Assessment of liquidity management in Islamic banking industry

Assessment of liquiditymanagement in Islamic banking

industryRifki Ismal

Faculty of Economics, University of Indonesia, Depok, Indonesia

Abstract

Purpose – The purpose of this paper is to assess liquidity risk management (LRM) practices inIndonesian Islamic banking industry during the period 2000-2007.

Design/methodology/approach – The paper constructs the LRM index (100 scale) which iscomposed of individual index of asset side; liability side; LRM policies; and the overall LRM index.

Findings – The index produces a “good” grade for the liquidity management practices in theIndonesian Islamic banking industry, represented by three Islamic banks which capture 82 percent ofthe total market share of the industry. However, the breakdown of the index of every Islamic banksuggests various achievements.

Research limitations/implications – It is found that the practices of LRM are not optimal yetbased on some considerations explained in this paper. Further progressive actions have to be taken bythe regulators and all industry’s players to improve the LRM practices.

Originality/value – To the best of the author’s knowledge, this is the first paper trying to assesshow good the LRM in Indonesian Islamic banking is.

Keywords Liquid assets, Risk management, Banks, Banking, Liquidity, Islam, Indonesia

Paper type Research paper

1. BackgroundThe concept of liquidity in finance lays in two areas:

(1) the liquidity of financial instruments in financial market; and

(2) the liquidity related to solvency of a financial institution.

The former deals with a liquid financial market; smooth transactions, no financialbarriers, etc. The latter deals with the obligation of a bank to make payments to the thirdparty or simply the solvency of the bank (Fiedler, 2000, p. 442). This paper analyzes thelatter especially focusing on the liquidity management in the Islamic banking takinginto account Indonesian Islamic banking industry as a case study. By constructing ameasurable liquidity management index[1], it tries to value the Indonesian Islamicbanking performance on managing liquidity.

In the practice, one of the ultimate objectives of liquidity management is maintainingasset-liability balances. Hence, it manages funding and financing activities; forecasts ofdemand of funding and financing; and maintains sufficient capacity (reserves) to fulfillfinancial obligations with the third parties. Under the global and open economiccondition, the task to build a proper liquidity management becomes very imperative andchallenging, unexceptionally for Islamic banks as new players in the banking industry.Actually, Islamic banks have unique characteristics of banking operations because inprinciple they have to comply with sharia principles. As such, setting up a liquidity

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Assessment ofliquidity

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International Journal of Islamic andMiddle Eastern Finance and

ManagementVol. 3 No. 2, 2010

pp. 147-167q Emerald Group Publishing Limited

1753-8394DOI 10.1108/17538391011054381

management mechanism in this financial institution requires extra efforts and specialattention. For example, dissimilar with the conventional banks which often disconnectthe performance of financial and real sector, liquidity risk in Islamic banks might arisewhen business (real sector) is in downturn causing a failure to conduct a proper liquiditymanagement (a balance asset and liability).

2. Liquidity risk problem in sharia perspectivePrincipally, Islamic banking efforts that aim to provide a sound liquidity managementare conducted throughout the real business transactions (Antonio, 1999, pp. 46-53).It is because Islamic bank ties every financing contract with real asset which is typicallya unique attribute of the Islamic banks compared with the conventional one (Kahf, 2000,p. 2). Therefore, in its operation, Islamic banks consider business life cycle, cooperationamong business partners, and good conduct of the stakeholders. Thus, liquidity risk, if itoccurs, comes from disharmony of all business partners or unfavorable businesscondition (economic downturn/crisis) leading to liquidity problem as mentioned before.All of these characterize the operation of Islamic banking industry in particular whendealing with liquidity risk.

Moreover, Islamic banking takes roles as financial intermediaries, supporter andfacilitator all together. Even, they position themselves as a trusted body for theinvestors and business partners by becoming business partner, advisor, consultantand source of information. As such, as they are fully responsible to provide liquiditywhen demanded by the third party, Islamic banks manage liquidity demanded throughcoordination with all the counterparties. Hence, the liquidity management in Islamicbanking is done based on trust, belief and support of each other, share the risk and itbecomes forbidden to defeat other parties (Ministry of Religion, Republic of Indonesia,2005, 26, pp. 180-3).

3. Construction of liquidity risk management indexTheoretically, the sound liquidity risk management (LRM) can be observed at least fromanalyzing the performance of the balance sheet (asset and liability side) and the LRMpolicies (Antonio, 1999, p. 46). Thus, referring to that, the paper analyzes the:

. asset side;

. liability side; and

. liquidity management policy of Islamic banks.

On the asset side, the evaluation of LRM takes into account Islamic bank’s efforts tomonitor the financing; arrange proper financing allocation; tackle financing default andunpleasant economic condition; and handle liquidity shortages.

On the liability side, the evaluation focuses on the bank’s efforts to set up anappropriate proportion of the funds; to build a good arrangement/communication withdepositors regarding their liquidity withdrawal behaviors; and to trace the potential ofliquidity run. Whilst, the evaluation on LRM policies captures mainly the corporatepolicies to build a healthy liquidity management practices such as corporate policies intreating Islamic securities to ratify liquidity demanded; relation with other banks inIslamic interbank money market; relation with the central bank and governmentregarding placement of liquidity, etc.

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Finally, the construction of the LRM index involves the distribution of the 100-pointindex to the asset side, liability side and LRM policy, applicable for Indonesian case.Assuming that the Islamic banking policies related to asset side (A) and liability side (B)are equally important, each of them is given 35 points. The LRM policy which isrelated to external factor (non-operational) (C) is given the allocation of 30 points. Hence,total index (L) is an accumulation of all points or L ¼ A þ B þ C, with A ¼ 35 points,B ¼ 35 points and C ¼ 30 points such that:

L ¼Xn

t¼1

Ai þXn

t¼1

Bi þXn

t¼1

Ci ð1Þ

Further, the index quota in every aspect being investigated (A into C) is then separatedinto some set of individual questions which contain index point(s) to detect bank’sactions on mitigating and preventing liquidity risk in detail. All of the questions are asdepicted briefly in Appendix 1, Tables AI-AIII in the last part of the paper.

In addition, in the process of constructing the LRM index, it involves three differentstyles of questions with the different treatment of index point(s). First of all is yes and noquestion (m) and for this, points are given to every single answers marking yes or no.There is always zero point value in every yes/no question. The second one is multiplechoice questions (n) which have points in each option of the question. There is no zeropoint value in this type because each answer is appreciated and given a point(s). Finally,ranking (priority) questions ( p). For this style, there is a standard (ideal practices)ranking of answers based on sharia perspective (Ismal, 2007, pp. 5-20) in order to gainpoint(s) and also there is no zero point unless the answer does not match the standardranking. Then, continuing from the equation (1) above, the detail formula of every aspect(asset, liability, LRM policy) is written as:

Xn

t¼1

Ai ¼X9

t¼1

mi þX22

t¼1

pi ð2Þ

Xn

t¼1

Bi ¼X7

t¼1

mi þX14

t¼1

ni þX3

t¼1

pi ð3Þ

Xn

t¼1

Ci ¼X13

t¼1

mi þX3

t¼1

ni þX12

t¼1

pi ð4Þ

Upon examining Islamic banks X, Y, and Z with the proposed index calculation, theoutput will produce three index values of every Islamic bank, which are:

(1) index value of its asset (A);

(2) liability (B); and

(3) LRM policies (C ).

Finally, in order to evaluate and judge the achievement of every aspect as well as theoverall index achievements, four criteria of examination are determined:

(1) excellent;

(2) good;


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(3) satisfactory; and

(4) poor.

The determination of interval value of the index for every criterion just adopts 25 percentrange from 0 (the lowest value) to 100 (the highest value) for overall index and 25 percentrange begins from the highest value for every aspect. Table I below writes the completeinterval value and all indexes as a whole.

Based on this grading system, the Indonesian Islamic banking industry is gradedexcellent if its total LRM index lies between 75 and 100; good if between 50 and 74;satisfactory if between 25 and 49; and poor if below 25. However, grading system andpoints in every assessment are subjective by the author. The regulators, banks can comeup with their owned value judgment for the result of the assessment.

4. Assessing Indonesian Islamic banking industryThe Indonesian Islamic banking industry[2] has been growing promisingly since theestablishment of the first Islamic bank in 1992. People’s awareness to employ Islamicbanking spurred by government and Indonesian Moslem Scholars Council has made theindustry meaningful. Up to end of 2007, there are three Islamic commercial banks (BUS)namely Bank Muamalat Indonesia, Bank Syariah Mandiri and Bank Syariah MegaIndonesia followed by 25 Islamic banking units (UUS) and 114 Islamic rural banks(BPRS) integrating 683 offices around the country (Table II).

In its development, Islamic banks have been showing a healthy financialintermediary and prudential banking operation shown by the banking performanceindicators. For example, financing to deposit ratio has been lying between 100 and120 percent annually since 2001 while in conventional bank it is around 60 percent andnon-performing financing (NPF) positions between 2 and 4 percent while conventionalrecords higher position at 8 percent. Others, like total asset, financing and deposit have

GradingAssessment Total points Excellent Good Satisfactory Poor

Asset side 35 26-35 17-25 8-16 below 8Liability side 35 26-35 17-25 8-16 below 8LRM policies 30 22-30 15-21 7-14 below 7Total index 100 75-100 50-74 25-49 below 25

Table I.Grading system of theLRM index

Banking indicators 2000 2001 2002 2003 2004 2005 2006 2007

Islamic banks (unit) 2 2 2 2 3 3 3 3Islamic banking units (unit) 3 3 6 8 15 19 20 25Islamic rural banks (unit) 79 81 83 84 88 92 105 114Total offices (unit) 146 182 229 337 443 550 567 683Total asset (trillion Rp) 1.79 2.72 4.05 7.86 15.33 20.88 26.72 36.53Total financing (trillion Rp) 1.27 2.05 3.28 5.53 11.49 15.23 19.53 27.94Total deposit (trillion Rp) 1.03 1.81 2.92 5.72 11.86 15.58 20.67 25.65

Source: BI

Table II.Selected Islamic bankingindicators

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been growing annually for more than 60 percent on average[3]. Lately, total asset hasbeen reaching Rp36.53 trillion with total financing of Rp27.9 trillion, well above its totaldeposit of Rp25.65 trillion.

Despite the promising achievement above, the share of the industry in the totalbanking industry is still very small. Total asset caters less than 2 percent of the totalasset of banking industry although it grows on average around 60-80 percentannually[4]. Less competitive, positioning of banks in people’s mind and lack of synergywith other financial institutions are some weakness of the industry (Bank Indonesia (BI),2005, pp. 18-22). Most importantly, some fundamental problems leading to liquidity riskchallenge this industry especially investment motivation of depositors; under developedIslamic financial market; limited Islamic banking instruments; the fragility of theIslamic banking industry towards macroeconomics issues, etc. (Ismal, 2008b, pp. 9-12).

As LRM is one important factor determining the successfulness of the IndonesianIslamic banking industry, there is a need to evaluate and value the practices of LRM inthe industry. The assessment takes all (three) Islamic banks as they dominate theindustry with 82 percent market share, much higher than UUS or BPRS (BI, 2002-2007).

Hopefully, this assessment of LRM would benefit the industry by, amongst others,examining the prospects of the industry and measuring the sensitivity of the industryagainst any issue on liquidity risk. The construction of LRM index itself usesinformation from LRM survey filled out by respondents from banking authority (as thesupervisor of the Islamic banks) and market players (Islamic bankers). Finally, in orderto maintain anonymity, the three Islamic banks are named as Islamic banks X, Y, and Z,without any correlation with the sequence of the way the three Islamic banks beingwritten previously.

Liability sideAssessment of the LRM from the liability side of the three Islamic banks has found thataround 50 percent of their total deposits is a rolled over one-month deposits owned bynon-individuals (mostly government institutions). Nevertheless, non-individuals areusually very cooperative and communicative with Islamic banks. Therefore, althoughthe domination of short-term deposits ever worries the banks especially from thosewhose behaviors cannot be predicted (rational individual depositors) but due to a charge(penalty) granted to any liquidation of immature deposits and a requirement for bigdepositors to give prior notice before withdrawing the funds, Islamic banks can so farsort out any short-term liquidity demanded from depositors.

For their future funding arrangement on the liability side, some of them plan todesign new banking instruments which fit the demand and expectation of depositors.The other prefers to attract international investor to invest money in the bank in order tostrengthen its capital or try to realign tenor of deposits from short-term into long-termdeposits.

Meanwhile, the purpose of depositors to take their money out of the banks is mostlydriven by daily transaction motive and no indication of huge deposit switching fromIslamic bank into conventional bank. Small fraction only happens if interest rate returnoffered by conventional deposit is increasing. These under controlled and predictedliquidity withdrawals have supported Islamic banks to manage their liquidity.

Considering the above factors, the three Islamic banks get different marks on theliability side index. Bank X gets an excellent grade, Bank Y records a good grade and


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Bank Z achieves a satisfactory grade as depicted in Tables III-V, respectively.Fortunately, none of them falls into poor criterion. And, due to the inter relation betweenliability and asset side, these achievements should positively contribute to theperformance of the asset side and finally the overall grade index of the industry.

Nevertheless, because only one Islamic bank stands in an “excellent” grade, it showsthat LRM from the liability side does not achieve an optimal result yet. Furtheranticipative actions on liability side such as intensive education on Islamic banking tothe public, product development, etc. have to be implemented to improve the overallposition of the industry. Particularly in the future, when the share and contribution ofIslamic banks become more significant than what have been reached nowadays, theneed to have a perfect achievement on the liability side is a must. Appendix 2,Tables AIV-AVI informs detail index calculation of every Islamic bank on liability side.

Asset sideOn asset side, all three Islamic banks have done many efforts to tackle such risk. First ofall, they conduct intensive monitoring and evaluation of the Islamic financing contracts.Even, they match financing plan with total available deposits by polling and releasingthe funds based on the maturity date. However, macroeconomics shocks seem theirultimate enemy because Islamic banking operates based on real sector performance asmentioned previously so that any unpleasant economic condition might potentiallycause direct impact to the banks. One important impact related to managing liquidity on

GradingAssessment of Bank X Total points Excellent Good Satisfactory Poor


Table III.LRM index for IslamicBank X

GradingAssessment of Bank Y Total points Excellent Good Satisfactory Poor


Table IV.LRM index for IslamicBank Y

GradingAssessment of Bank Z Total points Excellent Good Satisfactory Poor


Table V.LRM index for IslamicBank Z

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asset side is the increasing of NPF. It also makes banks difficult to find profitable andprospective business proposal to be financed.

However, whenever liquidity demanded exceed the internal cash reserves of Islamicbanks, two of them rely on repurchasing of Bank Indonesia Wadiah Certificate (SWBI) toBI and one of them tends to just resell its Islamic securities (such as Islamic moneymarket securities) in the secondary market. For the other two, selling Islamic moneymarket securities in the secondary market is their second alternatives. Nonetheless, dueto the infant Islamic money market in the country, depending on it is not their ultimatepriority in the case of liquidity run.

Regarding financing real sector projects, they typically still prefer debt-basedprojects (Murabahah, Salam, Istishna, Ijarah) to equity-based projects (Mudarabah,Musharakah) or service-based projects (Wakalah, Hiwalah, Kafalah). Then the rest ofthe funds go to the Islamic securities and SWBI as the zero risk investment instruments.These are not actually an ideal LRM practices, because sharia principles require Islamicbanks to mostly utilize the funds for the equity based long-term and profitable projects.

Furthermore, for their future LRM planning, all of them unfortunately stillconcentrate on boosting the revenue from debt-based financing rather than equity-basedfinancing. Amongst other reasons are due to the difficulties to find profitable businessproposals, trusted entrepreneurs and because of unstable business condition. Despitesetting such future planning, if the industry wants to dominate the national bankingindustry, basically they have to be very competitive by offering high deposit return,various banking instruments, sharia compliant and giving large impact to thedevelopment of the people in general. One way to reach it is again through involvementin the equity based long-term business projects.

By the way, upon implementing the above approaches on asset side, the three Islamicbanks can so far maintain the sustainable financing performance. All of them gain a“good” grade as explained in Tables III-V, respectively. The index result shows a goodachievement although it is realized that some improvement should still be followed up inorder to make it more perfect as suggested above. Detailed of the index calculation can beseen in Appendix 3, Tables AVII-AIX.

Liquidity management policyThis aspect is considerably very essential to determine the successfulness of thecomprehensive efforts being done. The banks have been adopting several policies tohandle such risk. In terms of managing the appropriate liquidity management, they havedivision/team dealing with risk management including liquidity risk. Furthermore, theyprovide the asset and liability balancing by planning every usage of funds, havingquantitative model to accurately identify the funds being used, and insuring all depositswith government’s owned insurance deposit (deposit guarantee institution). Some banksset up a communication with big depositors regarding the schedule of liquiditywithdrawals.

Because it is corporate level’s actions, every problem with regard to liquidity risk isprocessed by risk management team/division before being forwarded to the Board ofDirectors for the strategic decision. However, for the further policies in liquiditymanagement, the banks hope the government to sonly issue sovereign bond (sukuk) asone of the ideal Islamic instruments to manage liquidity andit will indeed act as abenchmark for all Islamic securities. Keep stabilizing the economic condition and


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socializing the Islamic banking are their other expectations to be provided by thegovernment in cooperation with all industry players.

As a result, the LRM index in this aspect introduces two banks which have anexcellent grade and one bank note for a good grade as seen Tables III-V. It is a veryremarkable achievement in terms of policy level. Although, some details of actions stillhave to be taken such as setting up a good communication between banks and theirdepositors with respect to managing and knowing their liquidity planning andtransaction behaviors. None of them are very cooperative with their depositors orbusiness partners while it is one of the core business values of Islamic banking operationand the main different between Islamic banking ways of treating their stakeholderscompared with conventional banking one. Detailed of the index calculation and actionsbeing explored in this aspect are explained by Appendix 4, Tables AX-AXII.

5. Overall, assessment of the Islamic banking industryFinally, the overall result of the LRM index comes up with a “good” grade for theIndonesian Islamic banking industry. This result clearly explains the quality of therecent liquidity management mechanism in the industry. The big industry’s players(the three Islamic banks) as the market driven prefer applying short-term liquiditymanagement with the ultimate purpose to gain short-term, liquid and sustainable profitto long-term liquidity management with the potential of a higher profit but uncertainand no guarantee of sustainability. By doing this, the Indonesian Islamic bankingindustry has been so far very successful to meet the expectation of depositors to receive apositive and regular payment of deposit returns and fulfill the demand of liquidity aswell (Ismal, 2008a, pp. 3-25). Nonetheless, the “good” grade index shows that they havenot reached the ideal practices of Islamic banking to manage liquidity and develop thereal sectors. Some improvements (as explained in the paper) need to be taken to redirectthe achievement of liquidity management index into the ideal one.

6. ConclusionIndonesian Islamic banking industry has been presenting a remarkable performanceand promising development since early 1990s. However, with regard to liquiditymanagement, an index assessment of all Islamic banks suggests that each Islamic bankstands between index grade of excellent, good, and satisfactory based on the valuation oftheir asset side, liability side, and LRM policy. In overall, they have been successfullymaintaining a robust liquidity management by gaining a good grade index. Nonetheless,this good grade index does not imply an optimal accomplishment. Some efforts need tobe pursued to further improve the performance of the industry to manage liquidityparticularly to reach a better grade index and apply an ideal Islamic banking practicesbased on sharia principles.

At the end, it is realized that this paper limits its analysis to only three aspects beingevaluated (asset side, liability side, and bank’s liquidity management policy). Thefurther extension of this research can be considered, particularly to engage other aspectsof liquidity management such as from depositors’ perspective (liquidity behavior ofdepositors, withdrawal decision, etc.) or banking regulators such as central bank andgovernment policies. A better and wider impact of the index might also be gained if itinvolves all UUS instead of all Islamic banks to reach almost 100 percent market share of

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the total Islamic banking industry with more detail questions and strict criteria of thepoint calculation (decision on weight, allocation of points, etc.).

Notes

1. From the idea of Ahmed (2006).

2. Islamic banking industry consists of BUS, UUS, and BPRS. UUS is a special sharia bankingunit in conventional bank (windows system or dual banking system) while BPRS namesIslamic banks operated in suburb/rural areas.

3. As reported in BI (2006).

4. Conventional bank’s growth is only about 10 percent annually.

References

Ahmed, H. (2006), “Assessing risk management system: an application to Islamic banks”,paper presented at the 7th Harvard University Forum on Islamic Finance, Boston, MA,April 22-23.

Antonio, S. (1999), Sharia Bank for Bankers and Practitioners, 1st ed., Bank Indonesia andTazkia Institute, Jakarta.

BI (2005), Blue Print of Indonesian Islamic Banking Development, Islamic Banking Directorate ofBank Indonesia, Jakarta, pp. 18-22 (revision of 2002’s Blue Print).

BI (2006), “Annual report of Indonesian Islamic banking”, Bank Indonesia, available at: www.bi.go.id.com (accessed June 3, 2007).

BI (2002-2007), “Monthly statistics report of Indonesian Islamic banking statistics”, BankIndonesia, available at: www.bi.go.id.com/ (accessed July 10, 2007).

Fiedler, R. (2000), Liquidity Risk, The Professional Handbook of Financial Risk Management,Butterworth-Heinemann, London.

Ismal, R. (2007), “Islamic banking issues on liquidity risk management”, paper presented atUstinov College Finance Seminar, Durham University.

Ismal, R. (2008a), “Analysis of liquidity risk management practices in Islamic banking industry”,unpublished academic paper, February, Durham University, Durham.

Ismal, R. (2008b), “The potential of liquidity risk in Islamic banking”, paper presented at SummerSchool in Islamic Banking and Finance, Durham University, February.

Kahf, M. (2000), “Treatment of excess liquidity in the Arab Gambian Islamic Bank”, avialble at:www.kahf.net/index.html (accessed January 20, 2007).

Ministry of Religion, Republic of Indonesia (2005), The Holy Qur’an, 10th ed., Diponegoro CV,Bandung.

(Appendices follow overleaf.)


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Appendix 1

Are private companies the dominant owners of your bank’s big amount ofdeposits? 2

TOTAL POINTS TOTAL POINTS

TOTAL POINTS IN LIABILITY SIDE

Choiceof Rank Points

How do you score (1-4) blending deposit fund with otherbanks for financing as your future plan with respected toliquidity risk management ?

How do you score (1-4) attracting international investors asyour future plan with respected to liquidity risk management ?

How do you score (1-4) designing a more suitable depositinstruments to manage liquidity withdrawal as your future planwith respected to liquidity risk management ?

How do you score (1-4) directing deposit into long termplacement as your future plan with respected to liquidity riskmanagement ?

1

2

4

3

0

0

3

3

30

0 3

3

4

Does the daily transaction needs push depositors to liquidate their deposit ? 0

Liquidity Risk Assessment

5

1

2

3

4

Assuming companies, which have big amount of deposit, will not take itshortly (very cooperative), how many of them lies between 21% - 40% oftotal depositors?



Related to liquidity risk management, do you charge a penalty for immaturedeposit withdrawal ?

Related to liquidity risk management, do you require depositors to give priornotice before withdrawing their deposit?

Assuming companies which have big amount of deposit will not take itshortly (very cooperative), how many of them lies between 0% - 20% of totaldepositors?

Assuming rolled over deposit will not cause any short-termliquidity pressure, how many of them lies between 41% - 60%of total deposits?

0

0

Pointsif Yes

3

3

Liquidity Risk AssessmentPointsif No



Do you consider the big amount of short-term deposit as themain trigger of liquidity risk problem?

Points ifYes

Points ifNo


Assuming rolled over deposit will not cause any short-termliquidity pressure, how many of them lies between 81% -100% of total deposits?

3

4

5

2

1

2Does increasing trend of bank’s interest encourage depositors to take theirmoney out?

Does switching deposit tenor (whichever promising higher return) underliedepositors to liquidate their deposit ?

Do you consider rational depositors as the main trigger ofliquidity risk problem in your bank?

Are foreign companies the dominant owners of your bank’s big amount ofdeposits?

Are other banks the dominant owners of your bank’s big amount ofdeposits?


Are government institutions the dominant owners of your bank’s big amountof deposits?

1

3

24 11

35

2

2

2

Table AI.Assessment on theliability side (surveymanual)

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Do you finance short term project by using short term deposit ? 1 0

Do you have difficulties in dealing with Islamic money market ? 0 1

TOTAL POINTS TOTAL POINTSTOTAL POINTS IN ASSET SIDE

1 2

3518 17

5 1

1

1

3

1

1

1

1

3

1

2

4

2

4

1

1

1

1

1

3

1

3

1 1

1

1

2 1

1 1


2 1

2

1

4

1 1

2 1

In case of business partners’ default, how do you score (1-3) the importance of switching (selling) the bank’s ownership to other party in order to cover your financing loss?In case of business partners’ default, how do you score (1-3) the importance of giving extra time to business partners to ratify their payment obligation?

0

0 1

1 0

How do you score (1-2) increasing revenue from equity based financing as your future plan with respected to liquidity risk management ?

0

How do you score (1-4) your financing priority policy to finance private companies projects?How do you score (1-4) your financing priority policy to have join financing?

How do you score (1-4) your long term financing problem related to difficulties in finding trusted business partners?How do you score (1-4) your long term financing problem related to difficulties in finding profitable business proposal?

How do you score (1-4) your financing priority policy to finance government projects? How do you score (1-4) your financing priority policy to finance retail entrepreneur’s projects?

Points if Yes

Pointsif No

0

0In case of liquidity run, how do you score (1-2) the importance of reselling (repo) your owned SWBI as your liquidity run mitigation strategy?

In case of business partners' default, how do you score (1-3) the importance of liquidating their collateral or asset (financing objects) in order to cover your financing loss?

1 0

Related to liquidity risk management, do you monitor and evaluatethe bank’s financing, including intensive coordination with yourbusiness partners?Related to liquidity risk management, do you adjust maturity of deposit with flow of fund from financing?


1

2

Do you pool all types of deposits before lending it with certain portfolio ?

Do you advance short term deposit into Islamic securities and SWBI whilst long term deposit is placed for long term project financing ?

Do you care with non-performing financing leading to decreasing profit sharing to depositors as one of serious liquidity problems?

How do you score (1-5) debt based financing (Murabahah, Ijarah, Salam dan Istisna) based on your financing priority strategy ?

Do you anticipate unpleasant economic condition that causes high banking interest?

Do you have difficulties in financing prospective and profitable projects ? .

How do you score (1-2) the importance of selling your owned Islamic securities in secondary market when demand for liquidity exceeds your cash reserve?

How do you score (1-2) the importance of reselling your owned SWBI (repo) when demand for liquidity exceeds your cash reserve?

Choiceof Rank

Points

In case of liquidity run, how do you score (1-2) the importance of selling your owned Islamic securities in secondary market as your liquidity run mitigation strategy?


2 1

How do you score (1-2) increasing revenue from debt based financing as your future plan with respected to liquidity risk management ?

2 2

How do you score (1-5) equity based financing (Mudarabah, Musyarakah) based on your financing priority strategy ?How do you score (1-5) service based financing (Wakalah, Hiwalah) based on your financing priority strategy ?

How do you score (1-5) buying Islamic money market securities, sukuk or Islamic stock based on your financing priority strategy ?

How do you score (1-5) placement fund in SWBI based on your financing priority strategy ?

How do you score (1-4) your long term financing problem related to uncertainty in economic condition?How do you score (1-4) your long term financing problem related to limited personnel to tackle (monitor, evaluate, value, etc) business partner’s performance?

Table AII.Assessment on the asset

side (survey manual)


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Do you want BI to lessen reserve requirement’s (GWM) policy? 0 1


TOTAL POINTS IN LIQUIDITY MANAGEMENT POLICY

2

0

0

0

1

Pointsif No

0 1

1

0

1

1

1

1

2

3

1

4

Points ifYes

0

0

0

0

In case of liquidity run, how do you score (1-5) the importance

of using intra day liquidity facility from BI as your liquidity run

mitigation strategy?


of using deposit guarantee from deposit guarantee institution

(LPS) as your liquidity run mitigation strategy?

In case of business partners’ default, do you compensate it with

profit reserve?

1

1

1

1

1

0

0How do you score (1-3) using excess reserve GWM in Bank

Indonesia when demand for liquidity exceeds your cash

reserve?

How do you score (1-3) using intra day liquidity facility in Bank


reserve?


of borrowing some money from Islamic money market (PUAS)

as your liquidity run mitigation strategy?


of selling your owned Islamic securities in secondary market as

your liquidity run mitigation strategy?


How do you score (1-3) borrowing some money from Islamic

money market (PUAS) when demand for liquidity exceeds your

cash reserve?


of reselling (repo) SWBI as your liquidity run mitigation

strategy?

2

1

3

1

1

1

Do you want BI to add another Islamic monetary instrument

besides SWBI?

Do you want all parties to keep socializing Islamic banking to

public?

Do you want BI/government to give consultation to solve liquidity

problem?

Do you want BI to be ready to inject emergency fund for Islamic

bank that is/are in difficult liquidity problem?

Pointsif Yes

Pointsif No

Do depositors who have high nominal deposit explain their

financial planning/purpose of deposit?

0

0

0

3

2

1

1

In case of serious liquidity problems and decision has to be taken,

will it be under responsibility of Board of Directors upon

recommendation from risk management team?


will it be under responsibility of President Directors upon the result

of Board of Directors meeting?


will it be under responsibility of risk management team (routine

decision) but soon will be forward into Board of Directors if condition

becomes worst (liquidity run)?

Is there no previous communication/agreement with depositors

who have high nominal deposit regarding their timing to

withdraw it?

Do you hope government to issue sovereign sukuk in order to

prevent liquidity risk problem?

Do you government to improve economic stability to raise business

profit of enterprises?1

1

1

1

Liquidity Risk Assessment Liquidity Risk Assessment

5 1

Related to liquidity risk management, do you have team/division

dealing with liquidity risk ?

Related to liquidity risk management, do you arrange financial

planning with deposit available ?

Related to liquidity risk management, do you have quantitative

model to maintain equilibrium of liquidity?

Related to liquidity risk management, are all your deposits being

insured against liquidity risk problem?

Related to liquidity risk management, do you have mudarabah

muqayyadah deposit to finance specific projects?

17 13

30


timing to take their money from deposit?Do you ask extra time to prepare for liquidity if depositors who

have high nominal deposit want to liquidate their deposit?

1

0

0

2

Table AIII.Assessment on theliquidity managementpolicy (survey manual)

IMEFM3,2

158

Appendix 2

Are private companies the dominant owners of your bank’s big



Does increasing trend of bank’s interest encourage depositors to

take their money out?

Does switching deposit tenor (whichever promising higher return)

underlie depositors to liquidate their deposit ?

Do you consider rational depositors as the main trigger of

liquidity risk problem in your bank?

Are foreign companies the dominant owners of your bank’s big

amount of deposits?

Are other banks the dominant owners of your bank’s big amount of

deposits?

Assuming companies, which have big amount of deposit, will not

take it shortly (very cooperative), how many of them lies between

81% - 100% of total depositors?

Are government institutions the dominant owners of your bank’s big

amount of deposits?

Do you consider the big amount of short-term deposit as the

main trigger of liquidity risk problem?

Points ifYes

Points ifNo

Assuming rolled over deposit will not cause any short-term

liquidity pressure, how many of them lies between 61% - 80%

of total deposits?


liquidity pressure, how many of them lies between 81% -

100% of total deposits?

5

Pointsif No



of total deposits?



of total deposits?



of total deposits?

0

Liquidity Risk AssessmentPointsif Yes










Related to liquidity risk management, do you charge a penalty for

immature deposit withdrawal ?

Related to liquidity risk management, do you require depositors to

give prior notice before withdrawing their deposit?

Assuming companies which have big amount of deposit will not take

it shortly (very cooperative), how many of them lies between 0% -

20% of total depositors?

3


3

4

Does the daily transaction needs push depositors to liquidate their

deposit ? 0

3

3

0

3


How do you score (1-4) blending deposit fund with other

banks for financing as your future plan with respected to

liquidity risk management ?

How do you score (1-4) attracting international investors as

your future plan with respected to liquidity risk management ?

How do you score (1-4) designing a more suitable deposit

instruments to manage liquidity withdrawal as your future plan

with respected to liquidity risk management ?

How do you score (1-4) directing deposit into long term

placement as your future plan with respected to liquidity risk

management ?0

0

2

0

24

16 8

5

3

4

6Table AIV.

Assessment on theliability side of Bank X


management

159

Do you finance short term project by using short term deposit ? 0

Do you have difficulties in dealing with Islamic money market ? 1


In case of liquidity run, how do you score (1-2) the importance of reselling (repo) your owned SWBI as your liquidity run mitigation strategy?


Choiceof Rank

Points



3 0












Points ifYes

Pointsif No

Related to liquidity risk management, do you monitor and evaluate the bank’s financing, including intensive coordination with your business partners?Related to liquidity risk management, do you adjust maturity of deposit with flow of fund from financing?


2

1


0

How do you score (1-4) your financing priority policy to finance private companies projects?

0

1

0

1



How do you score (1-4) your financing priority policy to have join financing?


How do you score (1-4) your financing priority policy to finance retail entrepreneur’s projects?

2 1

1

2

4

1 1

1 0

3

0

1

1



How do you score (1-4) your financing priority policy to finance government projects?

2 1

1 1

1

2

2

1

4

1

1

1

1

3

3

1

2

4

1

1

1

1

11 1122

2

1

0

0

5 1

0

Table AV.Assessment on the assetside of Bank X

IMEFM3,2

160

Do you want BI to lessen reserve requirement’s (GWM) policy? 1

TOTAL POINTS TOTAL POINTSTOTAL POINTS IN LIQUIDITY MANAGEMENT POLICY

Pointsif Yes

Pointsif No



0

3










profit of enterprises?

1

1

1

1


besides SWBI?


public?


problem?



withdraw it?





















cash reserve?2

1

3

1

1

3

How do you score (1-3) using excess reserve GWM in Bank


reserve?



reserve?


profit reserve?

1

1

1

1









0

2

0

0


5 1

1

1

1 1

1

2

Pointsif No

4









strategy?

Points ifYes

13 9

22

0

0

1

0

Table AVI.Assessment on the

liquidity managementpolicy of Bank X


management

161

Appendix 3

Are private companies the dominant owners of your bank’s big



0

0






management ?

0

15 7

22

0






5

3

3

0


4

3

6

0

4

Does the daily transaction needs push depositors to liquidate their

deposit ? 0

2

Pointsif Yes










Related to liquidity risk management, do you charge a penalty for

immature deposit withdrawal ?

Related to liquidity risk management, do you require depositors to

give prior notice before withdrawing their deposit?

Assuming companies which have big amount of deposit will not take

it shortly (very cooperative), how many of them lies between 0% -

20% of total depositors?

3

3




of total deposits?



of total deposits?



of total deposits?

Points ifYes

Points ifNo



of total deposits?




4


Does increasing trend of bank’s interest encourage depositors to

take their money out?

Does switching deposit tenor (whichever promising higher return)

underlie depositors to liquidate their deposit ?



Are foreign companies the dominant owners of your bank’s big

amount of deposits?


deposits?




Are government institutions the dominant owners of your bank’s big

amount of deposits?



Table AVII.Assessment on theliability side of Bank Y

IMEFM3,2

162




111122

2

1

0

0

4 0

1

1

1

1

1

3

1

2

4

4

1

1

1

1

3

1 1

1

2 0

1

1

Choiceof Rank

Points


How do you score (1-4) your financing priority policy to finance government projects?

2

1

1

0

3

5

1 1

1 0

2



How do you score (1-4) your financing priority policy to have join financing?


1

1

2


How do you score (1-4) your financing priority policy to finance private companies projects?

0

0How do you score (1-4) your financing priority policy to finance retail entrepreneur’s projects?

2

Points ifYes

Pointsif No



2

0














Choiceof Rank

Points



3 0

2 1

Table AVIII.Assessment on the asset

side of Bank Y


management

163



815

23

2

0

1

Pointsif No

0

5 1

1

1

0

1

2

3

6

4

Points ifYes

0









besides SWBI?


public?


profit reserve?

1

1

1

1

1

2


problem?






cash reserve?



strategy?

1

2

3

0

0

1








1

1

1

1

1
























withdraw it?

3



reserve?





planning with deposit available ? How do you score (1-3) using excess reserve GWM in Bank


reserve?



Pointsif Yes

Pointsif No

Table AIX.Assessment on theliquidity managementpolicy of Bank Y

IMEFM3,2

164

Appendix 4

Are private companies the dominant owners of your bank’s big amount of

deposits? 2



18 6

24

2

2

Does increasing trend of bank’s interest encourage depositors to take their

money out?

Does switching deposit tenor (whichever promising higher return) underlie

depositors to liquidate their deposit ?



Are foreign companies the dominant owners of your bank’s big amount of

deposits?


deposits?

Assuming companies, which have big amount of deposit, will not take it

shortly (very cooperative), how many of them lies between 81% - 100% of

total depositors?

Are government institutions the dominant owners of your bank’s big amount

of deposits?

3



Points ifYes

Points ifNo



of total deposits?




2

Pointsif Yes

3

3




of total deposits?



of total deposits?

Related to liquidity risk management, do you require depositors to give prior

notice before withdrawing their deposit?

Assuming companies which have big amount of deposit will not take it

shortly (very cooperative), how many of them lies between 0% - 20% of total

depositors?



of total deposits?


1



total depositors?



total depositors?



total depositors?

Related to liquidity risk management, do you charge a penalty for immature

deposit withdrawal ?

3

Does the daily transaction needs push depositors to liquidate their deposit ?

3

0

0

0












management ?1

2

Table AX.Assessment on the

liability side of Bank Z


management

165





2





Choiceof Rank

Points



2











2



1

Points ifYes

Pointsif No

0


How do you score (1-4) your financing priority policy to finance private companies projects?How do you score (1-4) your financing priority policy to have join financing?


How do you score (1-4) your financing priority policy to finance government projects? How do you score (1-4) your financing priority policy to finance retail entrepreneur’s projects?


0

1

2

1

4

1

2

1


2

1

3

1

2

2

4

1

1

1

3

3

1

2

4

1

1412 2

5 1

1

1

3

Table AXI.Assessment on the assetside of Bank Z

IMEFM3,2

166



14 5

19




1

0

2


5 1























withdraw it?





1

1

Pointsif Yes

Pointsif No



3

1


besides SWBI?


public?


problem?






cash reserve?



strategy?

2

1

3

1

1

1

How do you score (1-3) using excess reserve GWM in Bank


reserve?



reserve?














profit reserve?

1

1

1

1

1

0

1

2

3

1

4

Points ifYes

Pointsif No

0

0

0

0Table AXII.

Assessment on theliquidity management

policy of Bank Z


management

167

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Assessment of liquidity management in Islamic banking industry

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