The economic impact of the Covid-19 pandemic is getting more and more serious. A recent report by the International Labor Organization (ILO) estimates 25 million workers will lose their jobs globally as a result of the outbreak. The impact on the lives of the individuals involved and their families is going to be very severe. Millions may have to move out of their homes because they may no longer afford to pay the monthly mortgage payment or rent. Millions may also be unable to afford food for their families.

Many business organizations are not able to carry out normal business operations, especially in countries where authorities are implementing restrictive social distancing measures such as `Lockdowns’. The reduction in household incomes will also mean reduction in demand in the economy which will further cause reductions in revenue and income for business organizations.

In modern economic systems, many sectors are intertwined and interdependent. If one sector experiences problems, it will affect other sectors. In the case of the Covid-19 pandemic, many sectors are experiencing problems at the same time. Of course there are sectors that are worse off compared to others. Examples of the worst hit are the airline and hospitality sectors where some airlines such as SIA and Qantas are reportedly asking thousands of their employees to take unpaid leave. Emirates, one of the world’s largest airlines, has decided to completely shut down all passenger services to ensure there are no job losses.

One might think that the medical sector would benefit greatly since many patients would visit hospitals for treatments for Covid-19. However, in almost all cases the hospitals that accept Covid-19 patients are public or government-owned hospitals, not private hospitals. This is quite unsurprising. Private hospitals that accept walk-in Covid-19 patients will be taking a very great risk to their operations. If their staff get infected, the hospitals’ operations will be severely disrupted and may even have to close down for days which may in turn lead to severe financial losses.

The fact is, private hospitals are actually for-profit business organizations. They are not in existence due to pure altruistic reasons or objectves. The management of these organizations need to make sure the return on investment or return on capital figures satisfy their owners’ expectation if they wish to retain their jobs and earn bonusses.
In addition, many private hospitals are indebted to banking institutions. For example, the total borrowings of Malaysia’s largest medical group KPJ is almost RM1.5 billion. That is why KPJ needs to ensure that their income is not compromised so as to ensure their debt repayment capacity is also not compromised.

Many expect the government to help companies and individuals in financial distress. If the government has a lot of reserve funds, then that is definitely possible. But the fact is governments around the world, including the Malaysian government, are in dire financial straits. Total Malaysian government debt (when combined with government guarantees) is over RM1 trillion. Therefore, the only way the government can provide financial assistance is by incurring more debt which will ultimately be borne by tax-payers.

Some people highlight the Malaysian government’s foreign exchange reserves of more than RM400 billion which they say can be used to help the domestic economy. In actual fact, the reserves do not really belong to the government. Those are Bank Negara Malaysia’s (BNM) foreign currency reserves which are mostly denominated in US dollars (USD103 billion). The reserves are needed by BNM to facilitate imports by Malaysian firms and also to support the value of the Ringgit and stabilise it. If the reserves are insufficient, BNM will not be able to curb any decline in the value of the Ringgit in the future. This will not only cause in

stability in the economy but at the same time result in higher prices of imported goods (including food). This will result in what economists term as `Imported Inflation’. Moreover this will also impair the ability of Malaysian firms to pay off their debts to foreign financial institutions. That was what happened to Turkish firms last year, which has severely affected the Turkish economy to this day. We certainly do not want to see the same situation taking place in Malaysia.

The current severe economic problems as a result of the pandemic should indicate to us that we need a new economic framework which emphasises mutul help and assistance and minimises the level of indebtedness in society and to work on establishing a new paradigm in economic thinking where debt levels can be minimised. Actually, there is no need to reinvent the wheel. During the Abbasid period of Islamic civilisation, debts in society were very low (because the practice of Usury or Riba was banned) while Waqf institutions dominated the economy. Waqf is somewhat akin to the modern Trustee system. During the Abbasid period, medical services were provided by hospitals free of charge. These hospitals were funded by donors and managed by Waqfs committees and there were many of them in those days. They competed with each other to provide the best free services as the ones with better reputation would attract more donors. Even free veterinary hospitals were reputedly operating during that period in the city of Damascus. This is very different from the current situation in our country today where medical costs of private hospitals are prohibitively high and beyond the reach of most people.

The problems we are facing as a result of the Covid-19 outbreak should also make us realize that our economic model is ultimately beneficial only to a small segment of society – the wealthy elite, especially owners of financial organizations. It is a debt-based economy model where almost all economic activities are funded by debt provided by the wealthy elite with money created out of thin air. When society is in a debt crisis as what is happening now, this wealthy group will still insist that debts be paid regardless of the suffering that is being endured by the debtors, many of whom belong to the bottom strata of society.

In Islam, capital for business should be obtained from the investor by partnership, either through the Mudarabah or Musyarakah method, and not through debts. That is what the Messenger of Allah has taught us. Instead, nowadays most businesses including hospitals and educational institutions choose to borrow from the banking industry to raise funds. As a result, they are unable to provide free services to the community unlike Waqf-funded hospitals.
Moreover, Islam encourages people to avoid debt and conspicuous consumption. Instead, they are encouraged to donate income which is surplus to their needs either directly to needy people or indirectly through Waqf institutions. These days, however, due to the operation and growth of banks, many members of our society not only have no savings but are living in a cycle of debts. It is not surprising that the average household owes hundreds of thousands of dollars as the total household debt in Malaysia is over RM1.1 trillion.

Because of this, the monthly income of members of the community is channeled largely to the banking industry and not to Waqf institutions. As a result, the total assets of Waqf institutions in Malaysia is very small at less than RM10 billion, compared to the banking industry’s assets of more than RM3 trillion and growing rapidly.

The situation is made worse by the fact that the banking industry creates new money every time it issues loans to borrowers. The amount of new money being created in Malaysia is almost RM7 billion a month. As a result, the total amount of money in the country’s financial system is very high thereby reducing its purchasing power, which leads to the phenomenon of inflation. In a situation where wages and salaries’ rate of increase is lower than inflation rate, cost of living will increase and many will find their income inadequate to cover their needs.

Unfortunately, due to strong consumerist values, many may still want to buy brand new cars, have lavish weddings or go abroad for holidays even if that means they have to borrow money from banks. The reason is debt is easily obtained from banks which are only concerned with increasing their profits. According to the recent World Bank’s Malaysia Economic Monitor (MEM) report, more than 40% of borrowers earning less than RM3,000 spend more than 40% of their income to settle debts. According to the same, nearly 50 per cent of working adults in Malaysia lack financial resilience, especially among the younger generation. For example, in 2018, the AKPK found that 28% of working adults had to be helped by friends or family members to buy necessities. Bankruptcy cases are also on the rise among youths, with 60% of cases being between the ages of 25 and 44.

In an economic downturn everyone will feel the effects of high debt levels. It is highly probable that Covid-19 will cause the country’s poverty rate to rise dramatically and thousands of Malaysians will be homeless and many families will face shortage of food. Thousands of children will be suffering from malnutrition.

The short-term solution to the coming economic crisis is a humanitarian measure on the the part of the banking industry, which is not to put pressure on borrowers who are in dire straits. Banks should forgive the borrowers’ debts. However, we should also be aware that in the current system, the banks’ action to forgive borrower’s debts may cause their assets to decline, thus making them insolvent. If many banking institutions go bankrupt, this can in the immediate term lead to economic and social chaos which is a worse outcome.

Based on the above argument, it is clear we also need a long term solution, which is to change our economic system so that lending money is no longer an industry but a practice to help people who are in need of help. The most important institution in this alternative system is the Waqf whose sole purpose is to provide benefits to society, by channelling resources from the rich to the poor and the weak.

These changes require a change in the values of society to those where members of the community will prefer to spend their money to help others, rather than for purely personal and family enjoyment. Moreover, society needs to minimise or eliminate the consumerist culture where social status, values, and activities are centered on the consumption of goods and services, especially those funded by debts. The key values that should be nurtured in society are those that stress kindness to others, willingness to assist people in need, and other humanistic values. The efforts to change the values of society is not easy after decades of being indoctrinated that material wealth is the sole indicator of success. These efforts cannot be expected to come only from the government but also from non-governmental organisations and individuals. Religious teachings, especially those that stress the virtues of helping others in need are without doubt an integral aspect of these efforts.

Prof Mohd Nazari Ismail is a professor at the Department of Policy and Strategy, Faculty of Business and Accounting, University of Malaya.
His latest book in English is entitled `Till Debt Do Us Part – The Growth of The Global Banking Industry and Its Insidious Effects’, published University of Malaya Press