Liquidity Assessment of Islamic Banks
The sub-prime mortgage crisis resulted in a loss of confidence among
Research Reports
banks. As a consequence, many banks declined to participate in
interbank markets. The result was diminished liquidity in the
banking system at a crucial time. Lack of liquidity means loss of
June 2009
depositor s confidence and the resulting systemic risk which has
caused runs on a number of banks. Since the origins of the crisis rest
 Islamic banks face in the diminution of asset values, especially asset backed securities;
the nature of Islamic banking with its prohibition on interest has
challenges from declining
served to protect Islamic banks to some extent. That is not to
liquidity in the markets
suggest they are entirely immune from the impact of declining real
estate values and restricted real estate lending. However, Islamic
banks are less likely than conventional institutions to suffer negative
outcomes beyond their capacity to sustain core profitability and
capital. In particular, IIRA has evaluated the liquidity of Islamic Banks.
We have selected a sample of key Islamic Commercial Banks based in
a number of Islamic markets. The banks selected for this study are Al
Baraka Islamic Bank Bahrain (Albaraka), Al Salam Islamic Bank
Bahrain (Al Salam), Bahrain Islamic Bank (BIsB), Dubai Islamic Bank
(DIB), Jordan Islamic Bank (JIB), Khaleeji Commercial Bank (KCB),
Kuwait Finance House Bahrain (KFH) and Meezan Bank Pakistan
Limited (MB).
Liquid Assets to Total Liabilities in Various Banks
At year-end 2007, the Islamic Banks liquidity position was strong.
They were holding a large amount of liquid assets on their balance
sheets. Reflecting the constraints in deployment of funds imposed
by Shari'a guidelines and the competition from conventional banks,
liquid assets constituted average 46.9% in 2007 for the banks in the
study. The most liquid Banks are Al-Salam and Khaleeji Commercial
bank which were new start ups in 2007. Excluding these the average
drops to 32.5% of liquid assets in 2007 indicating strong liquidity
irrespective of jurisdictions. IIRA defines Liquid assets as cash or cash
equivalents, short term placements to banks or financial institutions
and liquid quoted investments such as Government paper and
quoted sukuk. Short term liabilities include deposits and borrowings.
The least amount of liquid assets were held by KFH Bahrain at 9.9%
and most liquid was Jordan Islamic Bank at 45%. On average
excluding the ratios of start up banks (KCB and Salam as mentioned
above) the liquid assets declined to 26% of total assets during 2008
from 32.5% in 2007. This shows that on average during 2008 the
impact of global crisis on the liquid assets has remained limited as
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reflected in a modest downward adjustment of the ratio. This
Islamic International Rating Agency
decrease should be seen in the context of an increase in loans to
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core funding ratio which indicates that some of the liquid assets are
now transferred to loans and advances. The chart above clearly shows
how the liquid assets in Islamic Financial Institutions have declined
 The liquid assets as a
relative to liabilities. Quite noticeable among them are BIsB and Dubai
percentage of total
Islamic Bank. Few exceptions are also present such as AlBaraka and
Meezan which have increased their liquid assets during the year.
liabilities declined during
2008 representing Banks
use of internal resources to
manage the funding
shortfall
Core Funding
Loans to core funding is a measure that captures resource utilization of
the bank. Core Funding is the funds available from customers
deployment of resources. Two principal components of core funding
are the stable portion of customer deposits and unencumbered capital
(capital after deducting mandatory reserves, investments in fixed
assets, branches and subsidiaries).
 Core funding was utilized
by the banks to increase As a result of the need to book only Shari a compliant assets, this ratio
has historically been low for Islamic Banks representing underutilization
the customer assets lifting
of the resources. This however proved to be an advantage for Islamic
loans as a percentage of
Banks as the conservative posture of their balance sheet helped them
core funding during 2008
to cope with the repercussions during the crisis situation. Depending on
their market, business model and risk positioning a bank often keeps
75-95% of its core funds in customer assets. The remainder is kept in
Liquid assets and investment portfolio in order to provide liquidity and
enable the bank to earn a small spread. In the universe under
discussion we see most of the banks registering a healthy increase in
their utilization ratio and also keeping it below 100% at the same time.
Only AlBaraka and Meezan have reduced their loans as a percentage of
core funding which was also evident in their increased liquid assets
ratio.
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Interbank Funding
The Interbank ratio is to assess if the bank is a net taker of funds or a
net contributor of funds to interbank market. A net provider status
means that lendings to financial institutions are higher than the
borrowings. Many islamic Bank who were net providers of funds to the
interbank market in 2007 became net borrowers during 2008. Unlike
2007 when all Islamic Banks except Albaraka Islamic were net lenders in
the money market 2008 has seen a reversal in trend. Banks like KFH
Bahrain, Dubai Islamic Bank, Bahrain Islamic Bank, and Al Baraka Islamic
 Many Islamic Banks
Bank became net borrower indicating their increasing liquidity needs.
became net borrowers from
They registered interbank ratios of 0.21, 052, 0.19 and 0.06
the interbank market
respectively. This shows that they have increased reliance on
professional sources (interbank and brokered deposits) of funds to
during 2008 from net
cover the increased deployment in the business.
providers of funds in 2007
indicating increased
liquidity needs
3 Month Maturity Gap to Total Assets
An additional significant measure to assess the liquidity position is the
maturity profile of assets and liabilities of the Islamic Bank commonly
known as Gap analysis. Gap analysis gives an indication of how well the
bank is expected to meet its maturating obligations with the help of
inflows from maturing assets. The deficit needs to be covered with the
help of external borrowings.
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 Few Banks have large
maturing liabilities
resulting in significant
negative gap while some
have maturing assets
adequately supporting
As evident from the gap analysis the above two banks are facing
challenges with respect to the liquidity position. Large maturities in
maturing liabilities
the shorter tenure indicate reliance on borrowings and using short
term sources to advance longer tenure customer assets such as loans
and advances.
A bank is considered to have positioned itself adequately in terms of
maturities of assets and liabilities as long as negative Gap in up to 3
months does not exceed 10% in of total assets. Excluding the above
two the rest of the institutions are adequately covering the maturing
liabilities from maturing assets. Dubai Islamic Bank has not reported
maturing assets and liabilities in their published accounts.
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For Further inquiries,
please contact:
Mr. Umer Zuberi
Assistant Vice President
[e-mail]
Mr. J. M. McMullen
Senior Vice President- Ratings
[e-mail]
Tel: [phone]
Fax: [phone]
Disclaimer
All of the information contained herein is obtained by IIRA from sources believed to be accurate and reliable. IIRA does not
audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided "as is"
without any representation or warranty of any kind. IIRA's rating is an opinion and not a warranty of a rated entity's current or
future ability to meet contractual obligations, nor it is a recommendation to buy, sell or hold any security.
Reproduction or distribution of IIRA Reports without the explicit consent of IIRA is strictly prohibited. To reprint, translate, or
quote IIRA s publications, contact:
Islamic International Rating Agency,
Al-Zamil Tower, 7th Floor, Govt. Avenue, Manama, Kingdom of Bahrain;
Tel: [phone] Fax: [phone]
Page | 5 of 5
Liquidity Risk Measures
All Amounts in USD ,000
For the Year ended 2008 ABaraka Al-Salam BIsB DIB JIB KCB KFH MB
LIQUID ASSETS of ISLAMIC BANKS
Total Cash and Cash Equivalent 216,029 221,576 131,509 1,810,509 911,149 62,011 185,122 90,269
Total Placement with Banks and FIs
12,989 231,213 96,488 860,060 59,961 350,005 170,878 229,943
Total Liquid Investments - - - 44,854 43,647 73,467
82,480 -
Total Cash/ Cash equivalent and liquid assets 229,018 535,269 227,997 2,670,569 971,110 456,870 399,647 393,678
Liquid Liabilities
Deposits 551,543 897,509 1,320,167 18,085,761 2,302,116 756,496 1,561,247 881,462
Borrowings 234,530 87,217 519,581 1,656,684 12,009 80,183 799,607 61,298
Total Liquid Liabilities 786,073 984,726 1,839,748 19,742,445 2,314,124 836,679 2,360,854 942,760
Liquid Assets to Liquid Liabilities
29.13 54.36 12.39 13.53 41.96 54.61 16.93 41.76
Total Core Funding
Total Deposits (+) 551,543 897,509 1,320,167 18,085,761 2,302,116 756,496 1,561,247 881,462
Economic Capital (+) 207,592 368,937 401,833 2,745,984 249,707 377,257 800,692 94,922
Investments in Affiliates (-) - -
21,252 19,690 1,213,177 25,323 31,936 188,806
Investment in Fixed Assets (-)
11,818 6,854 9,642 182,412 38,678 14,650 83,313 22,675
Large Depositss (> 5% Equity) (-) - - - - -
- - -
Reserve Deposits with Central Bank (-)
9,997 34,167 82,886 1,183,774 182,938 33,459 84,149 32,042
Core Funding 737,320 1,204,173 1,609,783 18,252,382 2,304,885 1,053,708 2,005,671 921,668
Gross Advances and Fianncing
Gross Advances 613,395 302,426 1,159,066 11,427,988 1,336,834 434,714 1,609,676 442,632
Gross Financing - 35,220 51,804 76,310
24,568 235,899 369,849 4,928,669
Total Gross Advances and Financing 637,963 538,325 1,528,915 16,356,657 1,336,834 469,934 1,661,480 518,942
Loans to Core Funding
86.52 44.70 94.98 89.61 58.00 44.60 82.84 56.30
Interbank Placements
12,989 231,213 96,488 860,060 59,961 350,005 170,878 229,943
Interbank borrowings 234,530 87,217 519,581 1,656,684 12,009 80,183 799,607 61,298
Interbank ratio (x) 0.06 2.65 0.19 4.99 4.37 3.75
0.52 0.21
Interbank Borrowings 234,530 87,217 519,581 1,656,684 12,009 80,183 799,607 61,298
Total Assets
1,001,461 1,470,771 2,318,215 23,150,286 2,603,342 1,233,403 3,407,626 1,082,871
Interbank placements to Total Assets 5.93 22.41 0.46 6.50 23.47 5.66
23.42 7.16
Liquidity Risk Measures
All Amounts in USD ,000
For the year ended 2007 ABaraka Al-Salam BIsB DIB JIB KCB KFH MB
LIQUID ASSETS of ISLAMIC BANKS
Total Cash and Cash Equivalent
163,401 40,248 48,671 1,521,230 828,161 16,363 62,706 152,416
Total Placement with Banks and FIs 35,760 595,361 468,899 4,570,768 78,039 209,722 214,019 143,902
Total Liquid Investments (Govt Issued Securities) 54,058
- - - - - - 5,000
Total Cash/ Cash equivalent and liquid assets
199,162 689,667 517,570 6,091,998 906,200 226,085 276,724 301,319
Total Liabilities
Deposits
423,956 351,106 798,302 17,739,793 2,003,203 198,233 1,187,029 837,288
Borrowings
408,047 257,249 432,939 1,360,098 8,728 141,947 205,117 89,508
Total Liabilities
832,004 608,355 1,231,241 19,099,891 2,011,931 340,180 1,392,146 926,796
Liquid Assets to Total Liabilities 31.90 45.04 66.46 19.88 32.51
23.94 113.37 42.04
Total Core Funding
Total Deposits (+)
423,956 351,106 798,302 17,739,793 2,003,203 198,233 1,187,029 837,288
Economic Capital (+)
206,789 361,853 366,467 2,410,724 201,915 358,064 374,393 103,954
Investments in Affiliates (-) 21,733 18,687 1,018,508 20,237 17,727 109,698 30,837
-
Investment in Fixed Assets (-)
7,369 7,903 6,809 172,020 30,289 3,658 50,385 15,686
Large Depositss (> 5% Equity) (-)
- - 161,005 - - - - -
Reserve Deposits with Central Bank (-)
7,322 14,960 32,586 833,968 148,759 8,130 31,340 65,901
Core Funding
616,055 668,364 945,682 18,126,021 2,005,834 526,783 1,370,000 828,817
Gross Advances and Fianncing
Gross Advances
673,936 114,264 520,562 10,023,680 1,061,052 226,321 765,419 537,672
Gross Financing 19,671 23,936 220,385 2,899,292
- 13,729 95,149 35,492
Total Gross Advances and Financing
693,606 138,200 740,947 12,922,972 1,061,052 240,050 860,568 573,164
Loans to Core Funding 112.59 20.68 78.35 71.30 52.90 45.57 62.82 69.15
Interbank Placements 35,760 595,361 468,899 4,570,768 78,039 209,722 214,019 143,902
Interbank borrowings
408,047 257,249 432,939 1,360,098 8,728 141,947 205,117 89,508
Interbank ratio (x)
0.09 2.31 1.08 3.36 8.94 1.48 1.04 1.61
Interbank Borrowings
408,047 257,249 432,939 1,360,098 8,728 141,947 205,117 89,508
Total Assets
1,045,430 1,054,898 1,747,928 22,961,350 2,250,894 714,883 1,950,374 1,092,334
Interbank placements to Total Assets
39.03 24.39 24.77 5.92 0.39 19.86 10.52 8.19