Question

What is your observation regarding the economy during the current crisis of COVID 19? Is there any instrument of Islamic financial products that you think can help to lessen the economic burden faced by some people during this crisis? Explain.

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Answer 1

The Corona Virus Pandemic is causing huge problems for the society and economy alike. Due to the same, establishments remain shut and people are not demanding for goods and services beyond what is very essential for consumption. All major malls, schools, markets etc remain closed to avoid gatherings and this has led to a big recession across the globe.

The domestic demand for goods and services is declining sharply, leading to great losses for business owners who in turn are reducing costs of operations by firing people. Thus, on one hand, the economy is going through a phase of less demand and on the other it is unable to pay people and their total income is also falling rapidly. This has led to a situation of mass recession wherein people are finding it very hard to survive. The worst hit is those, that do marginal jobs which require low skills as they have no clue if they ever would find work for themselves and live in extreme poverty and uncertainty.

The same can be explained with the help of the following graph: -

In the above graph, we see that the demand for goods and services is declining sharply and is reducing the prices as well. This further reduces the quantity of goods and services demanded in a country and the overall output or the gross domestic product also falls. This is a classic example of deep recession in the economy.

Islamic tools to bring relief to the situation: -

It is widely true, that any recession can be corrected only by pumping money back into the economy which should also take place during the Corona Virus Pandemic. However, granting loans does not mean business success and conventional banking system involves the payment of constant interests no matter if an organization makes a profit or loss.

This is not the case with Islamic Lending Tools, which can be used to reduce the risk of operations. Murabaha as a tool can be used to grant loans to producers, which is to be repaid only if the business owner makes a profit and will be paid off in a larger time frame. The loan continues until the capital and interest is repaid but in the advent of losses, the payments may be deferred. This allows for business owners to take money from banks today, increase investment for itself in this environment and keep prices and demand stable, and repay as profits begin to pour over the next several months. It reduces the risk of operations on one hand, and on the other higher interest rates may not be paid until a firm makes suitable profits unlike conventional systems.

Please feel free to ask your doubts in the comments section.