In managing liquidity, conventional banks resort to investing in treasury bills, overdrafts, placements with the central bank or with other conventional banks in order to gain interest, even if the placement is only overnight. However, it is not possible for Islamic banks to use the same instruments because of the numerous Sharīʿah violations in them. Furthermore, Islamic banks have alternative financial products that are derived from Islamic jurisprudence. They can use various contracts such as qarḍ ḥasan (benevolent loan), muḍārabah (profit sharing between a capital provider and an entrepreneur who contributes only his labor and expertise), murābaḥah (mark-up sale), or other Sharīʿah-compliant contracts. In their capacity as financial intermediaries, Islamic banks need instruments that will allow them to utilize their surplus liquidity in a temporary form and for short periods or to receive help from other financial institutions using their available liquidity to cover their own short-term liquidity needs. Thus, they are in need of contracts that will help them to manage liquidity in surplus as well as deficit situations.
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