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The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19

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This research aimed at examining the Islamic banking and finance responses to the emerging financial needs of MSMEs in country cases studies (Indonesia, Jordan, Kuwait, Senegal and Russia). Considering that emergence of the Islamic economics movement focused on constituting Islamic development process (Chapra, 1993, 2000; Ahmad, 1979, 1994; Naqvi, 1981, 1994, among others), MSMEs financing should be an essential part of Islamic banking and finance, which is the main institutional emergence of Islamic economics discourse. Within the normative base of Islamic economics, developing real economy embedded and profit and loss sharing (PLS) and risk-sharing financing proposition is articulated as an existential operational principle for Islamic finance and banking. MSMEs are such a sphere that directly correspond to the real economy, PLS and risk-sharing tenets, and therefore, it is expected that Islamic banks and financial institutions develop structures to meet the financing demands of MSMEs whereby they could contribute to economic development. Thus, Islamic logic is expected to prevail over market logic on transforming the societies and demonstrate that Islamic finance is not only a transaction-based proportion. While there are credible criticisms raised against Islamic banks and financial institutions for giving up such morally constructed propositions and operations and surrendering to the market logics, this research has taken the task to test the performance of Islamic banking concerning their inclusiveness of MSMEs. Such a query is crucial, as the world has been going through a very challenging period of health and well-being crisis. The emergence of COVID-19 as a pandemic has affected every corner of the globe resulting in human tragedies with millions of people died due to the pandemic. On the other hand, the sustainability of everyday life has become under threat due to lockdown. The VUCA World that marks the nature of the post-modern world has become vivid and so obvious. Volatility, Uncertainty, Complexity and Ambiguity (VUCA) has been closely witnessed from one day to another in the lives of everyone on earth through the COVID-19 process. MSMEs are considered the backbone of the economy by contributing to economic wealth, job creation and innovation in every economy in the world. However, being embedded in the real economy and everyday lives of people, they were victims to COVID-19, as lockdown of societies and economies meant they could not operate their businesses. Hence, they lived through the realities of VUCA every day. Each country and society developed policies within the realities of their socio-economic and political realities. Financially and economically robust nations were more proactive to respond to the needs of the society and businesses, including MSMEs, while financially less-off countries faced difficulties, yet MSMEs needed to survive to make the economy running even under the lockdown conditions. The financial sector, being an important stakeholder, is expected to be part of the efforts to ease the economic and financial tension in a way to test whether it is a ‘good finance for a good society’ (Shiller, 2013; Akgiray, 2019). However, unless the government directives provided specific incentives, financial institutions did not show the humanistic finance side expected to be a core value in the sustainable development era as they needed to maximise shareholder interest. During all these developments and examining the impact and consequences of COVID-19, Islamic finance principles, shaped by the iqtisad’s (As Sadr, 2009) normative world of adalah (justice) and ihsan (beneficence and equilibrium) leading to sharing and participatory economy, has given some hope that Islamic finance will be able to demonstrate a different narrative compared to conventional finance implying that a human well-being and social welfare oriented face of Islamic finance could emerge to illustrate the distinction of Islamic finance. Therefore, the expectation was that Islamic banks and financial institutions could move away, at least for a short period, in mitigation COVID-19 related risks and moderate its economic and financial consequences, such as providing a positive opportunity sphere for MSMEs who were suffering under the COVID-19 conditions. Against such hopes to return to the fundamentals of Islamic morality, as discussed below, market logics have been more prevalent than Islamic logic. While in some instances, Islamic finance was more vocal than others, the general trajectory has been ‘doing finance’ as usual with Shari’ah compliant manner regardless of the circumstances. In the analysis presented below, various practices can be observed as Islamic banking and finance responses to the needs of the MSMEs. However, it is difficult to draw a line between Islamic and conventional banking and finance regarding their differences. In other words, the normative and theoretical distinctiveness of Islamic banks and financial institutions disappears in operation under the market logics, while the degree of difference between one country and the other has to be acknowledged due to the development of the Islamic finance ecosystem. As the analysis in the following sections demonstrates, in countries with a better Islamic finance ecosystem and architecture, Islamic banks and financial institutions have been found to be better responding to the crisis. As a developed ecosystem provides the Islamic finance institutions with a more significant opportunity sphere to develop necessary toolkits, instruments and strategies to respond to the circumstances. Despite being under market logics, implementing normative implications of Islamic logics concerning Islamic finance is significantly more possible. The findings suggest that public policy developed by the political process for the financial world has been deterministic on the strategies designed by Islamic and conventional banks in the case studies but also the world. This suggests that Islamic banks and financial institutions, in particular, should be more flexible to go beyond the shareholder maximisation paradigm and, at least during the crisis period to make use of the essentialised principles of Islamic finance such as PLS and risk-sharing and qard al-hassan. Such an expectation is also very obvious from the findings developed through the questionnaire survey as the majority of the respondents opted for equity financing and qard al-hassan to respond to the initial difficulties created by COVID-19 conditions. It is also important to highlight that in responding to COVID-19 conditions, in some jurisdictions, traditional Islamic social welfare institutions (or as it is called Islamic Social Finance) such as zakat funds and awqaf, have been recourse to moderate the consequences of COVID-19 on the MSMEs, if not on the operational side but at least providing means of survival for the owners and workers. This shows that authentic Islamic institutions are more capable of responding to the crisis than the Islamised institutions of the market system could. However, as discussed in the following sections, there exist important examples of how Islamic banks mobilised their zakat funds and waqf based charities to provide qard al-hassan financing or pay off the debts of some customers, including the MSMEs within the frame of CSR. The analysis presented in this report, hence, has been developed through interviews and questionnaire-based survey as well as an extensive search of published material by public administrations, Islamic banks and financial institutions, zakat funds and awqaf, NGOs and professional and academic research centres. We are all grateful to all the participants in the research process leading to the completion as a report. It is hoped that the analysis and findings can shed some light upon the performance of Islamic banks and financial institutions under the VUCA conditions such as COVID-19. It will help to recognise the good practices in the Islamic finance industry and also identify the ways we can develop further develop Islamic banking and finance to demonstrate Islamic logics or substantive morality of Islam in economic and financing life that is adalah and ihsan as part of tawhid so that ihsani society or the good society can be achieved as ‘rahmat al alameen’ (beneficence for humanity).
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The Role of Islamic Finance in Supporting
Microenterprises and SMEs Against COVID-19
COMCEC COORDINATION OFFICE
October 2021
Standing Committee for Economic and Commercial
Cooperation of the Organization of Islamic
Cooperation (COMCEC)
The Role of Islamic Finance in Supporting
Microenterprises and SMEs Against COVID-19
COMCEC COORDINATION OFFICE
October 2021
Standing Committee for Economic and Commercial
Cooperation of the Organization of Islamic
Cooperation (COMCEC)
III
COMCEC COORDINATION OFFICE / October 2021
This report has been commissioned by the Standing Committee for Economic and Commercial
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            
 












COMCEC COORDINATION OFFICE / October 2021
Contents
LIST OF TABLES ...............................................................................................................................VII
LIST OF FIGURES .............................................................................................................................. IX
ABBREVIATIONS ............................................................................................................................... XI
EXECUTIVE SUMMARY ................................................................................................................... 13
1. INTRODUCTION ....................................................................................................................... 17
............................................................................
1.2. Research Methodology ....................................................................................................................
......................................................................................................................22
2. COVID-19 PANDEMIC CONDITIONS AND ITS IMPACT ON MSMEs FINANCING AND
PERFORMANCE: GLOBAL PERSPECTIVE .......................................................................... 23
 ...................................................................................................
 ...................................
 .....................................................................................
 .................................................................................
  ................................
3. COVID-19 PANDEMIC AND ISLAMIC FINANCE ................................................................ 33
 
 ..................................................................................................................
  .
  ........................
 
Responses ...........................................................................................................................................
4. FINDINGS ON THE ROLE OF ISLAMIC FINANCE INDUSTRY IN MODERATING THE
ADVERSE IMPACT OF COVID-19 ON MSMEs ................................................................... 44
  ...........................................................................................................................
  .............................................................................................
  .............................................
  ....................................................................
  .............................................................................................................................
  ............................................................................................................
  .........................................................
 
 .................................................
 
Offerings .................................................................................................................................
  ..........
  ..................................................................................
  ............................................................
  ....................................................................................................................
  .........................................................
 
 .................................................
 
Offerings .................................................................................................................................
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
  ..........
 
Recommendations .......................................................................................................... 102
 .................................................................................................................
  ......................................................
 
 .............................................. 
 
Offerings .............................................................................................................................. 112
  .......
 ..............................................................................
  .........................................................120
  ..............................................................................................................122
  ......................................................122
 
 .............................................. 
 
Offerings .............................................................................................................................. 
  .......
  ...............................................................................
  .........................................................
  ................................................................................................................... 
  ......................................................
 
 .............................................. 
 
Offerings .............................................................................................................................. 
  .......
  ...............................................................................
  .........................................................
5. CONCLUSION AND POLICY RECOMMENDATIONS ........................................................152
REFERENCES ................................................................................................................................... 161
APPENDICES FOR THE INDONESIAN CASE STUDY .............................................................167
 ..................................................................................
 ....... 
 ....... 

COMCEC COORDINATION OFFICE / October 2021
LIST OF TABLES
 Case Countries 20
  
  
  
  
 Demographic Information about the Respondents 
  
 
 
 Characteristics of MSMEs in Indonesia 
  
  
  
  
 Measures Taken in Each Sector 
 Support Needed Across Sector 
  
  
  
  
  
  
  
  
  
  
 Steps Taken by the Ministry of Finance to Support MSMEs during the
 
  110
  
  
 Distribution of Companies by County 
  
  
  
  
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
 Distribution of SMEs in the Russian Federation based on Firm Size (employ
ees) as of 10 August 2021 
         
Regions 
 SMEs Financing Figures 
 
 
          
2021) 
  
IX
COMCEC COORDINATION OFFICE / October 2021
LIST OF FIGURES
  
  
  
  
  
  
  
  
  
  
  
  
        
 
  
  
 
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
XCOMCEC COORDINATION OFFICE / October 2021
  
 Manufacturing MSMEs Distribution by Sector 
 Distribution of Sources of Finance Distribution (%) 
  
  
 
 
           
Contribute Salary for at least Month 
  
            
 
  
  
  
  110
  111
 
 112
 Distribution of Financing According to the Islamic Contracts 
 Distribution of Financing According to the Economic Sectors 
  
 Distribution of MSMEs in Senegal 
 Distribution of Companies by Sector 
  
 Muslim Majority Republics in Russia Federation 
 Distribution of SMEs in Eight Region of Russia as of 10 August 2021 
 Distribution of SMEs in Muslim Majority Federations (as of 10 August 2021) 
  
XI
COMCEC COORDINATION OFFICE / October 2021
ABBREVIATIONS
AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions
  ZakatZakat
  
  
  
  
  
  
  
  
CMA  
COMCEC Standing Committee for Economic and Commercial Cooperation of the
Organization of the Islamic Cooperation
CSR Corporate Social Responsibility
DOS  
FDR Financing to deposit ratio
  
  
  
ICD  
IDR Indonesian Rupiah
  
IIFM International Islamic Financial Market
IIH  
  
IMF International Monetary Fund
  
ITFC International Islamic Trade Finance Corporation
  
  
  
  
  Awqaf 
  
  
  
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
XII COMCEC COORDINATION OFFICE / October 2021
  
  
  
MESA Middle East and South Asia
MFIs  
MSMEs  
  
NOM Net Operating Margin
  
  
OECD  
OIC Organisation of Islamic Cooperation
  
  
  
  
  
  
RFI  
ROA Return on Assets
ROE  
SESRIC          
Countries
SMEs  
  
  
  
  
WHO World Health Organization
WTO World Trade Organization
 

COMCEC COORDINATION OFFICE / October 2021
EXECUTIVE SUMMARY
T
           
          






  


   
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   



 

   

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
      
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         


  
            
        



shareholder interest.
           
 iqtisad adalah
(justice) and ihsan
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
              

    

 

        


Shari’ah compliant manner regardless of the circumstances.



    






        


             
  


qard al-hassan 

qard al-hassan 
conditions.

 
zakat funds and awqaf



zakat
funds and waqf qard al-hassan 

            
            
      zakat funds and awqaf  
professional and academic research centres. We are all grateful to all the participants in the
research process leading to the completion as a report.

COMCEC COORDINATION OFFICE / October 2021

         


adalah and ihsan as part of tawhid so that ihsani
rahmat al alameen’ 
Efforts for ihsan (success) may be granted by Allah (swt).

COMCEC COORDINATION OFFICE / October 2021
1. INTRODUCTION
1.1. Aim, Objectives and the Scope of the Study



           

   
2021a).

 
            


     1       
            



  
          






 
             

     
 
 
economy.





1 While the IMF expected -4.9% contraction in GDP, World Bank’s baseline forecast was -5.2% for 2020. Please see the reports,
IMF World Economic Outlook Update-June 2020 (https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/
WEOUpdateJune2020), and World Bank Global Economic Prospects-June 2020 (https://www.worldbank.org/en/publi-
cation/global-economic-prospects).
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
 
countries to support this segment during and after the economic and social crisis caused by the

      

  
qard al-hassanwaqf
zakah
            

 

             
takaful


      

    
          

             

1.2. Research Methodology


             
     





    

   Shari’ah       



 
 
 

COMCEC COORDINATION OFFICE / October 2021
 Shari’ah
sampled countries.
 
Shariah

Shariah
            

The challenges faced by the Shari’ah
 
 

            
of other stakeholders in the OIC member countries and beyond. Despite a global attempt to

  



(i) identify and assess the nature and dynamics of the MSMEs sector in the sampled countries

 
 

            
waqf and zakat
         



           
          

 waqfzakat


 



           
          

The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
20 COMCEC COORDINATION OFFICE / October 2021
       


           
            
analysis of the case countries.






          


Table 1: Case Countries
Country Region Islamic Finance Development Level
Indonesia Asia Developing
Jordan Arab Developing
Kuwait Arab Matured
Senegal African Developing
Russia Non-OIC Infancy

Indonesia

    
             

               



    
               

        


            

              2
      

2 In this section, all the references to IFSB relates to this report.
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COMCEC COORDINATION OFFICE / October 2021

 



Jordan,    
            






 

           
             
important case study in this research.
Kuwait            


 



             
  

            

         

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          
        


Senegal is considered a case study in this country due to representing the African dynamics and
  



            
          


units of the Senegalese business sphere. While most of these MSMEs remain in the informal sector

The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
22 COMCEC COORDINATION OFFICE / October 2021
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        
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            

         




1.3. Overview of the Study

Chapter 2 discusses the role of the MSMEs in the OIC member countries in particular and the

         

            
        

zakah and waqf are discussed by considering



   




 


  



COMCEC COORDINATION OFFICE / October 2021
2. COVID-19 PANDEMIC CONDITIONS AND ITS IMPACT ON MSMEs
FINANCING AND PERFORMANCE: GLOBAL PERSPECTIVE
2.1. Political Economy of COVID-19
   
   
              
  
  

              

   

Figure 1: GDP of the OIC Member Countries
               
   


The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021



       
  
                


Figure 2: Comparative Economic Performance (GDP) (PPP in Current USD)
Source:





          


       

for the larger public.
             

            
 
   


COMCEC COORDINATION OFFICE / October 2021

     

        

    

   
 







              



           
      


  
     


              
 
          

increased.

               



  


as charities in general and zakat waqf and sadaqah type Islamic institutions in the Muslim
            



The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021




zakat funds and waqf 



political economy that is mizan (balance) can be sustained only through ihsan 

mizan can
zakatwaqf and sadaqah



            
      
  

           
              


riba



suggests.
2.2. Effects of Pandemic on MSMEs and Policy Responses in Global
2.2.1. Impacts of Pandemic on MSMEs
            
            
  ITC COVID-19 Business Impact
Survey 

   

              

             
    
trade operations.


  

COMCEC COORDINATION OFFICE / October 2021





   


et al.,          

     
problem persists due to the containment measures during the pandemic (Adian et al.,


 
        

 
             
        

   

 

     


           


           




et al., 
for the emerging political economy.
        



              

 


The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
2.2.2. Policy Responses towards MSMEs

    
           



            
            


        




     et al.,

   
 


conditions.

Table 2: Support Types to SMEs During Pandemic
Type of Support Instruments

         
        
        


          
      

Employment
support

         
  
        
 


COMCEC COORDINATION OFFICE / October 2021

 
       
       
        
         
procedures and regulations


       
        




        
       
          

Demand







       
       


       
    
       


Source:
            

             
            
essential measurements groups in supporting SMEs. Each country has implemented these

  

The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021
Figure 3: Type of Measures and Their Percentages
Source:

            
            



by Adian et al. 

      


2.3. Policy Responses by OIC Member Countries towards Pandemic


              



         



COMCEC COORDINATION OFFICE / October 2021
Table 3: Economic Policy Responses of OIC Countries to COVID-19 as of 27 April 2020
Policy Category Intervention Type # of Implementing OIC
Countries
 Fiscal stimulus package 

Interest rate cut 
Monetary stimulus package 
Other monetary policy
measures 
   

Direct monetary policy
   

Accompanying monetary



Source: SESRIC (2020)

          
           
            
        

 

Figure 4: The IsDB’s Response Program
Source:
The Role of Islamic Finance in Supporting Microenterprises and SMEs Against COVID-19
 COMCEC COORDINATION OFFICE / October 2021


         
          


2020).
