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Islamic Finance: An instrument to heal the economic scars of Covid-19?

The novel COVID-19 virus has caused an economic shock three times worse than the 2008 financial crisis. It has been a crisis like no other shutting shops and schools, closing borders and putting half of humanity under some form of lockdown during the spring of 2020. The extent of the damage will depend on how quickly the virus is contained, the steps authorities take to contain it, and how much economic support governments are willing and able to deploy. The COVID-19 outbreak has generated both demand and supply shocks reverberating across the global economy. However, pandemic will have more severe and deeper impact on financial markets as the crisis is affecting MSMEs and SMEs and if we talk about conventional banking, Islamic finance has a larger exposure to these MSMEs and SMEs in the form of micro finance especially in Asia and there is no doubt in the fact that instead of all Governmental efforts to contain the economic outcomes of the virus these businesses are still under severe strain. Along with its economic implications, it enforce the Islamic finance industry to adapt the new emerging trends in the evolving market via digitalization, where these institutions are struggling even before COVID to reduce their operational cost through automation of internal processes that translates into higher revenues.

In this current time of hardship Islamic finance is recognized as one of the tool to withstand the catastrophic fallout of pandemic which is unseen in recent history. The United Nations Development Program (UNDP) highlight and recommend three actual Islamic financial tools to cater the financial hardship amid COVID-19. Zakat can be an important component of emergency support program, which may be easily adopted at national level as it caters both the poor and the economically insecure community while Individual philanthropy is a broad tool that can be used to support healthcare, food and other immediate needs. Corporate philanthropy may also be used as a way for businesses to contribute not only money but also goods and expertise. Indonesia’s national Zakat collection agency is an example of how Zakat stakeholders can systematically link their projects with the Sustainable Development Goals, including in response to crises.

Equipment financing such as vehicles and other sources of livelihood along with the trade finance are also the tools by which Islamic banks and financial institutions can support recovery. Aligning their financing activities with the SDGs is a significant opportunity for Islamic banks. In 2018, the Al Baraka Banking Group launched a collaboration with UNDP that seeks to align over US$600 million of its financing portfolio with the SDGs in the Middle East, Asia, Africa, and Europe. The coronavirus pandemic makes such initiatives all the more urgent where we need to focus on impact investing that translates into some social impact necessary for the recovery but obviously short term policies will not guarantee sustained growth so, there is a strong need to adopt long-term recovery options as well so, aligning Sukuk bond is also an important tool of Islamic mode of financing that will generate long-term capital for governments and companies engaged in the COVID response and recovery as the pandemic has made long-term funding for development more crucial. Waqf endowments can, in many contexts, be important contributors to long-term resilience. Financial or non-financial assets such as land or buildings are permanently dedicated to social purposes. This can be an important way for stakeholders to contribute to social infrastructure and help countries to ‘recover better’ over the long term but the awareness regarding potential of Islamic finance require growth and sustainability in the upcoming post pandemic world which is only be possible through smart policies of digitalization accompanied with the adoption of financial technologies, which will accelerate the pace of socially transformed role of this sector along with the standardization of Sukuk bonds as greater standardization will enable Islamic banks to move into new areas by exploring new sectors such as health and Shariah-compliant tourism, which require hard work to develop Islamic banking products suitable for these sectors.

There is no doubt that the pandemic has put in motion new opportunities for Islamic financial markets, such as the provision of Shariah-compliant trade finance products, as well as trade development programs that focus social impact, sustainability, innovation and digitalization and to me this is a right time to try new ways that effectively treat the scars of COVID-19.

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