Everyone knows that recessions are a natural part of the economic cycle. The United States has experienced at least one recession in every decade since the 1800s. In fact, we’ve even had several major recessions over the past 20 years – including the particularly painful Great Recession of 2008. We all know that recessions pose challenging financial circumstances for businesses and individuals. Individuals who are unprepared can find themselves without an income or any savings to fall back on. Businesses that aren’t prepared for the downturn can see their revenue dip substantially, which may force them to lay off employees or even go out of business. Recessions may be a normal part of the economic cycle, but they can still be scary events for everyone involved. There are things you can do to prepare yourself and your business – not only for this recession specifically, but also for potential recessions in general. This guide will walk you through everything you need to know about recession preparation and how Islamic banking and finance can help in such challenging times.
What to Do Before a Recession Begins:
It may be easier to prevent a recession than to recover from one once it’s already under way. If you can prepare for a recession before it actually happens, you’ll have a better chance of coming out of it with minimal damage to your finances. What specific steps should you take to prepare for a recession? There are a few things you can do to get yourself ready.
Save more money:
This one may seem obvious, but it really is the most important thing you can do to protect yourself. If you’re saving enough money to cover the cost of living during a recession, you’ll have something to fall back on in case your income takes a hit.
Review your spending:
Where exactly are you spending your money? Are there areas where you can cut back? It may be helpful to make a spending plan or a budget so that you can see where your money is going. Having this information will help you figure out where you can make cuts to save more money for a rainy day.
Invest in your skills:
During a recession, businesses may be reluctant to hire new employees or pay for additional training, so you may have limited opportunities to advance your career. You can prepare for this by investing in your skills and improving your resume, so you have more options if you need to look for a new job. An online diploma in Islamic banking and finance from AIMS is the best example.
Islamic Finance in a Recession:
Islamic Banking and Finance is a set of financial practices that are designed to comply with Islamic law. These practices differ in a variety of ways from Western-style finance and banking. Although predominantly a Muslim phenomenon, Islamic Finance is a rapidly growing field globally. Islamic Finance is currently practiced in over 100 countries, and its assets are projected to exceed $20 trillion by 2025. Islamic Finance has the potential to actively contribute towards mitigating the effects of and preparing for future economic recessions. According to one of AIMS’ phd in Islamic banking and economics graduate, Islamic banks and financial institutions have lower leverage ratios than conventional banks. When equity capital is low, banks are less able to extend credit and thus the economy contracts, potentially leading to a recession. In comparison, Islamic banks have lower leverage ratios and therefore require more equity capital to conduct business. This may impede their ability to extend credit during an economic contraction, which may in turn alleviate the adverse effects of a recession.
Why Study Islamic Banking and Finance?
Islamic Banking and Finance is a growing field of study for a number of reasons. First, it’s been expanding globally at an incredible rate, with several new Islamic banks opening up in the United States over the past few years. Besides the increasing number of Islamic banks in the United States, another major factor in the growth of Islamic finance and takaful insurance is that it offers something for everyone. Islamic finance is designed to be accessible to everyone, regardless of their faith. It’s also designed to be appealing to businesses of all sizes – even startups and small businesses typically excluded from the conventional financial system can utilize Islamic finance to access the necessary capital they need to succeed.
Advantages of Islamic Finance During a Recession:
Beyond simply being useful during a recession, Islamic Banking and Finance has a number of advantages over conventional finance. These benefits make it an appealing field of study for individuals and businesses of all types. Some of the key advantages of Islamic Finance include: - Stronger asset quality. Islamic banks lend money primarily on the basis of the assets they are lending against. This means that they’re less likely to lend money to individuals and businesses who are highly likely to become insolvent. This leads to a stronger asset quality, and thus a lower probability of default and a healthier financial system. - Stronger regulation and supervision. Islamic banks are subject to more thorough regulation and supervision than conventional banks, which may lead to greater financial stability.
Recession preparation tips for businesses:
If you’re a business owner, the best way to prepare for a recession is to make sure you have enough savings to cover your costs while they’re low. Ideally, you should be saving at least 25% of your revenue each month so that you can cover your costs even if your revenue suddenly drops. If your expenses exceed your revenue, you’ll have to either take out a loan or reduce your expenses. Loans are usually short-term solutions that are very difficult to pay back if your revenue doesn’t pick back up. Reducing your expenses is a much more sustainable solution that will help you get through the tough times until the economy recovers.
Conclusion:
A recession can be a challenging time for the economy and for individuals and businesses. Fortunately, there are ways to prepare for a recession so that you’re less impacted when it actually happens. In particular, Islamic Banking and Finance offers a number of advantages over conventional finance that may help mitigate the effects of a recession. If you’re preparing for a recession, it’s important to start saving money right away. Make sure that you’re saving enough to cover your expenses during tough economic times while also making sure that you have enough left over to invest in growing your business.
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