Islamic finance can play a key role in Post-COVID-19 economic revival

Islamic finance social instruments could help countries navigate the economic turbulence wrought by the COVID-19 pandemic in core Islamic finance countries.

ISLAMIC FINANCE INSTRUMENTS THAT COULD HELP
Four Islamic finance social instruments in particular can help core Islamic countries, banks, and corporations navigate the current situation.

Qard Hassan
This instrument 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
These are sukuk, 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 (those looking to invest for social reasons) and/or Islamic investors (looking for Sharia-compliant investments).

Waqf
This 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 the Islamic Corporation for the Development of the Private Sector to look at the potential use of Waqfs as a source of sustainable financing focusing on vulnerable Saudi communities.
The Accounting and Auditing Organization for Islamic Financial Institutions prepared an exposure draft on Waqf governance, but it has not yet been approved.

Zakat
This 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 our conversations with market participants, we believe that Zakat could help compensate the loss of income for households because of COVID-19.

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