Amid the coronavirus pandemic, Islamic Relief’s Dr Mohammed Kroessin, head of our Islamic Microfinance Business Unit, explores how microfinance can aid economic recovery.

Dr Mohammed Kroessin, head of our Islamic Microfinance Business Unit.

The global pandemic that has pushed a number of countries into an unprecedented lockdown of society and the economy to stop the spread of the disease has also led to their governments issuing macroeconomic rescue packages to restart businesses.

Liquidity is being injected into the banking system and creative measures taken to avoid unemployment, but it is microfinance institutions that are picking up the pieces with micro, small and medium enterprises.

The main challenge for the 700 million people in the Muslim world living around the poverty line is that their sources of income from day labour, small business activity or small-scale farming are dramatically affected by the effective closure of parts of the economy. This leaves many destitute and forces them to sell their tools or land, or even to take on unsustainable debt.

Pakistan — interest-free coronavirus recovery loans

In a country like Pakistan, the economic impact of Covid-19 has become a matter of life and death. “If the economic condition of Pakistan was like the US, Italy or France, I would have announced a [full] lockdown in Pakistan,” Pakistan’s prime minister, Imran Khan, stated in April.

“But our problem is that 25% of our people are below the poverty line. If I impose a full lockdown, the rickshaw drivers, small shopkeepers and villagers will be locked. They will not be able to feed their wives and children. We do not have the capacity of delivering food to their homes.”

But it is not just handouts that are required.

Akhuwat — perhaps the largest Islamic microfinance institution in the world — has launched a ‘Corona Relief Fund’ through its over 800 branches in Pakistan, identifying vulnerable families in need of capital.

A loan of a minimum of PKR5,000 (US$31.12) and a maximum PKR10,000 (US$62.24) is disbursed to a family from the newly created Emergency Loan Fund.

When the lockdown eases and economic activities restart and employment or self-employment is restored, the borrowers are expected to repay the loan over a period of up to 20 months.

Refinancing in Bosnia

In the Balkans, the Federal Civil Protection Authority of Bosnia and Herzegovina declared a nationwide state of emergency on the 17th March and introduced an age-based lockdown.

Strict social distancing rules were introduced for all public service providers, including microfinance institutions. The lockdown also suspended public transport, hence many poor clients could not access financial service providers.

In April, rumours circulated in the media that the government of Bosnia and Herzegovina would order repayment holidays or even debt forgiveness which has caused confusion.

The only Shariah compliant microfinance institution in Bosnia and Herzegovina, Prva Islamksa (‘First Islamic’), however, proactively offered to refinance Qard Hasan financings of borrowers who were struggling with repayments in uncertain times.

Edina Hadzimurtezic, the executive director of Prva Islamska, explained:

“We offer refinancing on our Qard Hasan product to extend the time for repayments — without any admin fee and provide a two-month grace period to further reduce the pressure on clients.”

Both approaches create a win-win situation under difficult circumstances: clients have a sustainable amount of financing and sufficient liquidity to allow their micro business to get back on its feet, thus aiding economic recovery.

This article was first published in Islamic Finance News on 27 May 2020.