– The aim of this paper is to review monetary and systemic liquidity management policies that essentially aim at containing crisis and limiting their spread. A corollary is whether relevant public authorities and market participants have tools at their disposal to deal with a systemic crisis affecting Institution Offering Islamic Financial Services (IIFS).
– The method used in this study is an examination of existing literature. This paper considers mechanisms that may help contain a crisis and those that may foster post crisis recovery in the case of conventional and Islamic finance.
– The progress made to date to develop money markets accessible to IIFS is commendable; however, it is not sufficient. Licensing IIFS in dual financial systems entails a public authority responsibility linked to the authorities’ accountability for the conduct of monetary policy and systemic liquidity management. Licensing an IIFS entails acknowledging the responsibility of being able to manage a system that includes IIFS. This is feasible and possible, but the issue needs to be addressed directly. In a crisis monetary policy and systemic liquidity management will be at the forefront of the stabilization efforts.
– The experiences of Bahrain and Malaysia in developing a monetary policy and systemic liquidity management framework for their jurisdiction are assessed. The paper identifies also channels of potential spillover effects from conventional to Islamic finance.
