Central Bank Liquidity Management Instruments in Islamic Banking Systems:A Comparative Analysis of Operational Frameworks and Country Practices

Abstract

Contemporary financial systems increasingly operate as dual banking systems in which conventional and Islamic banks coexist. Consequently, central banks have developed Shariah-compliant liquidity management instruments to facilitate monetary policy implementation, preserve financial stability, and support the effective functioning of Islamic money markets. This study comparatively analyses the principal liquidity management instruments used for liquidity absorption and provision, focusing on instruments operationally implemented by central banks rather than all theoretically permissible Islamic contracts. It examines the operational structures of wakala, commodity murabaha, qard, partnership-based contracts, sukuk, repo, and collateralized investment arrangements, and develops a qualitative framework for comparing their use across jurisdictions. The findings indicate that, despite differences in regulatory frameworks and market development, Islamic central bank liquidity management converges toward a limited number of core instruments. Sukuk-based instruments form the foundation of contemporary liquidity management frameworks, while wakala and commodity murabaha are the most widely used operational mechanisms. Evidence from Malaysia, Bahrain, the United Arab Emirates, Indonesia, Pakistan, Bangladesh, Oman, Jordan, Türkiye, and the United Kingdom demonstrates convergence toward operationally efficient Shariah-compliant instruments. The study provides a systematic comparative framework for analysing the operational implementation of Islamic central bank liquidity management instruments.