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“Liquidity means the availability of liquid assets to a company.”

• Unable to meet its short term obligations.• Arises from difficulties in obtaining cash at reasonable cost from borrowings or sale of assets.

• Component of market risk• Can cause the failure of an institution even when it is technically solvent.

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Liquidity risk consists of:

• Assets liquidity risk.

Called market or product liquidity risk Arises when transactions cannot be conducted at quoted market prices due to the size of the required trade relative to normal trading lots.

• Funding liquidity risk. Called as cash flow risk Arises when institution cannot meet payment obligations.

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Liquidity risk in bank result Bank’s ability to match the maturity of asset and liability is impaired. Such risk result from mismatch between maturities on two sides of the balance sheet Creating either a surplus of cash that must be invested or shortage of cash that must be funded.

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It arising from both source (Assets & liability side) and is critical for Islamic Banks. Cannot borrow funds to meet liquidity requirement. Shariah’ does not allow the sale of debt other than its face value. Selling debt based asset is not an option to Islamic financial institutes. Assets of Islamic Bank’s are not liquid as compared to the assets of Commercial Banks.Slow development of financial instruments Islamic Bank’s are also not able to raise funds quickly from the markets

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To evaluate the liquidity risk management (L R M) through a comparative analysis between conventional and Islamic banks of Pakistan.

Liquidity risk is the risk that a bank may be unable to meet its short term obligations. This research would be addition into existing body of knowledge.

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Ali (2004)Analyzes the source of liquidity risk in Islamic banks and identifies the risk in different mode of finance. Can be controlled by predicting the timing of cash flows. Increasing the collateral amount can also mitigate the liquidity risk. Smooth operation of banking depends on the smooth operation of the system.Microeconomic imbalances are another factor. Contractual forms of Islamic banking create the liquidity risk.

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Salman and Amanat (2008)

Analyze the comparison in profits of Islamic and conventional banks which is measured by ratio of return on equity.It is an empirical study.They provides the specific risk management procedures of Islamic banks.Concluded that equity based business in Islamic bank face more risk than that of conventional banks.Because Islamic banks are new born banks.Conventional banks have longer history so the practices that they are using are adequate to mitigate risk.

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AbdulMajid and AbdulRais (2003)

Liquidity management is the larger risk weather for the Islamic or conventional banks.It is critical and complex issue.Islamic banks relay on the commodity Murabaha for their short term investment and liquidity management.Sukuk structure is also being introduced for this purpose. Islamic bank can meet their liquidity obligations by smooth operation.Emphasizes the close cooperation between the IFI and the central banks. To make such instruments that is eligible for the Islamic banks reserve requirements. Central banks should hold Sukuk as a part of their portfolio.9

MoinAnalysis between Islamic banks and conventional banks.Measured by different financial ratios.Islamic banks are less profitable than conventional banks.Islamic banks are stated only few years back so their economies of scale is quite low. Conventional banks have an experience to handle risks and profits .Risks cannot be detached with profits however Islamic banks can improve their liquidity management techniques by improving their practices to mitigate risk.

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Ho: Banks with Islamic Financing have on average High liquidity risk than bank without having Islamic financing facilities.

H1: Banks with Islamic Financing have on average lower liquidity risk than bank without having Islamic financing facilities.

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The nature of data is secondary. The source of all the data is from the annual reports of past three years i.e. 2008 to 2010. Financial data from these annual reports is used to calculate and to evaluate the liquidity risk management in conventional and Islamic banks of Pakistan.

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Following ratios are calculated for this purpose:

Cash deposit ratio (CDR)Current ratio (CA)Current asset to total Assets ratio (CATA)

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Cash Deposit Ratio = Cash Deposit

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Current ratio = Current Asset Current liabilities

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CATA = Current Asset Total Asset

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Comparative study. Study employed two banks.Analyze through the ratios. Islamic bank has lower deposit ratio. The Current ratio of Allied Banks shows increasing trend Dubai Islamic bank which shows decreasing trend. CATA ratio is lowers in Allied Banks as compared to Dubai Islamic bank.

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Conventional banks have better techniques to mitigate the liquidity risk. Islamic banks can hedge the liquidity risk.They can mitigate it by: Internal and external audit. GAP analysis.By applying new Shariah’ compliant techniques. Liquidity management decisions.

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Can take other financial institutions. Can be analyzed through the experimental procedures.

Limitation of time and resources. Study can also be enhanced through different variable.

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