Purpose
This paper aims to assess how Sharīʿah guidelines improve the working capital needs of the Indian sugar industry. Previous studies reveal that the sugar industry in India is in a state of cash deprivation for decades. Finance is not available for expansion, as well as for working capital requirements. Banks have also declined to provide working capital loans to the sugar industry.
Design/methodology/approach
Lack of working capital management and its impact upon sugar mills profitability are examined based on a sample of six Indian sugar mills and the use of panel data analysis for the period 2011-2015.
Findings
The regression results suggest the need for reducing the number of days’ account receivables and inventories to a reasonable minimum to maintain the liquidity necessary for the mills, which current mills cannot manage to achieve, and consequently, suffer liquidity problems.
Practical implications
This paper presents a model of Sharīʿah-compliant working capital financing for cash deprived Indian sugar industry. All the three parties stand to benefit from this arrangement: the farmer will get the price of his crop promptly and at its farmland, sugar mill will secure the required quantity of raw material (sugarcane) without any immediate cash outflow, and the Islamic bank will earn a reasonable mark-up profit from this transaction.
Originality/value
The study is the first comprehensive effort to explore the possible combination of Islamic banking products subject to the fulfillment of needs of sugar mills and farmers and the application of an Islamic banking instrument in the agriculture sector of India. It also suggests the possible models for financing under a Salam and Murabahah contract.
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