SS 44 · Financing operations

SS 44: Obtaining and Deploying Liquidity

What this standard is about

Banks constantly balance cash: sometimes they are short and need funds quickly (obtaining liquidity), sometimes they hold idle cash that should earn a return (deploying liquidity). Conventional banks solve this with interest-based borrowing and lending, which Islam forbids.

This standard lists the compliant alternatives. A bank short of cash can obtain liquidity through salam, istisna'a, sale-and-leaseback, mudaraba or musharaka financing, investment sukuk, tawarruq, or an interest-free loan. A bank with surplus cash can deploy it through an investment agency (wakalah) arrangement. For example, it can place funds with another Islamic bank and pay an agency fee for the service rather than interest.

Why it exists

Liquidity management is daily business for every bank. Without approved Shariah-compliant tools, Islamic banks would be pushed toward interest-based markets. The standard gives them a legitimate toolkit so they can manage cash safely within Islamic rules.

The key rules, simply put

A bank short of cash may obtain liquidity through salam, istisna'a, sale-and-leaseback, mudaraba or musharaka financing, investment sukuk, tawarruq, or an interest-free loan.
A bank with surplus cash may deploy it through wakalah (investment agency): it appoints another party to invest the funds for an agreed fee. The fee is paid by the bank that owns the funds (the principal) to the agent.
A bank may also raise funds by issuing investment sukuk backed by real assets.
Interest-based borrowing or lending is never permitted as a liquidity tool.
All liquidity instruments must avoid riba (interest).

An everyday example

Bank A ends the day with $50 million in spare cash; Bank B is $50 million short. Bank A (the principal) appoints Bank B as its agent to invest the $50 million overnight in halal activities. Bank A pays Bank B an agreed agency fee. No interest changes hands.

Words to know

Liquidity — having enough cash (or assets quickly convertible to cash) to meet obligations.
Wakalah (investment agency) — appointing an agent to invest your money for an agreed fee.
Sukuk — certificates giving ownership in a real asset, earning returns from what the asset produces.
Riba (interest) — any guaranteed extra charged on a loan. Not allowed in Islamic finance.
Halal — permissible under Islamic rules.

Source

AAOIFI Shariah Standard No. 44 — full text in the 2015 Shariah Standards book (pp. 1083–1095) — https://aaoifi.com/download/24233/