The Liquidity Risk in PLS

 There are two types liquidity risk which are funding liquidity risk and market liquidity risk. The first risk arises if the Islamic bank cannot meet  expected and unexpected current and future cash-flow and collateral needs without affecting the daily banking operations or the bank’s financial conditions. This funding liquidity risk  related to unexpected withdrawalsof funds by depositors . The market liquidity risk appears if the bank is not able to easily eliminate a position at the market price due to market deficiencies such as market disruption or the inadequate market depth. In others words, these two categorized liquidity risk are  lack of access to funding and lack of liquidity in the market. In PLS financing, the liquidity risk arise if there is a late or nonpayment of profit payment during the contract or at the end of contract. In PLS liabilities, the liquidity risk emerges if the bank is not able to satisfy the liquidity behavior of its depositors for both routine liquidity demand and liquidity distress demand. Islamic bank must ensure available sufficient funds to match the demands for repayment which can avoid liquidity risk. In addition, Islamic bank should prepare a “contingency funding plan” to deal with any situation that regarding liquidity risks.


reference ;
http://ured-tn.com/useruploads/files/khoutem_ben_jedidia,_hichem_hamza_2014.pdf

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