COVID-19 and its impacts on the Islamic financial industry in the OIC countries

This article is the opening chapter of 13 chapters of the e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" that is available as a pdf download from HERE. Read the article in the e-book for the complete set of tables, charts and references. 

The novel coronavirus COVID-19 was first reported on December 31, 2019 in Wuhan, China, a city with a population of over 11 million. The virus went on to spread to nearly every country in the world. As of May 1, 2020, the disease infected at least 3,175,207 people with fatalities of more than 224,172 globally, according to the World Health Organization (WHO). This global pandemic has already had a dramatic impact on global economic activities. This introductory chapter is an attempt to examine the impact of COVID-19 on the Islamic financial industry particularly among the Organization of Islamic Cooperation (OIC) countries.

The first incidences of COVID-19 in the OIC countries were reported by Malaysia with three cases on January 25, 2020. Consequently, the virus spread throughout the OIC countries at exponential rates. As of May 5, 2020, there were at least 408,113 recorded confirmed cases, 13,896 (3.4%) fatalities and 202,835 recovered cases in the OIC countries, with 202,835 recoveries (49.7%), according to the Statistical, Economic and Social Research Training Center for Islamic Countries (SESRIC). The highest number of fatalities among the OIC countries has been reported in Iran, followed by Turkey and Indonesia.

ECONOMIC DOWNTURN LEADING TO DEBT

The uncertainties caused by the pandemic have put the global economy in jeopardy and global recession seems inevitable for all countries including those of the OIC. In just a few weeks of COVID-19’s outbreak and spread, the fallouts and impact on the world’s economy surpassed that of the global financial crisis in 2008. Those who can work from home mostly have stable incomes, but non-permanent or daily workers are at risk of losing their earnings, particularly in the most affected industries such as property, construction, tourism, retail, and food and beverages. With countries shutting down industries and sectors, the economic impacts have amplified and spilled over to most of the global economy, the effects of which are seen in the short-term and will continue to be felt in the long-term.

Various measures have already been taken by governments in OIC countries to reduce the economic impact of the crisis caused by COVID-19. Some countries, predominantly emerging markets, are turning to debt, which was already prevalent among OIC countries pre-COVID crisis. The total external debt of the OIC countries increased by 139.5% from 2005 to 2019 and 58.5% from 2010 to 2019 (SESRIC, 2019)3 . With the onset of the crisis, in the beginning of April, Iran – the hardest hit country in the OIC – requested $5 billion from the International Monetary Fund (IMF) to fight the COVID-19 outbreak.

It was the Islamic Republic’s first request for an IMF loan since its Islamic Revolution in 1979. Iran isn’t the only OIC country asking for loans. As of April 16, 2020, Pakistan welcomed debt relief measures for an additional $1.4 billion from the IMF to cope with its increasing number of COVID-19 cases despite a lockdown. The government previously announced an $8 billion stimulus to feed the poor as well as to extend relief to businesses. Nigeria also took on similar relief measures at the end of April. The IMF approved $3.4 billion in emergency financial assistance to support Nigerian authorities’ efforts in addressing the severe economic impact of the COVID-19 and the sharp fall in oil prices. The COVID-19 outbreak has magnified existing vulnerabilities, leading to large external and fiscal financing needs.

The Islamic Development Bank (IsDB) has also made a contribution to support its member countries. So far, a total of $2.3 billion has been approved to be channelled towards preventing, mitigating and recovering from the COVID-19 pandemic. The latest contribution made by IsDB is to support innovation in minimizing the adverse impact of COVID-19 on its member countries.

IMPACTS ON AND RESPONSES FROM THE ISLAMIC BANKING INDUSTRY

Domestic consumer demands have dropped mainly due to travel and movement restrictions, curfews, quarantines, and lockdown imposed by most countries. This has disrupted global supply chains and consequently pushed many companies to lower production and shrink employment. A large number of people have already lost their jobs and global unemployment will rise. In particular, the micro, small and medium-sized enterprises (MSMEs) sector is significantly disrupted by the pandemic. MSMEs are struggling to survive, at the same time that many are obliged to pay expenses such as instalments on their financings from financial institutions. Consequently, the disruptions also spread to the financial industry.

Central banks have been quick to respond to the needs of the financial industry. Measures taken by various central banks include reducing banks’ capital buffers in order to finance rescheduling of loans/ financings and to allow a temporary deferment of financing repayments of customers affected by the economic fallouts of the COVID-19.

For example, the Saudi Arabian Monetary Authority (SAMA) announced the Private Sector Financing Support Program with a total value of 50 billion riyals ($13.29 billion) and has directed banks to provide concessional loans aimed at helping businesses maintain their employment levels. SAMA has also helped banks by postponing the implementation of outstanding BASEL III standards.10 The Central Bank of Bahrain (CBB) reduced the reserve requirements for banks from 5% to 3% while the Central Bank of UAE (CBUAE) cut the reserve requirement by 50% from 14% to 7%. Banks are allowed to give temporary deferment on monthly loan payments for a six-month period in Bahrain while in the UAE the deferral is extended until December 31, 2020.

Bank Negara Malaysia (BNM) released a robust set of measures. The central bank cut the statutory reserve requirement from 3% to 2% to inject over 30 billion ringgit of liquidity into the banking system. BNM is also allowing banks to draw down 2.5% capital conservation buffer, run the liquidity coverage ratio below 100% and utilize accumulated regulatory reserves.

Meanwhile, Indonesia’s Financial Services Authority (OJK) issued a stimulus policy that includes credit restructuring for affected borrowers and leniency for banks in determining the quality assessment of financing to affected borrowers as well as relaxation of periodic report submissions by financial institutions.

A number of Islamic financial institutions have also pledged to provide relief packages for their customers amidst the COVID-19 pandemic. In Malaysia, banks including RHB Islamic Bank, Maybank Islamic, Public Islamic Bank, and Hong Leong Islamic Bank have pledged to provide relief packages for their customers. The measures taken include flexibility to defer financing repayments as well as restructuring and rescheduling of financing payments. In Indonesia, some private Islamic banks such as Permata Islamic Bank, Bukopin Islamic Bank, Mega Islamic Bank, and Muamalat Bank enacted loan repayment delays and granted relief of rent payments.16 Turkish private lenders and Islamic banks, namely IsBank, Akbank, Ziraat Katilim and Vakif Katilim are also allowing clients to postpone loan repayments until June 30, 2020 in order to ease their financial burdens. In Saudi Arabia, Al-Ahli Bank announced that it will defer the payment of personal, real estate, and leasing financing instalments for public and private health workers for a period of three months.

MARKET REACTIONS

The spread of COVID-19 has shaken the global stock markets, and the OIC countries are no exception. Islamic indexes have dropped a few times since the beginning of the pandemic at the end of 2019. Since the beginning of 2020, the net return of the MSCI Saudi Arabia Domestic IMI Custom Min Vol declined by 18.33% as the markets struggled with the spread of COVID-19 as well as the oil price war between Saudi Arabia and Russia initiated by Saudi Arabia in early March 2020.

The Jakarta Islamic Index took a hard hit in March 2020 since the announcement of the first confirmed case of COVID-19 in the country. The stock market sharply declined by 6.44% on March 19 alone. The FTSE Bursa Malaysia Shariah fell 4.9% on March 13, 2020 then started recovering with a gain of 2.41% on April 7, 2020.

ISLAMIC NON-BANKING INDUSTRY

The non-banking sectors are not spared, including takaful. Although the insurance and takaful sector is considered to be one of the most important economic sectors in Kuwait, it is also one of the weakest because it does not enjoy any significant support from the government. Gulf Takaful Insurance claimed that the insurance sector is currently suffering from a lack of new business in light of the interruption of government and private projects as well as a decline in collections. Moreover, the suspension of business activities in Kuwait will affect the ability of companies to pay insurance premiums or cause them to defer premium payments to insurers, which will lead to a decreased liquidity for the latter and affect their cash flows. This will affect the ability of insurers to continue to pay compensation and benefits. A Supreme Committee for Insurance was established on February 1, 2020 by the Ministry of Commerce and Industry of Kuwait that aims to regulate and supervise the insurance business in the country. It will be difficult for such a new body to introduce any immediate solutions to the crisis. The United Arab Emirates appears to be more ready to address the impact of the COVID-19 outbreak on its takaful sector. On April 27, Abu Dhabi National Takaful, which is listed on the Abu Dhabi Securities Exchange, announced a 40% discount on car insurance renewal premiums for the period of April and May, to be effective on May 1, 2020 until the end of the year. The announcement comes simultaneously with another initiative launched by the company in its effort to support the physical distancing policy. The company has also had to turn to digital options and social platforms such as WhatsApp to respond to customers.

The extent and severity of the damage caused by the COVID-19 pandemic on our economies may not be clear amidst the health crisis we are currently fighting. But the initial indicators discussed in this chapter suggest that we; governments, financial institutions, policy makers, investors, individuals and down to the smallest social units of our economies, should come together to look for solutions to face the economic storm that we might be heading towards as the dust of the pandemic storm settles.

As Prophet Muhammad SAW taught us: “The believers, in their mutual kindness, mercy, and compassion, are like one body. When any limb of it aches, the whole-body aches, because of sleeplessness and fever.” (Bukhari and Muslim)

The full e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" is available as a pdf download from HERE. The e-book is published by Indonesia's Islamic Finance and Economy Committee (KNEKS) in partnership with DinarStandard and Salaam Gateway. It was launched on May 27, 2020. The 12 countries covered are: Bahrain, Bangladesh, Brunei, Indonesia, Iran, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Turkey, and UAE.