This article is a chapter out 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 hit China in December and outbreaks have since spread worldwide. Saudi Arabia saw its first case on March 2, 2020 and on May 1 registered 1,344 new coronavirus cases, raising the total number of COVID-19 infections in the country to 24,097, according to the Ministry of Health.
Since the identification of the first case in the country, the Kingdom of Saudi Arabia is working hard to combat the spread of the virus. Initially, some parts of the eastern province were put on lockdown followed by other parts of the country. As of this writing, the country’s border has been closed with restricted movement internally. Most private sector and government employees are working from home. The government took measures to ensure uninterrupted education for schools and higher educational institutions by introducing virtual learning platforms. During the holy month of Ramadan curfew was partially lifted and most commercial establishments, including shopping malls, were re-opened with restricted access and social distancing.
The present COVID-19 pandemic has affected the financial market in Saudi Arabia, with effects seen in the banking and capital market. Saudi Arabia as the regional leader and powerhouse of Islamic finance is also facing challenges in its Islamic finance market.
Government measures to stimulate the economy
Saudi Arabia introduced various economic packages to mitigate fallouts from the COVID-19 outbreak. Stimulus packages include tax benefits, temporarily amending banking regulations and regulating the labor market to support spending and reduce unemployment.
In March, authorities announced measures exceeding 120 billion riyals ($31.93 billion) to mitigate the impact of the coronavirus outbreak on the economy. The package includes 50 billion riyals to support banks, financial institutions, and small and medium enterprises, and includes other initiatives to support the economy exceeding 70 billion riyals.
The General Authority for Zakat and Tax (GAZT) introduced a general extension of three months for filing tax returns and payments of related tax for registered taxpayers. The extensions apply for zakat, income tax, withholding tax, value added tax (VAT), and excise tax due for the period from March 18 to June 30 2020. These measures will provide relief for corporations and SMEs to carry on their regular business activities and save on working capital.
In April, the government implemented additional tax relief measures—including those to ease, for a limited time, the filing and payment obligations for taxpayers. Relief from certain penalties and the postponement of zakat, tax, and withholding tax return filings and payment for the period 18 March 2020 to 30 June 2020 (KPMG).
Further, the Saudi Monetary Agency (SAMA), the central bank, introduced numerous economic stimulus packages including revising the interest or profit rate of credit cards, restructuring financing for individuals affected by the crisis , waiving minimum deposit and digital channel fees for six months and new rules to protect financial technology (fintech) companies.
Stimulus packages to stabilize the financial industry
The total assets of Saudi Arabia’s Islamic finance industry was $541 billion in 2018, according to an ICD-Refinitiv report on Islamic finance development. This is equal to 21% of the world’s aggregate Islamic financial assets. The kingdom holds around 48% of the Gulf Cooperative Council’s (GCC) Islamic finance assets and 45% of the GCC’s total Islamic banking assets. Further, the kingdom has a lion’s share of 79% of the total GCC takaful market. In 2018, the outstanding sukuk issue was $98 billion.
The present pandemic situation has hit the kingdom’s Islamic financial market. The government is taking serious steps to minimize the impact of the COVID-19 crisis in the finance industry and to stimulate the economy post-pandemic.
The central bank has directed lenders to provide concessional loans to businesses to help companies through the crisis. Banks are urged to extend financing to businesses at least for six months. These instructions also cover relief for debt repayment. These measures minimize the unemployment level in the kingdom during an ongoing pandemic situation.
The implementation of Basel III standards will also be postponed by SAMA to help banks through the crisis. Most banks in Saudi Arabia offer trade financing products such as export and import letters of credit, letters of guarantee, import and export financing using murabahah and tawarruq contracts. The instructions from SAMA to the banks can increase loans for trade financing for businesses and eventually, benefits could trickle down to the Saudi economy.
Five other incentives and measures have been introduced by SAMA to protect the banking industry and all measures are expected to be followed by banks for six months.
- Firstly, banks should waive all digital channel charges for six months. This can assist customers and drive the use of digital banking so that customers don’t need to visit the banks physically during the lockdown.
- Secondly, the minimum balance to be maintained by the bank should be waived. These measures help customers channel more of their income or savings to spending during this difficult time and to assist SMEs to increase capital or manage working capital requirements.
- The third incentive is that no fee should be charged to break an existing loan or refinance existing facilities. The businesses hit by the present pandemic situation can benefit by refinancing their existing murabahah or tawarruq trade facilities with Islamic banks.
- The fourth incentive is to assist credit card users. Credit card interest or profit rates and other fees need to be reviewed according to SAMA guidelines. Most credit cards and personal loans are offered based on Islamic contracts such as ujrah, murabahah and tawarruq. Revising the rates of these cards would help customers settle their debts without default during the economic hardship.
- A refund of travel booking to the customer’s debit, credit or prepaid card is the fifth incentive.
Support for frontline healthcare workers
Healthcare sector employees take on the most risk during this pandemic by risking their lives and their loved ones. They are one of the most respected professionals who serve the country along with law enforcement agencies. As a token of appreciation, the Saudi Arabia Monetary Agency (SAMA) instructed banks to defer the repayment of loan instalments for three months for healthcare workers. This announcement was made in the third week of March.
In the second week of April, the central bank introduced new rules to protect the fintech industry in the kingdom. SAMA said the rules will also introduce two new financing activities: digital finance intermediation and collection of financing agencies debts.
Overall, these new measures announced by the Kingdom will reduce the risk of defaults of sukuk outstanding and support Islamic funds to minimize losses. The measures are to protect businesses and make the Saudi Stock Exchange (Tadawul) stable. Further, these measures would also protect the banking sector.
The present pandemic situation has severely hit developed and developing economies. The economic impact because of the ongoing pandemic is common across all Islamic countries. The kingdom of Saudi Arabia, as a powerhouse of Islamic finance has taken maximum measures to stabilize its finance industry. These general measures of safeguarding financial institutions and business organizations can help the kingdom to minimize the impact of the crisis on the Islamic finance industry in general. These new stimulus packages and new measures can stabilize the Islamic capital market, Islamic banking industries and takaful industries.
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.