What You Need to Know About Islamic Finance and Covid-19

The principles of Islamic finance offer a strong safety net against exogenously induced downturns such as the Covid-19 crisis. Though the Islamic Finance industry is not immune to this kind of crisis, the Islamic way is better to absorb the losses and recover quickly. For example, Islamic equities performed much better compared to conventional equities in the crisis. The Covid-19 crisis hit the real economy of every country with severe economic losses. This pandemic is estimated to leave 2021 global GDP approximately five percentage points lower than in the pre-pandemic situation in 2020. The global economy is forecast to decrease by 5% per cent in 2020. The economic outcome caused by the pandemic is even worse than during the 2008–2009 Global Financial Crisis (GFC).

Islamic Banking Sector in the period of Covid-19

The Covid-19 crisis challenged the Islamic banking sector, the biggest component of the Islamic finance sector. To respond to the crisis accordingly, central banks have implemented several methods for liquidity support to the banking sector. These measures are:

  1. lowering reserve requirements,
  2. lowering of the regulatory capital buffer
  3. bond/ Sukūk buying programs,
  4. availability of central bank credit lines (reverse repo).

The first two ways are advantageous for both the Islamic and traditional banks, while the last two measures may not be functional enough due to non-availability or legal delays.

Islamic Capital Market in the period of Covid-19

The Islamic capital market is another vital component of the Islamic finance sector, where Sukūk is a crucial contributor. In 2020, the Sukuk market has proved durable to the effect of COVID-19. In the first nine months of 2020, Sukuk issuance reached $130.5bn, compared with $127.3bn in 2019.

All traditional Islamic tools such as zakāt, Sadaqah, waqf, takāful, and others may have a valuable role in the emergency support and recovery phase in this pandemic period.

For instance, Zakat can be a very beneficial instrument of national and NGO emergency support programs. Generally, you can distribute Zakat within one year of being given. This kind of immediate feature of Zakat suits well for crisis response. Zakat distributors can help countries or industries which are economically insecure during the pandemic. Zakat donors usually send cash, which is very favorable in the case of emergencies.

Following the start of Covid-19, IsDB (Islamic Development Bank) Group showed an immediate response to support member countries. The IsDB Group has spent around $ 2.3 billion funding package to support its Member Countries to fight against the COVID-19 crisis and improve their economic situation.

IDP, UNDP, and other organizations are ready to help, supporting its member countries using Islamic finance instruments to respond to the pandemic properly

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