At least four Islamic finance social instruments can help core Islamic countries navigate COVID-19 after-effects, according to global rating agency S&P. The rating agency believes that Islamic instruments like ‘Qard Hassan’, ‘Social Sukuk’, ‘Waqf’, and ‘Zakat’ can help Islamic countries, their banks, and corporations cushion COVID-19 economic impact.
The S&P noted yesterday that the effects of COVID-19 have significantly slowed core Islamic finance economies due to government measures and also caused a rise in unemployment rates.
The measures designed to curb the spread of COVID-19 are having a negative economic impact and worsening the business and financial positions of core Islamic finance countries. Data shows service sectors will be hit harder than manufacturing sectors; discretionary consumer spending will be hit harder than spending on necessities; and smaller businesses will be hit harder than larger ones.
In particular, lockdowns and social distancing constraints are damaging countries’ economies and S&P thinks that certain core Islamic finance countries will be hit hard in 2020. Islamic finance provides socially responsible products, and the current environment could offer the possibility to leverage them. For instance, the Islamic financial product “Qard Hassan” consists of a loan granted for welfare purposes or to bridge short-term funding requirements where the borrower is required to repay only the principal.
As corporations and individuals grapple with the impact of COVID-19 on their revenue, “Qard Hassan” from banks could provide breathing space until the environment stabilizes. For example, the central banks of some GCC countries opened liquidity lines for financial institutions at no cost to provide subsidized lending to their corporate and SME clients.
“Social sukuk” are sukuks, where the rate of return declines if the issuer fulfills certain social objectives. ‘Sukuk Ihsan’, issued by Khazanah National Berhad in 2015-2017, are an example of such instruments. These instruments could help support the education and health care systems amid the current crisis and attract particularly ESG investors and/or Islamic investors (looking for Sharia compliant investments).
“Waqf” consists of a donation of an asset or cash for religious or charitable purposes with no intention of repayment or remuneration. Waqf in the current circumstances could help provide affordable housing solutions or access to health care and education for people that might have lost a portion of their income. Recently, a UN agency signed an agreement with an agency dedicated to promote the private sector in one of the GCC countries to look at the potential use of ‘Waqfs’ as a source of sustainable financing focusing on vulnerable communities.
“Zakat” is similar to a tax levied on wealth over a certain threshold. ‘Zakat’ can be used for social welfare purposes, for example supporting people in need or that have lost a portion of their income, without any expectations of repayment or remuneration. Based on S&P’s conversations with market participants, the rating agency believes that ‘Zakat’ could help compensate the loss of income for households because of COVID-19. In addition to these instruments, S&P said, Islamic banks are considering a more lenient approach concerning their potential headcount reduction, unless the crisis deepens further.
Several conventional banks have already announced that they will retain staff for the time being, but also use other measures, such as paid leave with or without a reduced salary or remote working arrangements.
