THE LEQUDITY MANAGEMENT OF ISLAMIC FINANCE AND KAZAKHSTAN COMMERCIAL BANKS

Rusten U. Amalbekova G.E

M.Kh.Dulaty Taraz State University,Taraz city.

Nowadays, growth and prosperity of any economy is based on its financial sector’s performance, with the banking sector being the most crucial and prominent.^[1] Siraj and Pillai (2012) assert that the stability and growth of any economy depends, to a great extent, on the stability of its banking sector. Due to the significant role of banking sector performance, it is vital to constantly monitor and evaluate banks’ risks. According to ^[2]Abdul Majed (2003) most of the bank’s failures, whether they are Islamic or conventional banks, are due to the difficulties in managing the liquidity needs. Due to this fact one of the most familiar and decisive type of risk with banks is the Liquidity risk.

Liquidity in financial markets and intermediaries has many different meanings. Firstly, liquidity symbolizes the capacity of a financial firm to uphold continually the stability between the financial inflow and outflow over time ^[3](Vento 2009). Secondly, liquidity is the evaluation of the ability of a financial firm to sell assets quickly without incurring huge losses. This means that the asset’s side of the balance sheet is focused on. Thirdly, liquidity is sometimes understood as the ability of a bank to increase funds on the wholesale financial markets by ever-increasing its liabilities. Overall, in reflection of the meanings above, liquidity risk can be concluded as the risk that a financial firm either does not have an adequate amount of financial funds to allow it to meet its obligations as they fall due, or can obtain such funds only at extreme cost. Furthermore, different authors and institutions, in diverse moments, highlighted a number of different features in identifying and defining liquidity and liquidity risk.

The financial crisis that began in 2007 and the recent financial developments have highlighted the significant of liquidity risk problems to all financial institutions, including Islamic banks. However, at the same time it is observed that Islamic banks were almost unaffected due to this crisis and that was due to their nature of being more liquid. Meanwhile, Islamic banks need to control liquidity in order to be solvent like their conventional counterparts. In particular, it’s important for Islamic banks to have a rigorous liquidity risk assessment and mechanism, if they want to be more engaged in any business activity. Islamic banks do not pay interest or charge interest. However, somewhat their business model is primarily the same as that of conventional banks: they take money from customers on a short term basis, and use that to finance individuals and businesses on a longer term foundation. As a result they face the same liquidity management risks as conventional banks, but can find it tougher and more challenging to manage those risks. According to Islamic financial services board (IFSB) Guiding Principles of Risk Management (2012), liquidity risk to Islamic banks arises from their inability to meet their obligations to depositors or to fund increases in assets as they fall without incurring unacceptable losses or costs. In addition, Liquidity risk accrues from maturity mismatches whereby the liabilitie’s side has a shorter tenor than assets side. An unexpected increase in the borrowers‟ demands above the expected level could result to shortages of cash or liquid marketable assets (Oldfield and Santamero, 1997)^[6]. Therefore, reducing the liquidity risk is one of the most important characteristics of banks‟ asset and liability management, especially Islamic banks due to their unique challenge and Shari’ah laws.

In general, liquidity is tricky and complicated to define and even more difficult to measure’ (Persaud, 2007). In addition, managing and monitoring liquidity risk can be even more challenging, particularly in episodes of difficult scenarios like the financial crisis, primarily because the underlying variables driving the exposures can be unpredictable and dynamic (Simplice 2010). For Islamic banks, monitoring, managing and measuring liquidity risk is an even more challenging due to liquidity shortfalls, as Islamic banks cannot ask for the help of money market or other instruments because as per the Shariah law, Islamic banks cannot collect fund for interest (Sole, 2007)^[7]. Furthermore, because of because of the Shari’ah standard it is somewhat difficult for the Islamic banks to invest the excess liquidity for a shorter period of time (Ahmad and Humayoun2010). For years it has been have argued that liquidity risk problem is a major risk facing the Islamic banks (Ray, 1995)^[6], and key barrier to the growth of Islamic banks (Vogel and Hayes 1998)^[4].

These factors have outlined that Islamic banking industry is still struggling to manage liquidity risk management (LRM) and the significance of having a robust liquidity risk management program to anticipate future liquidity risk problems is even more needed. Whereas, Conventional banks have nowadays established numerous tools for managing liquidity risk management.

The first Islamic bank- Al Hillal bank in Kazakhstan was established in January 2010. Signing of a Memorandum of Understanding between Government of United Arab Emirates and the Government of Kazakhstan was one of the key factors on development of IB in our country. [4]In addition, to create and implement the first Islamic bank there was a need to make significant changes and amendments to the Civil and Tax Code, as well as in the regulations that govern the scope of banking services in Kazakhstan. Following the amendments to the laws “On banks and banking activity”[5] “On the Securities Market” and a number of other laws and regulations regarding Islamic finance in the country were in fact created the legal conditions for the development of Islamic banking. Kazakhstan not only the first post-Soviet space creates an acceptable model for a secular society of Islamic banking, but also produces acceptable format compatibility between classical and Islamic finance. According to experts, today, Islamic finance was an alternative to all that has been invented and implemented in Kazakhstan as a way to attract finance, including securitization.

The Government and NBK continue to demonstrate a political will to support the new industry. Kazakhstan has adopted a “roadmap” for the development of the Islamic finance market. Its implementation will help create the conditions for sustainable development of the Islamic financial services industry, creating a critical mass of issuers, investors and market participants, as well as the establishment of Almaty as an Islamic financial center. The Road map includes main actions to be taken, responsible parties and period for the following directions: Legislation Improvement; Educating market; Islamic Finance Infrastructure Development; International Cooperation; Public Sector Development; Islamic Financial Services Development; Science and Education; Investors Relations. [6]

As we have already stated, Islamic banks is an alternative of Conventional banking system. Because there is only one IB in Kazakhstan, we will consider Al- Hilal as an example. Turning to the analysis of JSC “Islamic Bank «Al Hilal», look at the financial position of the bank in Table 1.5.2

Table 1.5.2 A Basic financial indicators of Al-Hilal bank

Assets	2012	2013	2014	2015	2016
Total assets	6 342 016	11 616 228	11 575 279	13 199 975	13885 737
Total Liabilities	254 827	1 413 998	1 070 106	2 321 615	2 544 308
Total equity	6 087 189	10 202 230	10 505 173	10 878 360	11 341 429
Loans	434 623	2 418 081	8 665 108	3 646 272	8 602 371
Deposits	63 009	28 852	8 198	8 592	202 189
Entity	68 547	672 215	247 393	1 513 204	1 653 149
Note – Compiled by author in accordance with the data provided by NBRK

For Conventional banks, liquidity risk arises from when banks are not able either to meet the obligations of the depositors when they come due or to fund increases in assets as they fell due without incurring unacceptable costs or losses. From the risk viewpoint, two explanations can be made:

(1) deposits on the liability side of the balance sheet creates the instantaneous liabilities irrespective of the outcome of the usage of the funds on the asset side and as a result if the best possible operation is not made a mismatch occurs on the asset and liability side;

(2) Medium to short term assets are funded by the stream of short term liabilities including the dues of the other banks. Furthermore, liquidity risk problem arises from the depositors because if a decision is made to redeem their deposits and the bank has not enough cash in hand it creates liquidity problem. In real, banks find imbalances in the asset and liability side on the regular basis and must need to manage accurately else they would face solvency risks.

In summary, the literature view indicates that, the size of bank, Net working capital (NWC), return on assets (ROA), return on equity (ROE) and capital ratio (CAR) have effect on liquidity risk. To the best of my knowledge, no single research in the Kazakhstan has focused on the factors that influence the liquidity risk managements of Islamic banks of Kazakhstan. Therefore, the current study investigates the factors that influence the liquidity risk management of Islamic banks of Kazakhstan over the period of five years from 2010 to 2016. Therefore, this study aims to fill the gap.

Bibliography

1. Siraji, K.K., Sudarsana, P. (2014). Comparative Study on Performance of Islamic Banks and Conventional Banks in GCC region. Journal of Applied Finance & Banking, 2, (3), pp 123-161. International Scientific Press. ISSN: 1792-6580

2. ( Abdul Majid, A. R; 2013. Development of liquidity management instruments: Challenges and opportunities. International conference on Islamic banking: Risk management, regulation and supervision. )

3. Brunnermeier (2015). Deciphering the Liquidity and Credit Crunch 2007–2008Journal of Economic Perspectives—Volume 23, Number1 2009—Pages 77–100

4. Khamis, M. & Senhadji, A. (2015). Impact of the global financial crisis on the Gulf Cooperation Council countries and challenges ahead. Washington D.C: International Monetary Fund Publication.

5. Akhtar, M; Ali, K; & Sadaqat, S. (2014). “Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan, journal of research in business, 1, pp 35-44.

6. Iqbal, A. (2015). “Liquidity risk management: A comparative study between conventional and Islamic banks of Pakistan”. Global journal of management and business research, 12 (5).

7. Muharam, H; & Kurnia, H.P. (2015). “The influence of fundamental factors to liquidity risk on banking industry: comparative study between Islamic and conventional banks in Indonesia”