Mushārakah—A Realistic Approach to the Concept in Islamic Finance and its Application to the Agricultural Sector in Pakistan

Abstract

Food is one of the basic necessities that is imperative for human survival. The majority of farmers related to agriculture belong to the lower class and are hence not in a position to fulfil their agricultural needs. Therefore, they must borrow from various sources, e.g., from individuals, organizations, and/or banks, using interest-based lending, which Muslims are prohibited from doing according to the Sharīʿah. Here the concept of mushārakah (participatory mode of finance) is the best option. The present work discusses the application of such transactions to overcome farmers’ financial problems. In this article, the concept of mushārakah is first elaborated in light of classical/contemporary Islamic law literature referring to its rules and regulations followed by a discussion on how mushārakah can be effectively applied to the agricultural sector. The concepts of muzāraʿah (temporary sharecropping contract), musāqah, diminishing mushārakah (al-mushārakah al-mutanāqisah), and customer agency are critically analyzed in such away to make these fit and viable for farmers and Islamic financial institutions.

Developing Fintech and Islamic Finance Products in Agricultural Value Chain

“…In contrast, it is rare to find some reference of this financing approach from Islamic perspective. Most of the studies are investigate the Islamic microfinance practice in agriculture (Obaidullah, 2015) or appropriate modes of finance in some specific case and area (Moh'd et al, 2017;Oladokun et al, 2015;Saqib et al, 2014) although agricultural value chain finance is quite mainstream in agriculture and development sectors. Obaidullah (2015) undertakes a review of various Islamic microfinance interventions in agriculture where it is strongly argued how the conventional products and services are not acceptable in the Islamic societies.…”

“…It is also found that, there is no one-size-fits-all mode of finance in agriculture sector. For instance, Saqib et al (2014) suggest types of musharaka with the concepts of muzara'a and musaqa to finance agriculture in Pakistan particularly in urban areas as compared to rural areas but still push Islamic banks to work for prosperity of the poor. Oladokun et al (2015) develop a Muzara'a supply chain model although it is similar with value-chain finance concepts through land partnership.…”

“…Based on multiple case studies, the transaction processes between actors are translated into appropriate Islamic finance modes of finance. Islamic agriculture's financing focuses on production process which smallholder farmers and landowners with modes of finance such as muzara'a & mukhabara (Oladokun et al, 2015), and musharaka-mudaraba (Saqib et al, 2014). Also, some finances help poor smallholder farmers with productive zakat and qard al hassan (Obaidullah, 2015).…”

“…It depicts the importance of Islamic finance contribution to global development agenda. The unique properties of Islamic finance which have a balance component in commercial, social, and spiritual (Moh'd, Omar Mohammed, & Saiti, 2017;Obaidullah, 2015;Oladokun, Larbani, & Mohammed, 2015;Saqib, Zafar, Roberts, Zafar, & Khan, 2014) similarly to the nature of agricultural value chain finance that blending commercial and social to increase the welfare for all actors along the chain.…”

Developing an Islamic Business Model: A Case for Agricultural Value Chain Finance in Agrobank, Malaysia

“…Value chain developed according to the Islamic approach, which could bring a solution for financing agriculture, has encountered problems during its practice in Islamic banks (Saqib et al, 2014;Hussain & Syed Ja'afar Alhabshi, 2016). As mentioned by Webber and Labaste (2010), value chain focuses on value creation-typically via innovative products or processes as well as marketing-and also, on the allocation of incremental value.…”