29 Profits and Losses Sharing paradigm in Islamic banks: Constraints or solutions for liquidity management? Khoutem Ben Jedidia 1 Hichem Hamza 2 Abstract Profits and Losses Sharing (PLS) involves specificities in the Islamic bank liquidity issue. Using hypothetic-deductive methodology, this paper tries to examine whether the participative intermediation is responsible for high exposition to liquidity shortage or leads to less exposition to liquidity risk. Seeing maturity transformation, we conclude that PLS intermediation leads to a more exposition to liquidity risk since Islamic banks often use short- term deposits to allow financing of musharaka and mudarabah at long term. However, for the risk transformation, the PLS mechanism between the banks and its depositors on the one hand and the bank and entrepreneurs on the other hand, permits less exposition to liquidity risk. The participative intermediation seems to generate a limited liquidity function and is characterized by less money creation. This implies that it is critical to reinforce the liability management of liquidity risk. Nevertheless, the impact of PLS intermediation on liquidity risk is influenced by the degree of development of islamic money market and the existence of Islamic lender at last resort. Keywords: PLS-Liquidity risk-Maturity-Islamic Bank- Risk liquidity Management JEL Classification: G21, G32, P4. 1. Introduction No one can claim any profit without incurring risk in the Islamic finance. This rule is called al-ghounm bi al-ghourm and the paradigm of Profits and Losses Sharing (PLS) 1 Corresponding author, Higher Institute of Accountancy and Business Administration (ISCAE), Manouba Campus, 2010, Tunisia, Research Unity of Development Economics, Faculty of Economics and Management of Sfax (Tunisia), Tel : 00216 98945309, Email: khoutembj@yahoo.fr 2 Higher School of Business (ESCT), Manouba Campus, 2010, Tunisia, Tel : 00216 98206244, Email : hichemhamza@yahoo.fr