Since most of the money market instruments are interest based, how Islamic banks manage their liquidity? Discuss briefly

 Islamic banks operate under Sharia principles, which prohibit the payment or receipt of interest (riba). Therefore, conventional interest-based money market instruments are not in line with Islamic finance principles. Islamic banks manage their liquidity in a unique way that aligns with the principles of Sharia law, which prohibits interest-based transactions (Riba). Here are some key strategies and instruments they use:

Islamic Liquidity Management Instruments (ILMI): These are used to help banks efficiently manage their excess liquidity or as a source of alternative funding. They include tradable government Sukuk, Islamic interbank placements, and Islamic liquidity facilities with central banks

 Sukuk: Sukuk, often referred to as Islamic bonds, are financial certificates that comply with Islamic religious law. Unlike traditional bonds, which are debt instruments, Sukuk represents ownership in a tangible asset, service, project, business, or joint venture

Interbank Placements: Islamic banks in most key markets use Wakala, Tawarruq, and Murabaha for Islamic interbank placements, which replicate conventional interbank placements to some extent.

Central Bank Islamic Liquidity Facilities: These facilities provide an additional source of short-term funding on a secure and lower-cost basis.

International Islamic Liquidity Management Corporation (IILM): The IILM is an international organization established by central banks and multilateral organizations to facilitate effective cross-border Islamic liquidity management.

However, the development of International Islamic Liquidity Management Corporation has been slow due to unsupportive regulations, Sharia-compliance complexities, limited standardization, the small number of Islamic banks, and the underdeveloped financial sector in many Organization of Islamic Cooperation countries.

 It's important to note that Islamic banks should have in place liquidity management policies that cover a sound process for measuring and monitoring liquidity, adequate systems for monitoring and reporting liquidity exposures on a periodic basis, and adequate funding capacity. They should also have access to liquidity through fixed assets realization and through sale and lease-back arrangements, and they should develop liquidity crisis management.