Durmuş Yilmaz: Managing liquidity in the Islamic financial services industry Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the conference on “Managing liquidity in the Islamic financial services industry”, organised by the Islamic Financial Services Board (IFSB), Istanbul, 6 April 2011. *  *  *  Distinguished Participants, Esteemed Guests and Valued Members of the Press, Welcome to the Conference on Managing Liquidity in the Islamic Financial Services Industry organized by Islamic Financial Services Board (IFSB). As the Central Bank of Turkey, we are very pleased to host this special event. I would like to extend my appreciation to the IFSB for organizing this timely conference in this beautiful city. I believe that this conference will be a productive platform for fruitful discussions on Islamic liquidity management practices. In this opening speech, I will share my thoughts regarding managing liquidity in Islamic finance and the challenges ahead. Distinguished Participants, As you all know, unconventional polices and extraordinary measures have been put in place by central banks and fiscal authorities during and after the financial crisis. As liquidity concerns played a major role in the deepening of the crisis, intense discussions on a new structure in global liquidity management have dominated the global arena. In this context, liquidity management issues in the Islamic Financial Services deserve a special attention. Successful implementation of a solid liquidity management system can be the key for sustaining the rapid growth of the industry.

The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of usury. Simply put, interest is prohibited, but profit sharing is not. The distinctive elements of Islamic finance could be listed as:   Its ethical element (the prohibition of usury and exploitation of the borrower),    The preference for trading in real assets (rather than synthetic products),    Partnership between the investor and investee,    and its governance structure (requiring a Shariah council). Although their interest-free business model makes participation banks more stable compared to conventional banks by protecting them from interest rate risk, it actually makes their liquidity risk management more difficult. Liquidity risk is directly related to the ability of a bank to maintain sufficient funds to meet its commitments, which may, in turn, be related to its ability to attract deposits or sell its assets. As institutions engaged in many kinds of banking activities, Islamic banks also have to meet their liquidity needs and obligations to ensure the smooth running of their business. However, the very nature of these banks with their objective of avoiding interest in any form makes it difficult and costly for them to meet their liquidity needs due to conventional mechanisms of liquidity management. As a new and improving banking model, Islamic banking has some shortages in comparison with their conventional counterparts. In the conventional banking system with a welldeveloped interbank money market, a variety of instruments are available for the banks.