Asset and liability management of an interest free Islamic bank.

The last two decades or so have witnessed the emergence of a new type of financial intermediaries. That is the establishment of interest free Islamic financial institutions (IFIs). As a result the literature that deals with aspects related to these institutions has grown rapidly. Three main areas have received considerable attention from economists, bankers, jurists of Islamic Jurisprudence and other academics. These are descriptive analysis of how such a system operates, theoretical framework of such a system utilizing modern tools of economic analysis and empirical studies of evaluating certain experiments. As far as the application of quantitative tools to certain problems of these intermediaries is concerned little progress has been made. This study is an addition to the work carried out in that area by discussing the Asset and Liability Management (ALM) problem of Islamic Banks (IBs) and then developing linear optimization models that help managers to decide the structure of assets, liabilities and capital accounts of their intermediaries. In addition, this study also aims to examine thoroughly the way these institutions operate so as the managerial problems of these practices are identified and taken into account in the modelling process. Similarly, the main characteristics that distinguish these intermediaries from interest based banks are identified. The application of the developed models to the data of two practising lBs reveals that the adoption of quantitative approaches to managerial problems of these firms is quite encouraging. In the sense that these techniques have captured some policies pursued by the management of the selected institutions. Moreover, these methods help managers to identify, and concentrate clearly on, the problem to be considered. However, the main requirement which deserves particular attention in the implementation process of these models is to have comprehensive, detailed and properly recorded and prepared input data.