Role of Islamic Fintech in Combating the Aftershocks of COVID-19: The Open Social Innovation of the Islamic Financial System
The most comprehensive definition came from
“Fintech is the fusion of finance with the information technology for providing the financial services in the most innovative way, at an affordable cost, at a lightning-fast speed, and with a seamless user experience”. Alternatively, Fintech can be defined as follows: “Fintech is the combination of two words finance and technology which uses modern information technology for providing the financial services with improvement in user experience and at an affordable cost”.
The huge 1.8 billion Muslim population provides an opportunity for the banks and financial institutions to find ways and offer them financial services as per the ethos and principles of the Qur’an (the holy book for Muslims) and Sunnah, the practices of the Holy Prophet Muhammad (SAW).
The purpose of the current study is to investigate the role of the Islamic financial system in recovery post-COVID-19 and the way Fintech can be utilized to combat the economic reverberations created by COVID-19. The global financial crisis of 2008 has established the credentials of the Islamic financial system as a sustainable financial system that can save the long-run interests of the average citizens around the world while adding value to the real economy. The basic ethical tenets available in the Islamic financial system make it more suited and readymade to fight the economic aftershocks of a pandemic like COVID-19. The basic principles of ethical Islamic finance have solid connections to financial stability and corporate social responsibility within the wide-reaching business context.
The emergence of financial technology (Fintech) it has provided a missing impetus to the Islamic financial system to compete on equal ground with its conventional counterpart and prove its mettle. The study uses discourse analysis along with content analysis to extract the content and draw a conclusion. The findings of the study indicate that the COVID-19 pandemic has provided the opportunity for social and open innovation to grow and the finance world has turned to open innovation to provide a speedy, timely, reliable, and sustainable solution to the world. The findings of the study provide significant implications for governments and policymakers’ inefficient application of Fintech and innovative Islamic financial services to fight the economic consequences of the COVID-19 pandemic.
The Novel Coronavirus, also known as the COVID-19, is derived from the Latin Corona which means “crown” or “wreath”. This deadly virus was first reported to a human being in Wuhan, China on 17 November 2019. This virus has already disrupted the composition of life and the economic consequences brought by the virus are really hard to measure; it will be a matter of research for future researchers, academic institutions, governments, and policymakers. In a situation of high uncertainty and uneven impacts, it remains a matter of debate how the recovery will look and how much time it will take to recover from the economic damages done by the pandemic. The role of banks and financial institutions is going to be huge in recovery during and post-Covid 19.
Financial institutions are the backbone of any financial system as it is responsible for the smooth functioning of the economy and ensuring a high level of liquidity in the economy. Financial institutions perform this task by offering credit, managing markets, and pooling risk among consumers. The recovery post-COVID is going to be huge and Islamic Financial institutions are going to play a key role, as it played during the recovery post financial crisis of 2008. Islamic finance is the only financial system in the world, the principles of which are based on ethics and morality. It is the financial system that ensures community participation, social and economic stability, promotes financial inclusion, and supports and encourages comprehensive human development. Islamic finance places great importance on improving quality of life, equal distribution of income, and social justice for everyone. Islamic finance is sustainable as it offers financial services which are asset-backed, ethical, and based on the PLS method, which means it shares risks equitably and is subject to good governance.
Islam embraces and encourages all types of innovation if it does not violate the principles of sharia. Financial technology (Fintech) is one such innovation that has disrupted the whole finance world and found acceptance in the Islamic finance world. Financial technology is defined as the use of modern innovative and disruptive technology like Blockchain, artificial intelligence, Regtech, smart contracts, crowdfunding, P2P lending, digital currency, etc. for providing financial services. The global financial crisis of 2008 is regarded as a time when Fintech peaked as a concept and found acceptance at the mass level. The financial crisis opened the door for technological advancement in financial services and Fintech is not only innovative, seamless, user-friendly, and faster but also it can provide financial services at an affordable rate. Fintech is an old term coined by Abraham Leo Battinger, Vice President of a New York bank in August 1972. Bettinger writes an article in a magazine interface, where he wrote, “In the last 4 years’ bank has developed more than 100 models which are being by the bank for its operations. A group of 40 models have been set aside and designated as the Fintech. Fintech is an acronym for financial technology, combining modern management science techniques with information technology”.
Conventional Fintech-based financial services are mainly Riba (interest) based innovation and Islam strictly the transactions with an element of Riba (transaction based on the interest), Maisir (transaction involving a high degree of speculation or gambling), or Gharar (high uncertainty, deception, and risk). Islamic Fintech is different from its conventional counterpart as it is more inclusive, transparent, ethical, beneficial to both parties, and complies with the principles of sharia. Islamic Fintech is a relatively new concept and only a few studies have been conducted in this regard including. Both Fintech and Islamic Fintech have essentially the same meaning, but the difference lies in the sharia compliance. Islamic Fintech must comply with the principles of sharia as every Fintech-based innovation is welcome and acceptable and it becomes unacceptable and impermissible if there is clear evidence that it violates the principles laid down by sharia. It must be noted that any innovation or advancement is permissible in Islam unless there is clear evidence that prohibits it.
The financial crisis of 2008 has changed the way banks and financial institutions used to do business; now the focus has shifted from short-term high earning to long-term and sustainable profit. Islamic finance is based on the principle of ethics and morality and it possesses characteristics such as:
- Its services are asset-backed which means derivative products such as, options, futures, swaps, etc. are prohibited.
- It is based on a PLS (profit and loss sharing) method of doing business. The contracts like Musharaka (joint enterprise where partners contribute capital and share profits and losses) and Mudaraba (joint enterprise where only one partner contribute capital and share losses, the other partners work and share profits only) are popular because of this feature.
- It is ethical as it affords importance to honesty, truthfulness, integrity, and respect for others. Islamic financial institutions not only have to follow the norms of the contract but also must follow Islamic law of transaction.
- Islamic finance is subject to good governance as it governed by sharia; the principles of sharia are derived from the Holy Qur’an and Sunnah of Prophet Muhammad (SAW). Islamic financial must adhere to principles of Qur’an and Sunnah to categories permissible (halal) otherwise it is declared (haram).
The above characteristics make Islamic finance more suited to be aligned with the United Nations—Sustainable Development Goals (UN-SDGs). The paper investigates the sustainability of Islamic finance and the role of Islamic Fintech in the post-COVID-19 era. The emerging and budding literature has given little importance to the sustainability dimension of Islamic finance. The findings show that Islamic finance has all the required ingredients in it and if combined with Fintech it can achieve the economic well-being of the masses and restore the previous position. Against this backdrop, this study employs the discourse and content analysis of earlier empirical studies and suggests that Islamic finance can be entrusted with a more decisive and important role in the post-COVID-19 revival. In this way, this study aims to fill the following research gaps through content analysis by answering the research questions as follows:
- What is the unique role performed by Islamic Finance and Islamic Fintech in the post-COVID-19 period?
- What are specific Islamic financial services that can be combined with the Fintech-based innovative solutions and meet the needs of the COVID-19 affected Islamic finance customers?
- Is the proposed Islamic Fintech model useful in the short run, medium run, and long-run to fight the economic aftereffects of the pandemic?
Islamic finance, in general, has not been examined and analyzed so far. It will prove to be a lighting guide to government officials and policymakers. The findings of the study will add to the already growing list of literature on the recovery stages like an open avenue for future work on the role of Islamic Fintech in the revival of the economy post-COVID-19.
Demographic Credit Quality Check
Government stimulus programs greatly eased the pandemic’s economic impact, but credit quality may fare worse in some countries than others amid an uneven recovery.
U.S. credit losses should be manageable as the economy transitions from relief efforts to growth mode. Many U.S. banks are increasingly optimistic about the economic outlook. Their earnings outlook remains subdued because of weak credit demand and excess liquidity. But as the recovery matures, banks expect loan demand to increase, perhaps in the second half of the year.
Asia-Pacific is still grappling with lockdowns and vaccine delays. Limited ability to ease fiscal response and a coronavirus resurgence could pose headwinds in countries like India. Asset-quality risks will come into focus once forbearance measures are withdrawn.
The global Islamic finance industry is expected to grow 10-12 percent during 2021-22 due to increased Sukuk issuance and a modest economic recovery in the main Islamic finance markets, says the latest report.
S&P Global Ratings said the $2.2 trillion industry continued to grow at a slower pace last year despite the Covid-19 pandemic. Global Islamic assets expanded by 10.6 percent last year against a growth of 17.3 percent in 2019 as the pandemic disrupted the rising trend due to a slowdown in the global economy.
“Islamic finance grew rapidly in 2020, albeit at a slower pace than in 2019, despite the double shock from the pandemic and the drop in the oil price,” said Mohamed Damak, head of Islamic Finance at S&P Global Ratings.
Islamic finance, which bans interest payments and pure monetary speculation, has been on the rise for many years across markets in Africa, the Middle East, and Southeast Asia, but it remains a fragmented industry with the uneven implementation of its rules.
“Although we expect a modest recovery for most core Islamic finance countries in 2021-22, we think that the sector will expand against the backdrop of continued standardization and integration,” Damak said.
The industry is expected to receive some support in the coming two years in Saudi Arabia, where mortgages and corporate lending are expected to rise as the country pushes ahead with plans to diversify the economy. Investments in Qatar for the 2022 soccer World Cup and the Expo event in Dubai later this year are also expected to support growth.
“Over the next 12 months, we could see progress on a unified global legal and regulatory framework for Islamic finance that the Dubai Islamic Economy Development Center and its partners are developing. Depending on the outcome and its adoption, we believe that such a framework could help resolve the lack of standardization and harmonization that the Islamic finance industry has faced for decades,” Damak said.
“We see pressure on real estate developers, given the drop in real estate prices in the GCC (Gulf Cooperation Council) and building risks in the commercial real estate sector. Similarly, companies related to aviation, tourism, travel, and hospitality — sectors that have been severely hit by Covid-19 — will take several quarters to recover to pre-pandemic levels,” S&P said.
“We expect an increase in the volume of issuances this year as liquidity remains abundant, corporates and sovereigns come back to the market, and new issuances exceed maturing Sukuk,” the statement said, adding that 5 to 10 percent growth in the Takaful sector is also likely.
Like Christians, Muslims also live across the world. But unlike Christians, in the countries where they have a majority, very few have democracy. That’s a checkable fact. Important to note, about 60 per cent of all Muslims are in Asia and four of their largest populations in the world live under different degrees of democracy, between India, Indonesia, Bangladesh, and Pakistan. Stretching this argument further, in countries where Muslims have a majority, secularism is generally a bad word or a Western concept. But in democratic nations where Muslims are a minority, they persistently put the republic’s secular commitment to test. France, Britain, the US, Belgium, Germany are all good examples. There is a reason I do not include India here. Because, unlike Europe to which they migrated lately, in India Muslims were equal and voluntary partners in forming this new republic.
There should be a resolved matter among Muslim populations and nations between nationalism and pan-nationalism. This arises from the concept of Ummah — that all Muslims of the world are one supra-national entity. If you believe that all Muslims are part of the same Ummah, then they must also have a Caliphate subsuming international boundaries and enforcing the common Shariat. Afghanistan, Iraq, Syria, Libya, keep counting. There are sharp national boundaries dividing Muslim populations and wealth. A bulk of the population, in Asia and Africa, lives in poor economies. Whereas the world’s wealthiest nations, the Gulf Arabs, have relatively minuscule populations. They won’t distribute their wealth equally to the rest in the spirit of pan-Islamism. everything, their political power, royal privileges, global stature depends on that one thing pan-Islamism challenges: Status quo. Nobody has an answer to this GDP-population mismatch. Let’s reconstruct the jigsaw. When Chechnya fought jihad against the Russians, many Muslim ‘fighters’ from across the world, including many veterans of Afghanistan, joined them. Because this was all they had learned to do yet, fight a jihad against the Russians. Pan-Islamism led to death, destruction, and mass destitution of Chechens. Tens of thousands escaped to liberal democracies for safety, a better life, and peace. Now they also want compliance with their own social and religious values there.
“Decide what your cartoonists mentally can draw and what future your teachers can teach. Islam will win with or without you, but you will lose everything without Islam.”