Currently there are five banks and several Islamic Saving and Credit Cooperative Societies offering islamic financial services (SACCOs). On the banking side, only Amana Bank, is a fully fledged bank established in 2011 the rest operate as Islamic Window, namely PBZ, NBC, KCB and Stanbic. On Saccos side, there is KUTAYBA SACCOS, TAMPRO SACCOS, HAJJ TRUST SACCOS and many other institutional based SACCOS. Among the banks, only three accepts deposits and provide financing namely, Amana Bank, KCB and PBZ whereas all SACCOs accept deposit and provide credit to their members.

A distinctive feature of Islamic banks and SACCOs is the obligation to conduct operations in accordance with principles of sharia, which is the religious law of Islam/Muslims. The basic sharia principle applied by Islamic financial institutions is the prohibition of usury/interest (arabic. riba). This principle has its origins in the holy book of Muslims – Koran. The hadiths, which describe the life and actions of Muhammad, the Messenger of Allah, also state that riba is condemned. According to most Islamic scholars one definition of riba is any sort of increase over the principal amount in the contract of loan. The prohibition of riba has huge implications on operations conducted by Islamic banks and Islamic SACCOs since none of them can be based on interest.

Hence one of many challenges Islamic banking industry has been facing since its inception is the creation of instruments which have to serve the same needs as conventional products but have to be constructed in a different way to comply with principles and rules of Sharia. Those instruments include money market operations, which are essential for managing the bank’s liquidity.

The purpose of this article is the investigation of the problems facing Islamic banks/window/SACCOs with regard to managing liquidity risk in Tanzania and analysis of what needs to be done by individual banks, and their regulators.


Liquidity is the ease by which an asset can be exchanged for another with little or no loss of value; usually cash. Liquid assets are those held in cash or are invested in instruments which can be converted rapidly into cash like deposits in cash with a bank as a current demand deposit, deposits in other banks and investments in short term liquid government securities. The bank tries to maximize bank’s return on total assets by investing as much of the cash available. However, the management is also challenged by the need to have enough liquidity to meet any mismatch of the term structure (maturity dates) of assets and liabilities. Liquidity risk results from the mismatch between maturities of assets and liabilities. The different maturity structure of assets (mainly medium and long-term) and liabilities (mostly short-term) generates the risk that the bank is unable to respond immediately to requests for payment or forces the bank to quickly sell a high volume of financial assets in its portfolio accepting the price much lower than the market value.

While liquidity surplus is considered a drag on competitivenes, shortage of liquidity is said to be assasin of banks. Liquidity stress is not unknown to fully fledged Islamic banks as well as Islamic banking divisions of conventional banks some forced to close e.g. Ihlas Finance in Turkey in 2001. During the recent crisis all these types have faced liquidity shortages of varying degrees and varying durations.

Due to lack of Islamic instruments for liquidity management and less developed infrastructure, fully fledged Islamic banks face more difficulties compared to conventional banks and the Islamic windows of conventional banks. Since the liquidity risk management is carried out at the bank level rather than divisional level, the risks of the division can be absorbed using conventional hedging tools without facing operation and reputation risks.Those tools include interbank deposits, foreign exchange swaps, repo operations, treasury bills and commercial papers. Interbank market where banks lend each other their liquid reserves has the most significant meaning for banks in managing their liquidity. It should also be noted that in critical situations, when because of lack of trust banks do not want to lend money to each other, they have possibility to approach a central bank for help. In this case a central bank plays a role of a lender of last resort (Iwona Sabol). This creates negative externalities for Islamic banks and for the Islamic financial system (Salman Syed Ali, 2012).


All the above-mentioned instruments are based on interest rate and that is why they are not accessible to Islamic banks. Thus the problem with the access to liquidity management instruments constitutes one of the most serious problems and largest challenges for Islamic financial institutions in Tanzania and elsewhere. Theoretically, islamic institutions should not suffer from shortage of liquidity but their problem is excessive liquidity. This is not always true because the practice much differs from the theory.In practice the nature of balance sheet of the Islamic bank is quite similar to the balance sheet of the conventional bank. Both institutions are characterised by illiquid assets and relatively liquid liabilities. Judging from the above it is not surprising that a lot of Islamic banks just like their conventional counterparts must be very careful about maintaining the proper level of liquidity. Otherwise, they risk insolvency.


In countries such as Malaysia, Sudan, Bahrain among others where Islamic financial services are taken seriously, we observe a number of common tools used for liquidity management such as:

1.Interbank money market placements through the contract of Mudharaba, Wakala and Commodity Murabaha.
2.Corporate Sukuk under different structures such Sukuk Ijarah, Sukuk Murabaha etc.
3.Government issued Sukuk through the central bank as well as commodity murabaha with the central bank.
4.Islamic Leasing Investment Fund.
5.Islamic Mutual Fund.

Furthermore, international efforts to manage liquidity risk led to the establishment of Liquidity Management Centre in Bahrain, International Islamic Liquidity Management Corporation in Malaysia,Islamic Interbank Money Market and International Islamic Financial Market in Malaysia. This international efforts should send clear signal to the regulator on the need to have proper policy and tools to enable Islamic Banks manage liquidity efficiently. Once Islamic banks have tools to manage liquidity, Islamic SACCOs who are clients of these banks shall have robust partner to manage theirs.


Before we start to witness liquidity stress from Amana Bank or else it is paramount for Islamic banks/Windows and the regulator to review their liquidity management practices and policies. Amana Bank and windows of conventional banks must find a way to engage themselves even if on non-commercial terms to assist each other but also to embark on joint financing. Externally, the central bank should examine and structure any of the above mentioned tools to cater for the liquidity management as well as to relax restriction on cross border movement of capital for the liquidity management purpose under well known internationa bodies. Failure to take action now, is like putting a head on crocodile mouth and expect smooth exit.