Forget Idealistic Theories

With the Coronavirus disease (COVID-19), the world changed upside-down. We witnessed extraordinary decisions by governments around the world. For example, several governments that subscribe to the Capitalism System started providing money handouts to its people or pay the salaries of employees in the private sector. This is to help people withstand the economic crisis that COVID-19 triggered. And of course, this contradicts the fundamental principle of nations being market-driven economies with no or little interventions by the Governments in the market.

This is not the first time Capitalist Nations do this. The most recent time was during the Subprime Financial Crisis that happened in 2008. This was when several governments poured trillions of dollars to bail out sinking corporations and banks. Several reasons made the Governments engage in such Socialism Interventions. The most common one was to avoid social chaos when millions of people lose their jobs. So, at times, it is fine to forget about idealistic theories to deal with the problem at hand.

Likewise, at times, we should forget idealistic theories to grab opportunities that present themselves to us. Because of COVID-19, the Central Bank instructed all the banks in Bahrain to defer the banks' installments for six months without charging any fees or extra interest to their clients. It was a smart move to help people cope with the economic slowdown. However, people had the choice to pay if they wished.

The announcement created a flood of social media posts. People were divided. Some, were for it. And some, against it. The latter group said you should continue paying the installments; that way, you will finish your loans quicker. It is always a good idea to be debt-free, they proclaimed. And this is an idealistic theory promoted by many financial advisors, internationally. Although I share the same financial background they have, I entirely disagree with them. 

This disagreement is based on my knowledge of the structure of the bank installments. Each installment you pay to the bank has two components: The Interest & the Loan Repayment Amount – the principal. At the beginning of your loan period, the bank recovers most of the interest amount. So, if you are already in the first few years of the loan, the bank has already charged you hefty interest amounts. With the mandate of the Central Bank, you can now enjoy six months break without making any payments. 

You should capitalize on this opportunity.

If you’re in the last periods of your loan, this applies to you too. The bank has already received all its interest amount. Now, your installments have more of the principal repayment amount and little of the interest amount. It’s your time to have a breather. Over this period, save this amount. Create an emergency fund. COVID-19 is here to stay. You never know what comes next. Corporations around the world are cutting salaries and laying off employees. And, those who don’t are not paying salaries on time. Their cash flows are affected adversely – just think of the airlines, hospitality, and restaurants. 

Just scan the news, and you’ll realize we’re in a dire situation:

1) World Economic Forum: “The COVID-19 recession could be far worse than 2008.”

2) CNBC: “The battle against coronavirus will last a ‘very long time,’ says Singapore minister.”

3) BBC: “The world is shutting down. Places that were once teeming with the hustle and bustle of daily life have become ghost-towns with massive restrictions put on our lives - from lockdowns and school closures to travel restrictions and bans on mass gatherings.”

4) The New York Times: “Unemployment ranks up 6.6 million as coronavirus hits jobs.”

5) Financial Times: “Global recession already here, say top economists.”

Be real. Be practical. Forget idealistic theories. And, capture this opportunity to defer your bank installments. 

Build yourself an emergency fund.

Mohamed Isa is a Business Advisor, an Award-Winning Speaker & 4-Time Amazon Bestselling Author.