COVID-19 exit strategy: Islamic finance prescription?

Walking the talk on Islamic finance has been a challenging venture. Calls to bridging the gap between theory and practice of Islamic finance are well documented. For example, in an academic article entitled ‘Islamic corporate financing: does it promote profit and loss sharing?’ published in a renowned journal Business Ethics: A European Review (2016, Volume 25, Issue 4), the authors urged policymakers to steer Islamic finance towards risk-sharing more than the controversial rent-seeking practice.

Interestingly, the economic implications of Covid-19 have amplified the calls for Islamic finance as interest rates on both sides of the Atlantic are approaching the base and driving borrowing costs to historic lows. In the United Kingdom, the Bank of England has revised downward the Bank Rate to 0.1% on 19 March 2020. In the United States, the Federal Reserve maintains the federal funds rate or range at 0-0.25% since 16 March 2020.

In Malaysia, the Overnight Policy Rate (OPR) was reduced to 2.5% on 3 March 2020. While it is still uncertain whether the rate will be reduced further, maintaining a high positive base rate provides little incentive for a zero interest rate policy. Following the old norm, borrowers are made to pay more than the borrowed (principal) amounts and largely liable to very uncertain prospect following Covid-19 economic implications. Measurable uncertainty remains counted (not fully discounted) as the credit risk premium to justify for an interest rate. For example, the bank loans approved as Prihatin Rakyat Economic Stimulus Package (PRIHATIN) for SMEs came with a rate of 3.5%, as reported by Bernama on 21 April 2020.

A Muslim-majority country with comforts of a healthy financial system, strong domestic institutional investors, adequate buffers and robust policy frameworks (as claimed) is tested with the most suitable time to forgo interest on lending and borrowing, which is prohibited from the day before we were born. A great opportunity to create a new norm is here.

"The difficulty lies not so much in developing new ideas as in escaping from old ones” (John Maynard Keynes).