Risk Management 289
Malaysia has taken signifi cant steps to promote Islamic banks and to
provide solutions to reduce liquidity risk. The central bank, Bank Negara
Malaysia, introduced the Islamic Interbank Money Market (IIMM) in early
- The activities of the IIMM included the purchase and sale of Islamic
fi nancial instruments among market participants (including the central bank),
interbank investment activities through the Mudarabah Interbank Investment
(MII) Scheme and a check - clearing and settlement system through an Islamic
Interbank Check Clearing System (IICCS). The Islamic fi nancial instruments
that are currently being traded in the IIMM on the basis of bay’ al - dayn
are what are known as Green bankers acceptances, accepted Islamic bills,
Islamic mortgage bonds and Islamic private - debt securities. In addition,
fi nancial institutions can sell Government Investment Issues (GIIs) to the
central bank, as and when required, to meet their liquidity needs. GIIs are
government securities issued on an Islamic basis, which fi nancial institutions
can also buy from the central bank, depending on the availability.
ALM Risk Assets-and-liabilities management (ALM) risk is a balance - sheet
mismatch risk resulting from the difference in maturity terms and the con-
ditions of a bank’s portfolio on its assets and liabilities sides. ALM com-
prises strategic planning, implementation, and control processes that affect
the volume, mix, maturity, profi t-rate sensitivity, quality, and liquidity of
a bank’s assets and liabilities. The primary goal of ALM is to produce a
high - quality, stable, large, and growing fl ow of net income. This goal is
accomplished by achieving the optimum combination and level of assets,
liabilities, and fi nancial risk.
ALM risk arises from the difference in maturity terms and conditions of
a bank’s portfolio on its assets and liabilities sides. In theory, Islamic banks
should not be exposed to the same asset–liability mismatch, and therefore to
equity - duration risk, as their conventional counterparts. This comparative
advantage is rooted in the pass - through nature of Islamic banks, which act
IFSB PRINCIPLES OF LIQUIDITY RISK
Principle 5.1: [Islamic Financial Institution] shall have in place a liquid-
ity management framework (including reporting) taking into account
separately and on an overall basis their liquidity exposures in respect
of each category of current accounts, unrestricted and restricted invest-
ment accounts.Principle 5.2: [Islamic Financial Institution] shall undertake liquid-
ity risk commensurate with their ability to have suffi cient recourse to
Shari’ah - compliant funds to mitigate such risk.