Research Paper in Focus

The World Economy and Islamic Economics in the Time of COVID-19

Paper Title: The World Economy and Islamic Economics in the Time of COVID-19

Author: Abdelhafid Benamraoui

Publisher: JKAU: Islamic Economics, 34(1), 67 – 78 (January 2021).

This paper presents statistics to illustrate the economic effects of COVID-19 in the global economy. Poverty and unemployment in the informal sector of developing economies is on the rise. On the other hand, developed economies have also seen economic contraction. Capital markets have seen sharp decline in the early part of 2020. However, the author notes that Islamic equity portfolios were less affected. This finding is discovered in other empirical studies as well where Islamic portfolios are found to perform relatively better in economic and market downturns.

An interesting section of the paper is where the author discusses how Islamic economics principles and institutions can contribute in tackling the economic crisis following the outbreak of COVID-19 pandemic. The author notes that there are certain distinguishing features in Islamic economics which can help in crisis management effectively:

  1. Strong encouragement for pure altruism which urges an individual to look beyond self-interest to allocate some budget on others and pro-social causes.
  2. Amidst zero bound interest rates, Qard-e-Hasan is already a well-established way of channelling funds in key economic sectors and to people who are poor or vulnerable to become poor.
  3. Profit and Loss sharing based equity financing is conducive in channelling investments without fixed debt commitments.
  4. Islamic equities and indices with cap on leverage allow the constituent securities in the portfolio to withstand economic crises.
  5. Takaful and Waqf can provide social protection and social services effectively and there is need to scale up their penetration in the economy.

The challenge is to institutionalize these promising features and foster growth in social finance and egalitarian ways of finance, such as equity financing. Despite the potential, Islamic microfinance still has minuscule share in Islamic finance industry. Equitable distribution of actual payoffs from the productive enterprise can happen in equity financing, but the scale of use of equity financing in commercial financial operations is minuscule. In South and East Asia, social finance institutions like Islamic microfinance, Zakat and Waqf have been revitalized and it is hoped that scale and institutionalization of these mechanisms will take more focus of investment in Islamic finance in future.

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