6th November 2020


Islamic Finance in Tackling COVID-19 Pandemic

The COVID-19 pandemic and economic lockdowns have severely affected the global economy. Countries put in place lockdown measures to curb the spread of coronavirus, but they negatively impacted the economy and worsened businesses and their financial positions. Unemployment rates increased with consequent significant income loss for households as companies took measures to lower their costs.

Particularly, the SMEs are more vulnerable and already on the verge of collapse.

They account for 90% of all enterprises globally and generate more than 50% of employment. Their downturn means widespread loss of output and hiked unemployment.

There's an urgent need to explore all possible options to mitigate the coronavirus outbreak's impact and revive economies beyond the pandemic under such dire circumstances.

Stimulus programmes

According to analysts at S&P Global Ratings; social instruments can directly support households by compensating them for lost income and provide access to affordable services such as healthcare and education.

Additionally, most governments have introduced various policies and massive stimulus programmes to cushion households and businesses from COVID-19 impacts.

The UN Secretary-General called for solidarity outlining three components; health emergency, social impact in response and recovery, and helping countries recover more sustainably for the long-term.

COVID-19 UNDP's Integrated Response also supports and guides countries to prepare, respond, and recover. Its immediate priorities include health systems support, integrated crisis management and response, social and economic impact needs assessment, and response.

Islamic finance in supporting economic recovery

Islamic finance can help countries to navigate economic turbulence caused by the COVID-19 pandemic.

They abide by the objectives and goals of Sharia (Maqasid). Even though interpretations of the Maqasid differ, they broadly revolve around the protection of life, faith, mind, wealth, and dignity.

Islamic finance also overlaps with Environmental, Social, and Governance (ESG) principles and the broader aim of sustainable finance.

That said, the Islamic finance industry has been considering the potential to use their social instruments to address the impact of COVID-19 on banks and corporates.

Such considerations include unremunerated or subsidised liquidity to help banks and corporates cope with short-term revenue loss and allow them to preserve employment.

Islamic banks consider a more lenient approach concerning their potential headcount reduction unless the crisis deepens further.

Several conventional banks retained staff and used other measures, such as paid leave with or without a reduced salary, or remote working arrangements.

Stakeholders in Islamic banks could perceive major layoffs negatively, and such moves would probably also find opposition from their governance structures, including Sharia boards.

Also, its orientation towards supporting SMEs will have a crucial role in tackling the effects of COVID-19.

How Islamic finance can contribute to the COVID-19 response

Islamic finance can help tackle COVID-19 in a range of financing instruments well-suited for each stage.

1. Short-Term Emergency Support

a) Zakat

Zakat is a term in Islamic finance that refers to a mandatory obligation for every Muslim to donate a certain portion of wealth every year to charitable causes.

While it’s a form of worship, it’s also vital in the national and NGO emergency support programs.

Zakat donors require it to be disbursed within one year of their donation to support the poor and those economically insecure - an area of increased need during the pandemic.

Zakat supports people in need or has lost a portion of their income without expecting repayment or remuneration.

The focus on immediate benefit makes Zakat suitable for crisis response and helps compensate households' income loss because of COVID-19.

b) Individual and corporate philanthropy

Charitable donations are a comprehensive tool that can support healthcare, food, and other immediate needs.

Businesses can contribute money, goods, and expertise through corporate philanthropy.

c) UNDP Partnerships

The United Nations Development Programme (UNDP) partnered with Badan Amil Zakat Nasional (BAZNAS) to help Zakat stakeholders systematically link their projects with Sustainable Development Goals (SDG), including response to a crisis. BAZNAS is a Zakat collection agency established in 2017 in Indonesia.

In 2019, UNDP launched a partnership with the World Zakat Forum to lay the groundwork for members to work with UNDP and SDG alignment globally.

Recently, UNDP also partnered with the Dubai Islamic Economic Development Center to reflect on how UNDP can support the private-sector companies' social impact.

UNDP has tools and frameworks by which firms can align their business activities and corporate giving with specific SDGs.

d) Qard Hassan

Qard Hassan is a form of interest-free loan. It’s granted for welfare purposes or to bridge short-term funding requirements.

As individuals and corporations grapple with the impact of COVID-19 on their revenue, Qard Hassan from banks could provide breathing space until they stabilise. For example, central banks of some of The Gulf Cooperation Council (GCC) countries opened liquidity lines for financial institutions at no cost. They provide subsidized lending to their corporate and SME clients.

2. Medium-Term Response

Aligning SDGs and Islamic financial activities is a significant opportunity for Islamic banks.

a) Equipment, vehicles, and trade finance

Islamic finance can support recovery through financing equipment, vehicles, and trade finance.

For example, in 2018, the AI Baraka Banking Group collaborated with the UNDP to align over $600 million of its financing portfolio with SDGs in Africa, Asia, Middle East, and Europe. The COVID-19 pandemic makes such initiatives more urgent.

b) Impact investing

Private investment prioritising social impact businesses can play a central role in post-COVID-19 recovery.

In 2015, the UNDP's Global Islamic Finance and Impact Investing Platform partnered with the Islamic Development Bank Group to bring global impact investing expertise to Islamic finance.

c) Social Sukuk

Social Sukuk is a financial instrument where the return rate declines if the issuer fulfils particular social objectives. For example, in 2015-2017, Khazanah Nasional Berhad issued the Sukuk Ihsan and successfully raised RM100 million ($24 million).

Proceeds from the fund built at least 20 schools and improved accessibility of quality education in Malaysian Government schools through a public-private partnership with the Ministry of Education.

As of June 2017, the programme had rolled out over 83 schools across 10 states, creating better outcomes for over 65,000 young Malaysians.

Such instruments can support the healthcare and education system during the current crisis. They could also attract social impact investors or Islamic investors looking for Sharia-compliant investments.

3. Long-term recovery and resiliencea) Bond equivalents or SDG aligned Sukuk

Bond equivalents or SDG aligned Sukuk can also provide long-term capital for governments and companies engaged in the COVID-19 response and recovery.

For example, in 2018, UNDP supported the government's Green Sukuk in Indonesia, including a $1.25 billion issuance. This is a prime example of how issuers can partner with UNDP to identify, track, and report on their SDG impact.

Through its Green Sukuk Initiative, UNDP has held workshops and other outreach programmes with partners in Pakistan, Malaysia, and beyond.

The pandemic has made long-term funding for development more critical, and UNDP is ready to help.

b) Waqf endowments

Waqf consists of donations of an asset or cash for religious or charitable purposes with no repayment intention.

In current circumstances, Waqf can provide affordable housing solutions, access to education, and healthcare for people that might have lost their income due to COVID-19.

Waqf endowments can contribute to long-term resilience. Financial and non-financial assets such as buildings and land are permanently dedicated to social purposes.

It allows stakeholders to contribute to the social infrastructure that serves the SDGs and helps countries recover better in the long-term.

Recently, the UNDP partnered with Islamic Corporation for the Development of the private sector to look at how Waqf can potentially provide sustainable financing towards the vulnerable Saudi communities.

Time to act

It's time to tackle the social and economic devastation of COVID-19 and invest in sustainable development. Adopting some elements of Islamic finance could remedy some of the economic impact of the coronavirus pandemic. UNDP is ready to help countries and communities unlock such vital partnerships and instruments to respond to the pandemic.