Issues in Existing Agricultural Credit and Scope of Bay‘ al-Salam as an Alternative

Abstract

This study focuses on issues in agricultural finance in Pakistan and suggests the use of bay‘ al-Salam, the forward contract as allowed in Islamic law of contracts. Despite vital importance, the agriculture sector in Pakistan hasn’t been able to make the case to gain attention on the Government’s priority list. A number of negatively impacting elements can be pointed out, but the standalone interest based system of agricultural credit can be termed as the most harmful for farmers, agriculture sector and the national economy. Major problems include insufficient institutional credit, exorbitant rate of interest, non-availability of collateral and the cumbersome procedures. This situation creates a credit gap which is filled by the non-institutional sources like middlemen, shopkeepers and money lenders who too exploit the poor farmers. However, they still borrow from private sources as the access is easier. The concerns are growing about the existing interest based credit system and voices are also raised for an alternative system that is easy to access as also compliant with the Shar¯ı‘ah principles. Salam financing for the purchase of crops initiated by Sudanese banks couldn’t create desired impact fully. Similarly, Salam financing offered by First Islamic Bank of Indonesia faced serious Shar¯ı‘ah compliance issues. However, a private body namely Wasil Foundation’s bay‘ al-Salam initiative in Pakistan seems comparatively a successful story. A relatively better response and wider acceptance by the stakeholders to Salam financing offered by Wasil indicates that banks (both conventional and Islamic) cannot apply Salam efficiently due to non-availability of required infrastructure. Although Salam financing is highly instrumental mode of finance for agriculture, but could fail if managed through the Islamic banks in obtaining the desired outcome. This study, based on the literature and expert opinion collected through a survey, proposes a separate body to handle Salam financing to agriculture in Pakistan.

Understanding farmers’ decision-making to use Islamic finance through the lens of theory of planned behavior

“…In Pakistan, agricultural (conventional) finance has been the most common financing approach for many years; however, Pakistani farmers mainly focused on choosing a bank that would offer loans on the best terms. In 2000, the State Bank of Pakistan introduced an Islamic banking system that adhered to the religious beliefs of farmers and offered a wide range of financial products (Ahmed et al , 2019; Zafar et al , 2015). In the past, several studies on agricultural finance addressed the credit issues through Islamic versus conventional lending (Puspitasari et al , 2019; Zafar et al , 2015).…”