Toolkit: An Introduction to Liquidity and Asset-liability Management

This paper discusses the liquidity and asset-liability management of savings institutions.

When an MFI starts raising voluntary savings and using those deposits to finance its loan portfolio, its liquidity and asset-liability management becomes more complex. The institution has to deal with the fluctuating demand for deposits, loans and withdrawals as well as varying interest rates and terms on loans and savings. Liquidity and asset-liability management in savings institutions requires a coordinated, planned approach.

Liquidity management ensures that the institution has enough cash and liquid assets to satisfy client demand for loans and savings withdrawals and pay the institution’s expenses. In order to manage liquidity, an institution must have a management information system that can generate information to make realistic growth and liquidity projections. Asset-liability management (ALM) is the process of planning, organizing and controlling asset and liability volumes, maturities, rates and yields in order to minimize interest rate risk and maintain acceptable profitability levels. It allows managers to be proactive and anticipate change, rather than reactive to unanticipated change.