Islamic finance to help navigate COVID-19 impact, says S&P
Islamic finance instruments could be used directly to support households by compensating them for lost income
ISLAMIC finance social instruments, in particular, Qard Hassan, Social Sukuk, Waqf, and Zakat can help core Islamic countries, banks, and corporations navigate the current COVID-19 crisis, S P Global Ratings has said in its latest report.
As regulators and policymakers around the world seek to establish a more sustainable, stakeholder-focused, and socially responsible financial system for the future, S P Global Ratings notes there are certain similarities between Islamic finance and sustainable finance.
Islamic finance abides by the goals and objectives of Sharia, and has some overlap with environmental, social, and governance (ESG) considerations and the broader aim of sustainable finance, it said.
In its report ‘Islamic Finance And ESG ShariaCompliant Instruments Can Put The S In ESG’, S P Global Ratings notes that COVID-19 has significantly slowed core Islamic finance economies because of their governments’ measures to combat the spread of the virus. It sees unemployment rates rising as some companies experience significant revenue reduction. However, Islamic finance provides socially responsible products, and the current environment could offer the possibility to leverage them.
Although this may sound obvious for environmental aspects through green Sukuk and governance aspects through the presence of additional governance layers, the social aspect has until now been less obvious.
The Islamic-finance industry has been talking about the potential to use the social instruments of Islamic finance to help address the impact of COVID-19 on corporates and banks through unremunerated or subsidised liquidity to help them cope with the short-term loss in revenue and allow them to preserve employment.
Social instruments could also be used directly to support households by compensating them for lost income, and by providing access to affordable basic services, such as education and health care. “From a credit rating perspective, in our opinion, banks’ use of social instruments would have a limited effect on their balance sheets, as long as such instruments did not significantly reduce their profitability or increase their costs materially,” the report said.
The social nature of Sukuk would have no bearing on the instrument’s creditworthiness as long as the social measures did not change the sponsor’s obligation to pay sufficient amounts for the periodic distribution and principal reimbursement.
In addition to these instruments, the report said, “We also understand that Islamic banks are considering a more lenient approach concerning their potential headcount reduction unless the crisis deepens further. Several conventional banks have already announced that they will retain staff for the time being, but also use other measures, such as paid leave with or without a reduced salary or remote working arrangements. Stakeholders in Islamic banks could perceive major layoffs negatively and such moves would probably also find some opposition from their governance structures, including Sharia boards.”