THE PANDEMIC AND THE ECONOMIC CONUNDRUM: HOW ISLAMIC FINANCE CAN HELP

Abstract

This paper examines the economic and financial impact of the COVID-19 pandemic and the responses that governments undertook. Though large and unprecedented in size, policy response has mostly been the same. Huge monetary stimulus, rate cuts, direct market intervention like bond purchases and debt moratoriums. Many of these were techniques used in the previous global financial of 2007–2009. Economies were already fragile and in a vulnerable state when the pandemic struck in late 2019. Continued use of the same policies did prevent a potential meltdown but has increased system vulnerability. The global debt burden is now much larger but governments may have fully expended all their monetary ammunition. Fiscal stimulus though much needed and more appropriate is seriously constrained by budget deficits and lack of fiscal space. Adding more debt to fund fiscal expansion is not really an option. Yet, the pandemic has made vulnerable, several parts of the economy that need to be salvaged. The SME sector which forms the spine of most developing economies is verging on collapse due to cash flow disruptions arising from lockdowns. The domestic banking sector which had funded these SMEs is exposed to a potential meltdown unless restructuring is done. The loan moratoriums widely adapted do not solve but merely postpone the problem. Governments, given their precarious fiscal position are in no position to provide the huge financial infusion needed to shore up the SMEs and banks. Islamic finance, which has risk-sharing alternatives can provide a way out of this conundrum. The paper proposes a shariah compliant risk sharing alternative to resolve this problem.

Keywords

• Pandemic
• restructuring SME financing
• securitization