Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 24Asset/Liability Management for Islamic Banks

We could refer to this chapter as vanilla asset/liability management as Islamic banks still rely on traditional modes of funding, which is deposits. Conventional banks also rely on interbank borrowing, repos, reverse repos, swaps, and a host of other products to fund their assets. Islamic banks have yet to develop products that offer alternative sources of funding.¹

We look at the basic problem faced by banks in general while funding their asset book. As always we illustrate our point by using an example. For illustrative purposes we refer to our familiar ABC Bank, which has the following assets and liabilities. In reality, a bank's balance sheets are far more complex, but the most complex of problems can be broken down to simple steps to develop one's comprehension.

ABC Bank has (for simplicity's sake) pooled its assets into three brackets as shown in Table 24.1. One bracket is of 30 days and contains $980 worth of assets, the other bracket is for 60 days and has $850 worth of assets. The last bracket is for 90 days and has $1,260 worth of assets. These assets generate returns, but need to be funded by liabilities. We shall assume that ABC Bank sources funds from deposits only and these are also mobilized as fixed deposits with three varying tenors. These tenors are 30 days, 60 days, and 90 days. The 30-day tenor has $380 in deposits, the 60-day tenor has $430 in deposits, and the 90-day tenor has $1,120 in deposits.