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Banks are required to maintain a minimum liquidity requirement by ensuring that the level of cash flows is matched by expected receipts so that they can meet their obligations as they fall due.  Liquidity is achieved through effective fund management.  Given the critical role of liquidity in banks’ operations, it is essential for banks to provide for both the expected as well as the unexpected fluctuations in their businesses as reflected in their balance sheets and to provide funds for growth. 

A bank suffers from illiquidity when its obligations to others mature faster than the obligations from others.  This leads to assets/liabilities mismatch as well as gaps between its receipts and payments.  When illiquidity occurs, it portends that the bank can no longer accommodate decreases in deposits or meet its obligations to its depositors.  In such situations, the affected bank would not be able to grow and would be forced to acquire additional liabilities under adverse market conditions at excessively high rates.  This would worsen the already illiquid position of the affected banks and may result in insolvency.