. The Unit supervised the parallel run of Basel ΙΙ along with Basel Ι at IBBL from early 2009 and supervising full operation of Basel ΙΙ from 01 January, 2010. In IBBL both the credit risks and market risks are very insignificant here because as the follower of Basel ΙΙ this bank faces low amount of default against its huge general investment what can be realized from the following data.

Bad and Loss amount to Total General Investment

Bad and Loss amount to Total General Investment2.39%2.33%1.98%1.65%1.35%


Stress Testing:

Bangladesh Bank executed stress testing about financial information for the first time of 48 commercial banks up to 30th June, 2009. This is a form of testing the stability of a given entity and also to choose scenarios and put them in the valuation model. Four types of risks are measured here which are credit risk, market risk, exchange rate risk and finally liquidity risk. Stress testing will be performed once in every 6 months. The main objectives of performing stress testing are managing risky exposures and helping diversification of those, monitoring the standard of service and also making sure of economic stability and fostering growth. If the depositors withdraw money at 2%-6% from the bank within five consecutive days, then what will be the liquidity condition of the bank-this is considered through stress testing. The stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities. The ratio “liquid assets to liquid liabilities” shall be calculated before and after the application of shocks by dividing the liquid assets with liquid liabilities. Appropriate shocks will have to be absorbed to the liquid liabilities if the current liquidity position falls at the rate of 10%, 20% and 30% respectively.

Liquidity Shock:

The ratio of liquid assets to liquid liabilities after a 10%, 20%, 30% fall in the later shall be calculated as:

Table- Liquidity Shock

Magnitude of Shock10%20%30%


Liquid Assets153887.31134312.24153887.31134312.24153887.31134312.24
Liquid Liabilities244292.14200343.41244292.14200343.41244292.14200343.41
Liquidity Ratio (%)62.99%67.04 %62.99%67.04 %62.99%67.04 %
Fall in Liquid Liabilities24429.2120034.3448858.4340068.6873287.6460103.02
Revised Liquid Assets129458.1114277.9105028.8894243.5680599.6774209.04
Revised Liquid


Liquidity Ratio after shock (%)58.89%63.38%75.42%58.80%47.13%52.92%

Here it can be proved that due to the fall of liquid liabilities consecutively by 10%, 20%, 30% liquidity ratio also falls. So if the liquid liabilities decrease, the bank is going to face liquidity shock because investment disbursement in short term is not decreasing. As a result significant amount of deposit collection must be increased or investment disbursement must be reduced. Here this stress testing is based on IBBL where only data of 2008-2009 is taken into consideration.  If liquid liabilities fall in this way, it is urgent to try to absorb the shock. But IBBL is not at all in this position because of higher rate of maintaining cash in hand.


Findings of IBBL Regarding Liquidity Management

Now IBBL is a leading bank in Islamic banking area in Bangladesh and we know that it was the pioneer of Islamic banking trend in Bangladesh. From the above analysis we have seen that IBBL is maintaining a good liquidity position. It always maintains SLR and CRR above the requirement ratio. So it never faces any liquidity crisis. But in spite of IBBL has some short comings in the liquidity management. Now some problems are given below

  • As we know that IBBL maintains huge amount cash in hand which are kept as idle bank has failed to utilize proper investment opportunity.
  • IBBL cannot utilize proper investment opportunity because of proper forecasting about investment.
  • As Riba (interest) is prohibited IBBL cannot involve in inter bank transaction.
  • Also IBBL cannot take part in purchasing Treasury bill for lack of Islamic Money Market.
  • IBBL is not attentive enough in marketing and advertisement in this competitive edge.
  • The periodic review program is comparatively not strong enough for which huge liquidity is kept as idle.



Islami Bank Bangladesh Ltd. has been able to establish its own presence with a continued expansion geared by increasing acceptance by the people. To continue this dynamic expansion IBBL needs to adopt modern strategy in every banking department of cope with the competitive banking sector. And at the same time it must be ensured that IBBL is following the Islamic rules and principles. In Bangladesh there is no Islamic money market and other laws regarding banking sector. So IBBL needs to think about its alternative regarding liquidity management. Here some suggestions are given below what should be achieved to be more efficient in liquidity management.

  • As IBBL maintains huge amount of cash in hand it cannot utilize proper investment opportunity. So IBBL should emphasize more on utilization of investment opportunity to increase it earning
  • It should give more importance on research & development to launch new product to cope with increasing competition
  • Board of Directors of IBBL should ensure the selection and appointment of qualified and competent management to administer the liquidity management function
  • Board of Directors should review periodically, but at least once a year, the liquidity management program
  • Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process
  • Monitoring economic and other operating conditions to forecast potential liquidity needs
  • IBBL should emphasize on promotion of the image of Islamic bank as PLS banks



Finally it can be said that liquidity management is one of the most essential part of all banks. Like others IBBL also gives emphasis on this section. Through properly handling this section a large problem is solved. That is holding customer confidence. On this the image of the bank is highly correlated. Throughout the report it is seen that liquidity management position is so strong and satisfactory. As a result IBBL achieves ST-1 rating from CRISL and it holds its performance from couple of years. Also CAMELS rating shows that this bank is performing in well manner. Compared to any other banks IBBL is performing in liquidity management in ideal way. Its risk management department is acting in a well organized manner which can be realized from the strict maintenance of Basel ΙΙ. But IBBL should give more importance in adopting competitive strategy like I-Banking and also in employee efficiency. If the employees are satisfied then the banks’ performance will be more spontaneous and smooth and consistent. This bank also should give importance in marketing strategy. 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 this bank has the restriction of taking Riba (Interest), this bank can’t invest in T-bill and bond. So as a one of the most profitable bank Govt. should consider to establish more accurate Islamic law and principles for the welfare of the economy which supports the Islamic Shari’ah.. So following this IBBL as a specialized bank contributes a lot in the economy by fostering its growth from any other banks in our country. Then lastly it can be said that though there are some limitations of the bank IBBL is trying to encourage socio economic uplift and financial services to the low income community particularly in the rural Ares.

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