How covid effect on Islamic financial institutions?
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The recent outbreak of COVID-19 shocked the world and kept a challenge in-front of the researchers to find an immediate solution. Solutions like social distancing policies are flattening the medical curve but steepening the recession curve and that is leading the financial system into a crisis (Baldwin & Mauro, 2020). Economic shutdown has created issues like demand and supply shocks that reverberate through the global economy. Manufacturing industries are cutting down production, employees are losing jobs and facing cash flow constraints. Governments are struggling to safeguard employment and livelihoods of the people to reduce the adverse impacts. All these effects turn it into a “Pandemic Crisis” (Guerrieri et. al., 2020). To fight the pandemic, many Governments have announced stimulus packages to channel the funds to people, so they have money to spend even if they aren’t working. However, the easiness of interest-based loans may create a debt trap for households and business firms in the long run, which will have a negative impact on the economic system (Cogan & Taylor, 2010; Freedman et al., 2010).
Islamic finance is an interest free system which is claimed to be responsible, ethical, sustainable and shock-preserving. As it is evident from Global Financial Crisis (GFC), Islamic finance has proven to be resilient because of the nature of its products and instruments which offers a balanced solution to channel the funds to end-users but not to increase the level of debt (Ahmed, 2010; Kayed & Hassan, 2011) Islamic Financial system has a wide range of products and instruments that can positively impact every group from bottom 20 (B20) end user to policy makers. While Islamic social finance solutions (i.e. waqf, zakat, Islamic microfinance) can help to ensure the ground level productivity, instruments like sovereign Sukuk can raise funds for governments (Hassan & Lewis, 2007; Mobin & Ahmad, 2016). When the innovation is costly, the rise of big data and artificial intelligence can help Islamic finance to reduce the mismatch and cost of transparency, tracing and tracking problems. Availability of a large volume of structured and unstructured data also allows the researchers to empirically test the conceptual Islamic financial solutions (Mohamed & Ali, 2018). However, since the GFC, there have been changes in the pattern of Islamic financial market as many innovations happened.
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