Applying Risk-Sharing to Mitigate Economic Consequences of the COVID-19 Pandemic

Abstract

Abstract—The COVID-19 pandemic is expected to have a severe socio-economic impact with significant losses of GDP and high unemployment rates. As a result, governments worldwide are attempting to mitigate these impacts through government intervention. One major method of alleviating the socio-economic impact has been to reschedule or defer loan and mortgage payments to ease the burden off borrowers and mitigate a massive wave of defaults. In other words, the governments are attempting to impose a degree of risk-sharing in the economy.

This paper debates the advantages of risk-sharing practices in the financial system in times of economic crisis, and argue that this should instead become the norm in the financial system and not only in times of economic downturns or pandemics. This paper further highlights that, although the principle of risk-sharing is enshrined in Islamic finance, many Islamic loans and mortgages do not reflect risk-sharing in practice. Instead, only a few genuine examples exist that actually do apply risk-sharing. These examples should be taken as best-practice models substituting the pervasive risk-transfer model that in times of crisis burdens the borrower in specific, and the entire society through government interference in general.