The Relationship Between Central Banks and Islamic Banks A Study of Liquidity Between Flexibility and Regulation – A Case Study of Al Baraka Bank

Abstract

This study aims to examine the nature of the relationship between the Bank of Algeria and Al Baraka Bank of Algeria. It also aims to examine the extent of its flexibility in terms of banking liquidity, by reconciling compliance with international regulatory standards and its specific characteristics. Although legislation governing the operations of these banks has been enacted, such as Article 71 of the Monetary and Banking Law No. 23-09, The Bank of Algeria has not provided any exceptions or a liquidity management infrastructure for these banks. We used a descriptive-analytical approach to examine Al Baraka Bank's liquidity management strategies, relying on financial analysis criteria. One of the most significant findings is Al Baraka Bank's capability to meet international regulatory standards, including the quantitative and qualitative requirements of Basel III. Although it has established appropriate strategies for managing liquidity risk, it still maintains substantial excess liquidity, as in the case with other Islamic banks, continues to hold significant liquidity excess due to the absence of Sharia-compliant mechanisms and instruments, such as Islamic sukuk, as well as a lack of liquidity management infrastructure, including an absence of an Islamic financial market and liquidity-supporting bodies.