Islamic finance makes faster recovery from COVID-19 crisis

By Rahul Vaimal, Associate Editor
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Islamic finance
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The global economy is severely affected by the COVID-19 pandemic but for the GCC nations these difficulties were further topped by the oil price crash. The non-oil sectors like tourism and real estate are also struggling. 

The International Monetary Fund (IMF) has predicted that the coronavirus can bring a global cumulative loss of $9 trillion for 2020 and 2021.

Financial deficiency and massive economic challenges were widely predicted for the Middle East also this year, however the GCC countries showed great potential to withstand this crucial situation through economic support packages framed by each of the Council’s six members.

With the global lockdown and movement restriction imposed, the travel and transport sector also faced a huge decline which in turn affected the oil demand. As the talks between the Organization of Petroleum Exporting Countries (OPEC) members and allies break down the Brent crude price dropped from $57.94/bbl on February 21 to $19.33/bbl on April 21.

Since the oil producers weren’t happy with low oil prices, Saudi Arabia and Russia entered into a deal in April which brought some gain in the Brent crude price about $42.00/bbl as of September 17.

Shariah-compliant equity

The pandemic hit has made the global stock market witness its record fall in February and March but the Shariah-compliant equities performed better than its counterparts. The S&P Global Broad Market Index (BMI) which measured the dollar denomination of 11,000 companies from 46 countries saw a fall of 34 percent in the months after February 21 before picking up to the level of this year beginning on September 16. 

In contrast to this situation, the S&P Global BMI Shariah that covers the Shariah-Compliant of small to large capital shares over 48 countries dropped 30 percent before retrieving to 12.5 percent by September 16. The sole reason for this recovery is that Islamic equity indexes are massively in the healthcare and information technology stocks which showed immense growth during the crisis.

Investment in metal

The Islamic investors are heavily dependent on trade of metals like copper and aluminum as the Shariah law states that the return must come from real economic activity. Even though the pandemic has slashed the commodity prices initially it rose strongly, especially copper. 

Gold also followed the same path by dropping 7 percent between the beginning of February and March 19 and by September 16 it surged into 24.3 percent. Similarly, silver witnessed a fall of 33 percent between February 1 and March 18 and then by September 16 recovered to 54 percent.

Investors have switched away from the riskier markets to safe ones and are expressing interest over emerging economies, especially those which rely on exports, commodities and tourism. Meanwhile, the Islamic finance can play a key role in the economic recovery and support the small and medium enterprises which are at risk of financial collapse.