COVID-19 and Islamic Social Finance

M. Kabir Hassan,Aishath Muneeza,Adel M. Sarea

• Editorial: Routledge
• Año: 2021
• ISBN:
  9781000356298
• Edición: 1
• Categoría: Business
• Categoría: Islamic Banking & Finance

It is said that the COVID-19 pandemic has turned back the poverty clock. As such, there is a need to have social mechanisms put in place to provide relief to those who are affected in this regard. Islamic social finance consists of tools and institutions that could be used to alleviate poverty. This book explores the impact of COVID-19 on Islamic finance to better understand the effectiveness of Islamic social finance in helping those who have been affected by poverty overnight due to the halt in all major economic activities in the context of the pandemic.

Since the struggle against poverty in each country will be different, the book attempts to shed light on the experiences of different countries by presenting successful models of Islamic social finance. The book first looks at poverty and COVID-19 before delving into the role of Islamic social financial institutions and how they have risen against COVID-19. The book concludes by examining the impact of COVID-19 on Islamic microfinance.

This book is the first of its kind on the subject of COVID-19, and it intends to bridge the gap in the literature.

Part I

Poverty and COVID-19

1 Impact of COVID-19 on Islamic social finance

M. Kabir Hassan, Aishath Muneeza, and Adel M. Sarea

1.1 Introduction

COVID-19 is considered by some as a ‘black swan event’, which is a pandemic that is unpredictable, unprepared for, and totally spontaneous (Gubler, 2020). This pandemic is different from four other recent pandemics the world has witnessed within the last 25 years (Gubler, 2020) as its impact has created not only a health crisis, but has led to an economic as well as human crisis brought due to a halt in all major economic activities in the world. The impact of COVID-19 on the sudden increase of poverty is uncontainable.

By 12 March 2020, the World Health Organization (WHO) declared COVID-19 a pandemic, as, since December 2019, the disease had been spreading worldwide, putting the world population at risk. Simultaneously, the number of unemployed increased turning back the poverty clock (Kharas & Hamei, 2020). This is because as Sumner et al. (2020; p.2) state: ‘global poverty could increase for the first time since 1990 and, depending on the poverty line, such increase could represent a reversal of approximately a decade in the world’s progress in reducing poverty’. They also observe that in some regions, the poverty levels could be what they were exactly 30 years ago (Sumner et al., 2020) ruining the progress that has been achieved by the world so far in this regard. According to the International Labour Organization (ILO), the continuous decline in working hours globally due to COVID-19 means that 1.6 billion workers in the informal economy, which is nearly half of the global workforce, are at immediate risk of losing their livelihood (ILO, 2020).

It is estimated that there are 12 countries in the world where poverty levels will increase to more than 1 million people due to the pandemic and these countries are India, Nigeria, Indonesia, Bangladesh, Congo-Kinshasa, Philippines, Ethiopia, Brazil, Afghanistan, Sudan, and Zimbabwe (Kharas & Hamei, 2020). It is observed that except for Brazil, which is in the South American continent, the rest of the countries are located in the Asian and African continents. The impact of the pandemic on poverty includes the contraction of per capita household income or consumption, where it is predicted that the minimum international poverty earning of USD 1.90 per day for the low poverty level will decrease by 5%, while the medium poverty level, which is USD 3.20 per day, will decrease by 10%, and the high poverty level, which is USD 5.50 per day, will decrease by 20% posing a real challenge to eliminating poverty by 2030, which is one of the United Nation’s Sustainable Development Goals (Sumner et al., 2020).

The ILO Director-General Guy Ryder states: ‘for millions of workers, no income means no food, no security and no future. [...] As the pandemic and the jobs crisis evolve, the need to protect the most vulnerable becomes even more urgent’. As such, to protect the most vulnerable at this time of human crisis, governments of different countries have also been formulating different policies such as stimulus packages and debt relief measures to ease their situations (ILO, 2020). As an immediate measure, the only way to help those affected in this regard is to provide cash payments or basic necessities in-kind. Therefore, many countries of the world have engaged in doing so via fiscal policies. For example, it is reported that in Afghanistan, with the support of the World Bank, humanitarian agencies, and other partners, the government has developed relief packages to provide food security to the most vulnerable households by cash transfer programmes and if transferring cash is not possible, in-kind assistance is provided; on 29 April 2020, the government started a programme to provide bread to about 2.5 million low-income families in Kabul (IMF, 2020). There are also some countries like Algeria where exports of several products, including food, medical, and hygiene items are banned (IMF, 2020) to have enough of these available to the local communities during the pandemic. Countries like Argentina has even banned exports of these essentials while at the same time controlling the price of food and medical supplies (IMF, 2020).

1.2 Islamic social finance

Islamic social finance is a branch of Islamic finance that offers not-for-profit products and services. The objectives of Islamic social finance are to achieve social justice via the redistribution of wealth. Islamic social finance has also been dubbed as ‘Islamic social safety nets’, and this is also considered as the charitable sector (Mohammed & Feddad, 2020). From Maqasid al-Shariah or the objectives of Islamic law perspective, it is mandatory for people to help each other and protect one another from hardship to achieve success in this world and the hereafter. The tools and institutions of Islamic finance include zakat, which is a compulsory payment paid every year by those who are eligible for the benefit of those who are stated in Quran, 9:60; sadaqat or infaq is a non-compulsory payment given to assist the poor and needy to seek the pleasure of Allah (SW); waqf like sadaqat is also a voluntarily made contribution, but unlike sadaqat is a permanent contribution of one’s wealth whether cash or in-kind to seek the pleasure of Allah (SW) for a social purpose; takaful is a concept based on mutual assistance or Ta’awun and donation or Tabarru’ where a joint guarantee is provided by a group of people who agree to participate with each other, known as contributors, by contributing an amount of money as a donation to help each other with damages caused due to unfortunate events to any participant in the group by helping them use the donation; and microfinance is providing finance to those who are poor to finance via non-profitable means interest-free loans (qard hasan) or profitable means such as mudharabah or musharakah. This list of tools and institutions of Islamic social finance is not exhaustive as it is still developing, and today, retail sukuk could also be seen as an Islamic social finance tool. In this regard, Rehman (2020) observed that Sustainable Development Goals (SDGs)-linked sukuk could be a vital source of long-term capital for governments and companies to fight the pandemic. In this pandemic, Islamic social finance tools and institutions have been considered as a way to provide relief to populations in poverty. Furthermore, a ‘pandemic sukuk’ could also be issued to overcome the financial challenges faced by the low-income groups due to the pandemic (Aassouli, 2020). The other instruments include qard (interest-free loan) and Kafalah (guarantee) as well (Zain & Ali, 2017).

1.2.1 Zakat

The administration of zakat in different parts of the world is different as some countries have centralized systems of collection while other countries have a decentralized system. The size of the zakat fund depends on the collection method, and the procedures and mechanisms followed to make the collection effective, such as instead of physically queuing to pay it or requiring one’s physical presence to pay it via cash or cheque, there is the option to pay it online or via mobile applications using Unstructured Supplementary Service Data (USSD) code. It is estimated by the Islamic Development Bank that each year, between USD 230 and USD 560 billion zakat is given worldwide (Modéer, 2018). The potential of the zakat fund and the actual amount received differ greatly, which may be due to the inability of the zakat administration bodies to successfully convince and reach the potential zakat payers to pay the zakat due in a timely manner. For instance, the zakat administrative body of Indonesia, BAZNAS, states that the potential zakat in Indonesia is valued at around 286 trillion rupiah per year, but the actual collection was 9.5 trillion rupiah ($577.3 million) in 2019 (Winosa, 2020). The discrepancy in this regard shows that there is a ne...