Profits and Losses Sharing Paradigm in Islamic Banks : Constraints or Solutions for Liquidity Management ?

Profits and Losses Sharing (PLS) involves specificities in the Islamic bank liquidity issue. Using hypothetic-deductive methodology, this paper tries to examine whether the participative intermediation is responsible for high exposition to liquidity shortage or leads to less exposition to liquidity risk. Seeing maturity transformation, we conclude that PLS intermediation leads to a more exposition to liquidity risk since Islamic banks often use shortterm deposits to allow financing of musharaka and mudarabah at long term. However, for the risk transformation, the PLS mechanism between the banks and its depositors on the one hand and the bank and entrepreneurs on the other hand, permits less exposition to liquidity risk. The participative intermediation seems to generate a limited liquidity function and is characterized by less money creation. This implies that it is critical to reinforce the liability management of liquidity risk. Nevertheless, the impact of PLS intermediation on liquidity risk is influenced by the degree of development of islamic money market and the existence of Islamic lender at last resort.