An Introduction to Liquidity and Asset-liability Management
Monnie M. Biety
hen a formerly credit-only microfinance institution (MFI) starts raising voluntary savings and using those deposits to finance the loan portfolio, the liquidity and asset-liability management of the institution becomes more complex. The institution not only has to deal with the fluctuating demand and varying interest rates and terms on loans, but also with erratic deposit demands and withdrawals and changing interest rates and terms on savings. Liquidity and assetliability management in savings institutions requires a coordinated, planned approach.
Liquidity refers to the ability of an institution to meet demands for …show more content…
Liquidity Management Policy
A savings institution should have a formal liquidity policy that was developed and written by the officials with the assistance of management. The policy should be reviewed and revised as needed, no less than annually. The policy should be flexible, so that managers may react quickly to any unforeseen events. A liquidity policy should specifically state:
Who is responsible for liquidity management. What is the general methodology of liquidity management. How will liquidity be monitored or, in other words, what liquidity management tools will be used. What are the time frames to be used in cash flow analysis, the level of detail, and the intervals at which the cash flow tools used are to be updated. The level of risk that the institution is prepared to take in minimizing cash to enhance profitability. Specifically, the policy should establish minimums and maximums for total cash assets and for the amount to be kept on-site. How often decisions about liquidity should be reviewed, including: assumptions used to develop the cash flow budget, the minimum cash requirement as described in daily cash forecasting, and any of the established ratio targets. The signatory authority limits of the liquidity manager should