World Economy and Islamic Finance: Comparison of Government Policies during the Global Financial Crisis and the COVID-19 Crisis

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World Economy and Islamic Finance: Comparison of Government Policies during the Global Financial Crisis and the COVID-19 Crisis

Azra Zaimovic⁽¹⁾

Associate Professor in Finance, School of Economics and Business University of Sarajevo, Bosnia and Herzegovina

Lejla Dedovic

PhD Student, School of Economics and Business, University of Sarajevo Bosnia and Herzegovina

ABSTRACT. COVID-19 has changed our lives and the way how business, social interacting, and healthcare is delivered like nothing else in modern history. This study aims to extend the growing body of literature on the topic of the COVID-19 crisis by critically analyzing and comparing government responses to the COVID-19 crisis in 2020, and the global financial crisis (GFC) in 2008. It focuses on investigating the similarities and differences in size, scope, structure, and timing of government policies between the two. Government policies and responses of the United States and China, as the main players in the global economy, are being analyzed in depth. What we seek to examine is whether governments have actually learnt their lessons and used their knowledge from the GFC to fight the COVID-19 crisis. We also analyze impacts of government measures on the stock market indices, S&P 500 and Shanghai Composite (SSEC). Our analysis shows that governments’ response to the COVID-19 crisis is quicker and more proficient than it was in the GFC. One of the effects of the COVID-19 crisis is the increased stock market volatility. Indeed, we found increased volatility of Dow Jones Islamic Market World Index (DJIM) in the COVID-19 period, compared to pre-crisis period. Our analysis also shows that DJIM performs much better in the COVID-19 crisis compared to the GFC, i.e., returns are positive and volatility of DJIM returns is significantly lower in the COVID-19 crisis than it was in the GFC. Islamic finance answers to the recent economic turmoil can be in public-private partnerships. Sharīʿah- compliant instruments could be used to raise private capital for infrastructure projects.

KEYWORDS: COVID-19, Pandemic, Global financial crisis, Dow Jones Islamic Market World Index, US, China, Public-private partnerships.

JEL CLASSIFICATION: E52, E58, G15, G18, G28 KAUJIE CLASSIFICATION: I75, Q4, Q5, Q82

(1) Authors would like to thank the editors of JKAU:IE for their valuable comments.

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1. Introduction

The current coronavirus known as COVID-19 started in December 2019 in Wuhan, China. It is spreading across the globe rapidly, with over 50 million cases of the disease and more than 1,250,000 deaths logged. To date, there are many scientists who have investigated how COVID-19 has impacted the many aspects of our life, from healthcare and social interac- tion, to business aspects. It is clear that COVID-19 is an exogenous shock that hit the economies hard, and that its effects will surely last for many years. Be- namraoui (2021) critically discusses the effects caused by COVID-19 pandemic on the world economy and Islamic economics. He states that the pandemic caused a sharp fall in economic output, sub- stantial increase in unemployment, rise in market volatility, and deterioration in the financial conditions of corporations, particularly in industries like airline, hospitality, tourism, and energy.

The World Bank predictions are that global growth rate will decline by 5.2 percent this year. If these predictions were fulfilled, this would be the largest contraction since World War II and the biggest drop in global production since the end of 19^th century (World Bank, 2020, para 1). All countries will experience a decrease in GDP, with postponed effects in the coming years. Jordà, Singh, and Taylor (2020, p. 2) analyzed previous pandemics and found that consequences of pandemics could be felt for up to approximately 40 years.

Financial markets reacted promptly to the COVID-19 outbreak with a sharp fall in stock market indices worldwide. Change in main indices value, calculated as the difference between the highest and lowest values in the period January-March 2020, reveals that indices lost about 30% of their value in the short run due to the COVID-19 outbreak. The US S&P 500 index fell by 31%, the German DAX by 38.8%, and the Great Britain FTSE by 34.9%. The Saudi Arabian Tadawul All Share (TASI) fell by 29.7%, while a much lower fall was noticed in the Chinese stock market where the Shanghai Composite (SSEC) fell by ‘only’ 14.6%. In the same period of time, the Dow Jones Islamic Market World Index (DJIM) fell by 30.7% (authors’ own calculations based on data from https://bit.ly/2M2UoXw).

In the period from July 2020 till October 2020, many stock market indices have occasionally or

permanently exceeded their highest pre-crisis values achieved at the beginning of the year 2020: the SSEC and DJIM in July, S&P 500 in August, and TASI in October. However, the DAX and FTSE have not recovered to the pre-crisis values at any point. By the end of October 2020, the best performing index among the previously mentioned indices was the DJIM with a 5.5% increase. On the other hand, the worst performing indices among previously mentioned indices were the FTSE and DAX with negative indices returns of -27.3% and -16.2%, respec- tively (authors’ own calculations based on data from https://bit.ly/2M2UoXw; DJIM, FTSE, and DAX returns are based on the indices value on October 30, 2020, and their highest values in January-February 2020).

It can be noticed that financial markets have shown quite different recovery paths after an overall sharp markets’ fall due to the COVID-19 outbreak compared to the recovery from the global financial crisis (GFC). GFC policy measures were imposed and implemented over several years, with long term effects visible today also. We aim to compare the current COVID-19 crisis government responses with those from the GFC. We investigate whether governments learnt lessons from the GFC and whether their response was quicker and more effective in the COVID-19 crisis than in the GFC. How have government measures affected financial markets? In order to evaluate the effects of the crisis on Sharīʿah- compliant equity markets, we analyze returns and volatility of the Sharīʿah-compliant index DJIM during the COVID-19 pre-crisis period and crisis periods. In order to make a parallel to the GFC, we compare DJIM volatility in both crises. We also give a suggestion of how Islamic finance can help developing countries milden the COVID-19 crisis effects.

The remainder of this paper is organized as fol- lows. Section 2 discusses the US policy response.

Section 3 examines the Chinese policy response, while section 4 discusses the impact of COVID-19 on Sharīʿah-compliant equity markets, especially focusing on analysis of the differences in DJIM volatility during GFC and COVID-19 crises. Section 5 brings possible answers of Islamic finance to the economic turmoil due to COVID-19, and the last section concludes the paper.

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2. US Policy Response during the COVID-19 Crisis and the GFC

The United States have been hit by the worst crisis since the 1930s (Rappeport & Smialek, 2020, para 1).

In lieu of numerous government measures to sup- press the transmission of the coronavirus, production decreased by 8% in 2020, the worst since the Great Depression. Furthermore, the US stock market repre- sentative S&P 500 index fell by more than 30%, the worst decline since the GFC (The Council of Advis- ers, 2020, p. 3). Challenged by an economic shock uncommon in transmission, the Federal Reserve (the Fed) responded with exceptional speed and measures in proportions like never before. Just a week after the first recorded deaths from coronavirus, the Congress passed the Additional Separation Act for coronavirus preparedness and response. After one month, the CARES Act of $2.2 trillion was announced. Equiva- lently, the Fed increased its balance sheet by more than $3 trillion to guarantee adequate liquidity for

market players (The Council of Advisers, 2020, p. 3).

The rapid policy responses to this exogenous shock eased the contraction which was on the way to be- coming even more severe than the one experienced in 1930.

Figure 1 displays the S&P 500 index movements with grey vertical lines that represent the days when news about the CARES act caused spikes in movement. The deteriorating trend caused by the COVID- 19 pandemic started its rebound on the day the Con- gress started to settle the negotiations about the CARES act. Just after the CARES act introduction, the value of the S&P 500 index return increased by more than 13% (The Council of Economic Advisers, 2020, p. 14). Such a reaction of the S&P index to announcements of new government measures means that investors’ expectations about their effect was positive and actually impose a feeling of stability for the US economy.

Figure (1) S&P 500 Index and the US Government Policy

Source: The Council of Economic Advisers (2020, p. 14).

The US economy was stronger before the COVID-19 pandemic than before the start of the GFC in 2006.

The debt-to-income ratio decreased from 11% in 2006, to 6.9% in 2018. Nowadays, lenders are giving much safer loans which is proved by the fact that the portion of mortgages with less than full amortization was 29.2% in 2006, while it decreased to 0.6% in

2018. Furthermore, mortgages that required just the minimal documentation fell, moving from 34.5% in 2006 to 1.8% in 2018 (The Council of Advisers, 2020, p. 57). Bhutta, Bricker, Dettling, Kelliher, and Laufer (2019, pp. 24-25) predicted that a shock similar to the GFC would cause less defaults on loans due to the healthier household balance sheets.

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The US banking sector, especially the loan sector, at the end of 2019 reached its record high in every liquidity and solvency indicator. This position was due to the laws passed as a response to the GFC that were primarily focused on better supervision of the sector and building higher reserves. The number of problem banks at the end of 2007 was 76, and at the end of 2019 it was 51. The US economy started the COVID-19 crisis with limited fiscal and monetary capacity. This is seen from the fact that the federal funds rate was 5.25% in 2006, while in early 2020 it was 1.6%. Furthermore, the debt-to-GDP ratio jumped from 62% to 107% during the same period (The Council of Advisers, 2020, p. 59).

During the GFC, the Fed’s policy response was developed and implemented over the course of several years, and it included different fiscal stimulus measures such as tax rebates, government expendi- tures, liquidity-enhancing programs, subsidies, regu- latory reform, etc. The Fed decreased the fed funds rate to zero and afterwards introduced a large asset purchases program. Furthermore, it announced a wide range of methods to inject liquidity including different facilities such as the Term Auction Facility (TAF) created in December 2007, the Term Securi- ties Lending Facility, and the Primary Dealer Credit Facility introduced in March 2008 (Weinberg, 2015, paras 4-11; The Council of Economic Advisers, 2020, p. 60).

Additionally, in November 2008, the Term Asset- Backed Securities Loan Facility was introduced, and in January 2009, an Agency Mortgage-Backed Secu- rity Purchase Program was initiated (The Council of Advisers, 2020, pp. 60-61). The government also passed important fiscal stimuli. The Economic Stimulus Act of 2008 was announced in February and the Emergency Economic Stabilization Act of 2008 was announced in October which amounted to allocating $700 billion to address the financial crisis.

In 2009, the American Recovery and Reinvestment Act (ARRA) was accepted amounting to $800 billions of tax relief and government spending on infrastructure and other developing sectors of the economy.

The last significant reform was passed in 2010, which was named the Dodd-Frank Wall Street Reform and Consumer Protection Act, mostly focusing on the supervision of the banking sector (The Council of Advisers, 2020, pp. 60-61).

If we contrast the response during the GFC and the COVID-19 crisis, the Fed has responded in a faster, more organized manner, and which was significantly greater in scale. This can be seen from the fact that the Fed swiftly cut the federal funds rate to the lower bound from 0% to 0.25 %, while in the GFC, the federal funds rate was not cut to this bound until December 2008. In just two months, most of the liquidity facilities that were used in the GFC were reintroduced by the Fed (The Council of Advisers, 2020, p. 61).

During the GFC, the government increased its balance sheet by $1.4 trillion from 2008 to 2010.

While from March to June 2020, the Fed increased it by $2.9 trillion (Leonard, 2020, para 6). As can be seen from figure 2, in the GFC period, the fiscal stimulus was implemented in phases from 2008 until 2010, as mentioned previously. By contrast, during March, 2020, the Fed passed two bills, the Families First COVID-19 Response Act and the CARES Act (Jaeger, 2020, para 1; The Council of Economic Ad- visers, 2020, p. 61). Additionally, the CARES Act is intended to provide a fiscal stimulus of $2.2 trillion;

whereas the ARRA provided around $800 billion.

The similarity among the two is that both con- veyed support to families in the form of tax reliefs and unemployment benefits (The Council of Advis- ers, 2020, pp.61). However, unlike the CARES Act, the ARRA provided a payroll tax cut and funding for States to tackle with the revenue underperformances.

In contrast, the CARES act contains the Paycheck Protection Program which supports small businesses with provision of loans to maintain workers and pre- vent bankruptcies (The Council of Advisers, 2020, p.

61). In the COVID-19 crisis, the direct payments to households are the largest than in any of the packages passed during the GFC.

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Figure (2) Comparison of the Timelines of US Policy Responses during the COVID-19 Crisis and the GFC

Source: The Council of Economic Advisers (2020, p. 62).

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3. Chinese Policy Response during the COVID-19 Crisis and the GFC

The COVID-19 crisis is a reminder of the financial crisis of 2008 when the Chinese government invested a record amount of funds to support their country during recession. This year, China has undergone its first quarter of economic contraction since the 1970s, with millions of jobs lost and businesses closed (As- sociated Press, 2020, para 1). However, China did not issue any stimulus package until the end of May 2020, whereas large economies such as Japan and the US did that already in March.

Figure 3 shows the SSEC index movements with grey vertical lines that represent the days that news about the different government policies have caused spikes in movement. The SSEC movement experienced several drops from January till March 2020.

The first increase of the index due to the government response was on February 19, 2020, when the People’s

Bank of China decreased the reserve requirement ratio and borrowing costs for lenders, while also pledging to widen access to funding for small businesses to mitigate the damage to the economy. The increase of the SSEC at the end of March was due to the announcements of the US fiscal stimulus, whereas the one at the end of May was due to the rise in expectations regarding the start of the annual meeting of the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC). However, after the decisions about the stimulus and government policies were announced in the beginning of June, there was a big drop in the index due to the fact that these policies signaled that “investors should expect greater volatility more than anything else” (Liu, 2020, para 4). The government response can be blamed for the overall higher volatility of the SSEC index compared to other observed indices.

Figure (3) SSEC Index and the Effect of Government Policies

Source: Authors based on data from Yahoo Finance.

2400 2500 2600 2700 2800 2900 3000 3100 3200

1/2/2020 2/2/2020 3/2/2020 4/2/2020 5/2/2020 6/2/2020

Liquditiy injection by PBC (3/12)

PBC decreases reserve requirements (2/19)

US fiscal stimulus announced (3/24)

Expectations for the annual meeting of Chinese parliament (5/13)

Pessimism about parliament decisions (6/1)

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Before the novel coronavirus hit, China had twice as high the level of debt than in 2006. At the beginning of 2020, China had the highest corporate debt to GDP ratio that amounted to 156.7% (Koty, 2020a, para 12). In 2019, annual growth rate was approximately 6% which is in contrast to Beijing’s situation before 2008 when the growth rate was around 13% (Yong- ding, 2009, p. 1). Over the decade before the GFC, budget deficits were quite low; particularly there was a budget surplus in 2007 and 2008 (Yongding, 2009, p. 10). Thus, we can say that China was in a much stronger position back in 2006 and that before the COVID-19 crisis, it had considerably less ammuni- tion to fight the crisis.

After the 2008 financial crisis hit their GDP, Chi- na reacted swiftly. In November 2008, the government announced a 4 trillion Yuan stimulus package for 2009 and 2010, which amounted to 14% of the GDP. In March 2009, the People’s Congress accepted the government’s new budget for 2009 of 7.635 trillion Yuan, which was larger by 22.1% from the previous year. Additionally, the State Council ap- proved the issuance of 200 billion Yuan in bonds on behalf of the local governments, while each local government announced their own stimulus package amounting to a total of 18 trillion Yuan (Yongding, 2009, pp. 9-10; Wong, 2011, pp. 9-11).

Since 2009, the People’s Bank of China (PBOC) pursued a very expansionary monetary policy. Fur- thermore, bank credit was augmented by RMB 7.3 trillion; this growth was very high, similar to the broad money supply, which also increased at a very high rate relative to the GDP (Yongding, 2009, p.

10). This injected liquidity in the inter-bank market together with PBOC’s intervention in the exchange market (selling their bills to eliminate excess liquidity) to offset the appreciation of Yuan created by the trade surplus (Yongding, 2009, p. 10). China’s banking system was pretty stable while the Western banking systems of the US and Europe were on the edge.

This was achieved by writing off non-performing loans and injecting a large amount of funds (Yong- ding, 2009, p. 11).

In the COVID-19 crisis, by contrast, the fiscal stimulus was waited and much anticipated. On May

28, 2020, the Chinese government announced a stimulus package worth 4.5 percent of the GDP to deal with the loss caused by the COVID-19 crisis to the world’s second-biggest economy. Key measures include: tax relief, exemption of social security contributions, investments in infrastructure, etc. (IMF, 2020, Fiscal response section under China). The PBOC, as directed by China’s central government, ran monetary policy to support and protect economic stability. These policies started from February 7, 2020, and they include: extension of different facilities, decrease of interest rates on relending and redis- counting policies, liquidity injections into the banking system, and many other policies and instruments (IMF, 2020, Monetary and macro-financial section under China).

Compared to 2008, the most interesting thing is that there is no complete monetary easing in the new COVID-19 stimulus. The PBOC is focusing on the provision of liquidity rather than making interest rate cuts. This was due to the interest of banks to evade an overflow of non-performing loans (Haasbroek, 2020, para 4). The main goal nowadays is to support small and medium enterprises while in the GFC crisis, the focus was more on the financial firms. As part of the COVID-19 stimulus, the government is planning to issue $140 billion of bonds (Koty, 2020b, para 14).

These bonds are commonly used by the Chinese government to stimulate growth through infrastructural investments, which was also the case in the GFC (Haasbroek, 2020, paras 4-6).

In the current COVID-19 crisis, the distributions for previously mentioned bond issues contain a con- trol mechanism, in contrast to the chaotic realization of the 2008 stimulus bond issues. Rather than tradi- tional infrastructures such as highways, railways, etc., the government in the current crisis is targeting investments in new infrastructure, such as 5G networks (Haasbroek, 2020, para 6). It can be said that the consequences of the 2008 fiscal stimulus are still felt in China and they exert restrictions on the current COVID-19 fiscal stimulus. Thereby, the Chinese government is more careful this time, and is implementing these packages that are smaller in size and scope than the one in 2008, and is acting more slowly to try to circumvent the creation of limitations in the future.

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4. Impact of the COVID-19 Crisis on Sharīʿah-Compliant Equity Markets In the empirical part of this research, we analyze how Sharīʿah-compliant equity markets reacted to the COVID-19 crisis and government policies. Sharīʿah- compliant investing is a type of socially responsible investing aligned with the Islamic law that excludes investments in companies that derive their income from forbidden business operations including alco- hol, gambling, speculative activities, conventional banking and insurance, etc. Additionally, in order to pass the Sharīʿah-screening process, companies have to fulfill certain financial requirements regarding interest paid, interest earned, and overall indebtedness.

Since we want to examine if governments have learnt lessons from the previous GFC, we analyze differences in trends and volatility in Sharīʿah- compliant equity market performance between the two crisis periods. The analysis is performed on the Dow Jones Islamic Market World Index (DJIM), as the most comprehensive index of Sharīʿah-compliant stocks in the world. S&P Dow Jones Indices LLC provided us with the data and other relevant infor- mation on the index.

We analyze the DJIM index total returns (including dividends) in a period of 18 months, from May 1, 2019 until October 30, 2020. We divide this period into two 9-month sub-periods, before and after Feb- ruary 1, 2020, i.e., the COVID-19 pre-crisis and crisis period. Since the GFC has lasted much longer, we had to limit the analyzed GFC period so it can be compared to the COVID-19 crisis; the focal point in this period is the fall of Lehman Brothers, the US fourth largest investment bank, that happened on September 15, 2008. The GFC dataset is divided into the period before the fall of Lehman brothers from January 1, 2008 to September 14, 2008, and the period after the fall of Lehman Brothers from September 15, 2008 to June 15, 2009.

Despite that the COVID-19 crisis is being characterized as the worst crisis after the Great Depression, holding period return including dividends (HPR) of DJIM in the period from February 1, 2020 till Octo- ber 30, 2020, amounts to +11.5% in contrast to the negative HPR of -14.7% in the GFC, in the equiva- lent 9-month period of time from the crisis focal point, September 15, 2008.

Figure 4 shows the DJIM country breakdown by listings, where all counties with 50 and more constituents, including Germany and selected Islamic capital markets, are presented on a comparative basis. At the end of January 2020, the DJIM had 2912 constituents, while at the end of October 2020 the number of constituents had increased to 3039, from 52 countries worldwide. Sixteen (16) countries displayed on the graph account for 84.6% of DJIM constituents in January 2020, and 86% in October 2020. It is interesting to note that in this period of time, the number of Chinese companies (based on the country of list- ing) in the index has increased by 236, from 448 to 684, while the number of US companies has decreased by 53, from 566 to 513. Chinese companies have become the most numerous in the DJIM. How- ever, by country of domicile, US companies domi- nate the DJIM with index weight of 63.3%, while all Chinese companies account only for 6.4% of the index weight (https://bit.ly/2VQTbnK).

For the analysis of differences of index returns and their volatility in the pre-crisis and crisis period, we have used Levene’s test (Levene, 1960) which is used to test if two samples have equal variances.

When two samples have the same variances that is known as the homogeneity of variance. Levene’s test is an alternative to the Bartlett test, and is less sensi- tive to departures from normality, thus, is more suitable for analysis of index returns (NIST & SEMATECH, 2013, p. 258).

Afterwards, we used Welch t-test assuming unequal variances, to examine the difference in the dis- tribution of mean values of the indices in the pre- crisis and crisis periods. Welch t-test is a two-tail test which is a modification of Student’s t test and is more suitable when the two samples have unequal variances and/or unequal sample sizes (Tudor, 2008).

These tests are mostly used on unpaired data meaning the datasets are independent.

The left-hand side of the table 1 shows the results of the tests performed on the DJIM daily total returns, for the GFC before and after the fall of the Lehman Brothers. Firstly, we test whether variances of the two periods are equal using a Levene’s test for equality of variances. We reject the null hypothesis and accept the alternative hypothesis of unequal variances for periods of before and after the fall of the Lehman

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Brothers, p < 0.01. From the analyzed period before the fall to the period after the fall, the standard deviation, i.e., the volatility, has increased 2.3 times. Con- sequently, table 1 also gives the results of the t-test of differences between the two samples assuming unequal variances. The calculated p-value is higher than 0.05, which allows us to accept the null hypothesis of equal mean values for periods of time before and after the fall of Lehman Brothers.

Based on the analysis of DJIM daily total returns for the COVID-19 pre-crisis and crisis periods, we found unequal variances in these two periods. Be- tween the two periods, the standard deviation, i.e., the volatility, increased 2.9 times. Furthermore, the

results of the t-test of differences between two samples assuming unequal variances show that there are equal mean values in Covid-19 pre-crisis and crisis period. What we notice is that during the COVID-19 crisis, volatility has increased 2.9 times compared to 2.3 times in the GFC crisis period. This increase is due to the fact that the period before the Lehman brothers fall was also characterized by higher volatility because the global recession had started before the fall of Lehman brothers; while the pre-COVID-19 period did not have any turbulences, and thus, was characterized by much lower volatility.

Figure (4) DJIM Country Breakdown by Listings, January 2020 and October 2020

Source: Authors based on the data from S&P Dow Jones Indices LLC.

566 448

318 250 211 170 142 79 64 60 50 39 31 16 10 9

449

513

684 291

274 223 155 142 69 58

62 55 33 21 17 10 9

423

0 100 200 300 400 500 600 700 800

USA China Japan Korea Taiwan India Hong Kong SAR, China Great Britain Australia Saudi Arabia Malaysia Germany Indonesia Turkey Qatar United Arab Emirates Other countries

October 2020 January 2020

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Table (1) DJIM Mean Returns and Volatility in COVID-19 and the GFC

DJIM GFC COVID-19 GFC vs. COVID-19

Before Septem-

ber 15, 2008

After Septem- ber 15, 2008

Before Janu- ary 31, 2020

After January 31, 2020

After Septem- ber 15, 2008

After January 31, 2020

Mean -0.00089429 -0.00057559 0.00047257 0.00062449 -0.00057559 0.00062449 Std. Dev. 0.01002147 0.02317509 0.00619041 0.01764461 0.02317509 0.01764461

Observations 183 227 236 232 227 232

Diff

Mean -0.0003187 -0.0001519 0.0020955

W0 34.035472 41.393606 11.901887

Pr > F 0.0000 0.0000 0.00061279

T -0.1867 -0.1239 -0.6232

Pr(|T| > |t|) 0.8520 0.9015 0.5335

Source: Prepared by authors.

When it comes to the comparison of volatility of the DJIM daily total returns in the GFC and COVID-19 crisis periods, based on the Levene’s test for equality of variances, we reject the null hypothesis of equal variances and adopt the alternative hypothesis of unequal variances in the COVID-19 and GFC crisis periods, p < 0.01.

It can be seen from table 1 that the standard deviation was higher after the fall of Lehman brothers than after the COVID-19 outbreak, which indicates that in the COVID-19 crisis, government policies worldwide were more effective and financial market rejection in mid-term was milder than in the GFC. Furthermore, in these two periods DJIM exhibits equal mean values, although the Covid-19 crisis mean value is positive while the GFC mean value is negative.

5. Islamic Finance’s Answer to the COVID-19 Crisis

Islamic economics and finance offers a number of solutions that can be effective at reducing the social and economic effects of the COVID-19 crisis (Be- namraoui, 2021, p. 73). The economic fallout could be softened through zakāh and waqf institutions, the variety of Islamic banking contracts, and takāful. We

would like to stress that one of the effective answers to the reduced production, contraction of consump- tion, and lower budget revenues in the COVID-19 crisis can be in Public-Private Partnerships (PPP).

PPP’s aligned with Islamic finance can help preserve high levels of public investments which will milden the COVID-19 economic effects.

PPP as an instrument of public service or public infrastructure delivery is most commonly used by developed and well-functioning countries. Since Is- lamic finance promotes social inclusion and development, Islamic financing can become a significant source of funding for PPP infrastructure projects in developing countries. Sharīʿah-compliant instruments can be used to mobilize private capital in public infrastructure projects like highways, hospitals, education, the energy sector, and airports. While countries around the world are facing increased indebtedness and budget deficits, adequately structured PPP can assure delivery of wanted public services and public infrastructure without government debt increase, which is one of the main advantages of PPP. Howev- er, the most important prerequisite for the success of PPP is political will.

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6. Conclusion

Our analysis shows that governments indeed have learnt lessons from the GFC and acted more efficient- ly in their response to the COVID-19 crisis. Even though these two were caused by completely different shocks, the 2008-2009 crisis has provided a prop- er guidance for current crisis government responses.

Many measures implemented during the GFC were reactivated, especially the ones connected to asset purchases, bond issues, different lending facilities, etc.

For the US, compared to the 2008 crisis, the Fed’s response was faster, more organized, and significantly greater in scale. This is seen from the fact that the fiscal stimulus to GDP is twice as high, federal funds rate was cut in just a few weeks from the first COVID-19 fatality, all liquidity facilities from the GFC were reintroduced in just two months, and the Fed’s balance sheet increased in record amount. All these measures took much longer to be introduced in 2008, which shows that the Fed entered the current crisis prepared.

The Chinese government spent a record amount of money during the GFC in order to support the economy during recession. However, in the current crisis, China did not issue any stimulus packages until the end of May and this stimulus was similar in size compared to the one in 2008. However, nowadays China’s economy is significantly larger than it was in 2008, meaning that this stimulus package is a much smaller percentage of the GDP. This is mostly due to the fact that China is constrained by the high debt it accumulated during the GFC. Thus, for China, it can be said that the consequences of the 2008 fiscal

stimulus are still felt in China and that they exert restrictions on the current COVID-19 fiscal stimulus.

Thereby, the Chinese government is this time more careful and is implementing these packages, that are smaller in size and scope than the ones in 2008, more slowly to try to circumvent the creation of limitations in the future.

In addition, it can be concluded that faster, more organized, and proficient government responses led to optimism on the stock market exchanges, which was one of the main reasons for stock market recovery. This can be seen from the rebound of national stock market indices after news about new government measures in mid-March, 2020. Furthermore, this is noticed on a worldwide level through the analysis of DJIM World Index where it is clear that in the COVID-19 crisis, higher returns and lower volatility were found in the mid-term period after the COVID- 19 outbreak compared to the index returns’ behavior after the fall of Lehman Brothers in the GFC.

Most developing countries are finding it hard to cope with the crisis. Government monetary and fiscal instruments can be of limited availability; many of them fight budget deficits and high unemployment rates, have difficulties to access capital, or have high government debts already. PPPs, as a procurement method, can help developing counties to milden the COVID-19 economic fallout and sustain public infrastructure spending. Sharīʿah-compliant instruments can be used in PPP structures to mobilize private capital. However, political will is a necessary condi- tion for successful PPP stories.

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Azra Zaimovic is currently Associate Professor in Finance at the School of Economics and Business, University of Sarajevo, Bosnia and Herzegovina. She teaches financial management, portfolio management, investments and similar courses. At joint diploma master studies Islamic Banking, delivered in cooperation with the University of Sarajevo and University of Bolton, Great Britain, she teaches the course Islamic capital markets. She was engaged as a key financial expert on the public-private partnership in Bosnia and Herzegovina project undertaken in 2016-2017. She is the author of several books Methodology for Value for Money Analysis in Public-private Partnership Projects (Public Administration Reform Coordinator’s Office in B&H, 2017), Financial Asset Valuation Models (School of Economics and Business in Sarajevo, 2015) and Applied Financial Management (School of Economics and Business in Sarajevo, 2010), as well as book chapters in Islamic Financial Literacy (Unissa Press and Islamic Research and Training Institute/Islamic Development Bank, 2016) and Islamic Finance Practices - Experiences from South Eastern Europe (Palgrave Macmillan, 2020). She has published several dozen papers in various journals and conference proceedings. She is a member of the Commission for public investment program in the Federation of Bosnia and Herzegovina (Ministry of finance of the FB&H) and Audit committee of the Raiffeisen Invest, Mutual Fund Management Company. For the last 15 years, she has worked closely together with union of accountants, auditors, and financial workers of the Federation of Bosnia and Herzegovina and commission for accounting and auditing of Bosnia and Herzegovina on education and organization of professional exams in accounting and auditing profession. She is a licensed investment advisor on the capital market, broker, and dealer (Securities Commission of Federation of Bosnia and Herzegovina, 2003) as well as chartered certified accountant and auditor. She has 20 years of working experience within the School of Economics and Business in Sarajevo. E-mail: azra.zaimovic@efsa.unsa.ba

Lejla Dedovic is a first year PhD student and a teaching fellow assistant at the Faculty of Economics and Business, University of Sarajevo. She has just recently obtained her Master’s degree in Financial Management from the School of Economics and Business, University of Sarajevo, taught in English. Her master’s thesis was linked to stock exchange indexes and the current COVID-19 situation. It aimed to extend the growing body of literature about the COVID-19 crisis by comparing the difference between the effect of the Global Financial Crisis (GFC) and COVID-19 crisis on stock market indexes. She is a proficient user of STATA package and always keen to work on financial modelling. She is particularly interested in the factors influencing the stock market movements, long term effects of crises, risk analysis, effects of merger and acquisitions, the importance of government policies, etc. She received the silver and golden badge reward from University of Sarajevo for her outstanding academic achievement during both her Bachelor and Master programs. She is currently working as a Junior Investment Banker at Torch partners, where she has gained knowledge on different financial deals particularly on firm’s financial statements and different valuation models. She is motivated to become a professional and a part of the educational system of Bosnia and Herzegovina aimed at improving and contributing to its community. E-mail: lejladedovic1@gmail.com

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:يملاسلإا ليومتلاو يملاعلا داصتقلاا

تاسايس نيب ةنراقم ديفوك ةمزأو ةيلماعلا ةيلالما ةمزلأا للاخ تاموكحلا

- 19

ع را ذ وميعز ء يف شت

ةراجتلاو داصتقلاا ةيلك ،ليومتلا يف كراشم ذاتسأ ،

كسرهلاو ةنسوبلا ،وفييارس ةعماج

ديد ىليل و

يف شت

ةراجتلاو داصتقلاا ةيلك ،هاروتكد ةبلاط ،

كسرهلاو ةنسوبلا ،وفييارس ةعماج

.صلختسلما ديفوك دجتسُلما انوروُك سوريف مهسأ

- 19 تارييغت ثادحإ يف يف ةريبك

ةقيرطلا يفو انتايح

.ثيدحلا خيراتلا يف هل ليثم لا لكشب ةيحصلا ةياعرلاو يعامتجلاا لعافتلاو لامعلأا ميدقت اهب متي يتلا ةحئاج عوضوم لوح ةديازتلما تايبدلأا قاطن عيسوت ىلإ ةساردلا هذه فدهت ديفوك

- 19 م للاخ ن

ديفوُك ةمزلأ تاموكحلا تاباجتسا ةنراقمو يدقنلا ليلحتلا -

19 ماع يف 2020 ةيلماعلا ةيلالما ةمزلأاو ، م

ماع يف 2008 هجوأ يف قيقحتلا ىلع ةساردلا زكرُت . م فلاتخلااو هبشلا

تيقوتو لكيهو قاطنو مجح يف

ودرو ةيموكحلا تاسايسلا ليلحت يرجي .نيثدحلا نيب تاموكحلا تاسايس تايلاولا نم لك لعف د

لكشب يملاعلا داصتقلاا يف نييسيئر نيبعلا امهرابتعاب نيصلاو ةدحتلما ريبك

للاخ نم ةقرولا ىعست .

ىلإ ةبراقلما هذه ةدافتسلما سوردلا ةفرعم

تاموكحلا لبق نم اهلماعت يف

،ةيلماعلا ةيلالما ةمزلأا عم

سوردلا كلت قيبطتو لماعتلا يف

عم راثآو تافلخ ُم ديفوك ةحئاج

- 19 ليلحتب ا ًضيأ ثحبلا موقي .

( ةيكيرملأا مهسلأا قاوسأ تارشؤم ىلع ةيموكحلا تاءارجلإا تاريثأت

S&P 500

( ةينيصلاو )

Shanghai

Composite (SSEC)

رثكأو عرسأ ناك انوروُك ةحئاج ةمزلأ تاموكحلا ةباجتسا نأ ليلحتلا رهظُي .)

فلخم عم اهلماعت يف هيلع تناك امم ةءافك ديفوُك ةمزأ راثآ دحأ .ةيلماعلا ةيلالما ةمزلأا راثآو تا

- 19 وه

زنوج واد" رشؤم يف ةديازتم تابلقت ثودح ناثحابلا دجو دقل ،عقاولا يف .مهسلأا قوس تابلقت ةدايز ( ةيملاسلإا قوسلل يملاعلا ةرتف يف ")

DJIM

ديفوك - 19 .ةحئاجلا لولح لبق ام ةرتف يف هيلع ناك امم رثكأ

و ا رهظُي ءادأ نأ ا ًضيأ ليلحتل ةمزأ يف ريثكب لضفأ

DJIM

ديفوك - رشؤلما عضو هيلع ناك امـب ًةنراقم 19

يف ريثكب لقأ تناك رشؤلما تادئاع تابلقت نأو ةيباجيإ تناك دئاوعلا نأ يأ ؛ةيلماعلا ةيلالما ةمزلأا نابإ ةمزأ ديفوك - نيب نم َّنإ .ةيلماعلا ةيلالما ةمزلأا للاخ هيلع تناك امم 19 لِّ كشُت نأ نكمي يتلا تارايخلا

نيب تاكارشلا يف لثمتت ةريخلأا ةيداصتقلاا تابارطضلاا ىلع يملاسلإا ليومتلا لبق نم ا ًماهسإ لالما سأر ةدايزل ةعيرشلا ماكحأ عم ةقفاوتلما تاودلأا مادختسا نكمي ثيح ؛صاخلاو ماعلا نيعاطقلا .ةيتحتلا ةينبلا عيراشلم صاخلا لا َّدلا تاملكلا :ة

World Economy and Islamic Finance: Comparison of Government Policies during the Global Financial Crisis and the COVID-19 Crisis