Enhancing food security with Islamic microfinance: insights from some recent experiments

Abstract

Purpose – Islamic microfinance institutions (IsMFIs) have used diverse models and tools, as they seek to provide financial and non-financial support to the farming communities. A majortity of IsMFIs focus on provision of micro-credit to farmers alone as a means to enhance food security, following an approach similar to that of the conventional microfinance institutions. Others adopt a “finance-plus” approach and provide support in a multitude of areas other than finance, such as, technology, production, marketing, business development, capacity building, and thus, ultimately steering the project to success. The purpose of this paper is to examine the models and tools of Islamic agricultural finance for the rural poor that display major variations and draw lessons from a policy perspective. Design/methodology/approach – The study undertakes a comprehensive review of the principles, modes and models of Islamic agricultural finance targeted at small-holder farmers. It uses a case study method to review several winning initiatives by IsMFIs across the globe. It highlights the various risks and challenges confronting the projects and how the same are sought to be mitigated. Findings – Islamic agricultural finance for the rural poor involves a range of modes, mechanisms and institutional structures. Credit-based and sharing-based modes work well under specific conditions and there is no one-size-fits-all solution for financing the rural poor. Case studies of successful initiatives reveal that composite models involving the integration of philanthropy-based, not-for-profit as well as for-profit components may provide ideal solutions. Additional factors critical for success include provision of safety nets, involvement of community, non-financial support in a multitude of areas other than finance, such as, technology, procurement, production, marketing, business development and institutional capacity building. Originality/value – The paper addresses a fundamental issue in financing the poor farmers in Muslim societies – whether to opt for a credit-based approach that would ensure greater outreach or to go for a holistic intervention involving financing of the entire value chain. The findings are based on personal interaction of the author with professionals directly involved in the projects.

The Potential of Bai Salam in Islamic Social Finance to Achieve United Nations’ Sustainable Development Goals

“…One of the foremost purposes of Shariah is to mitigate economic inequality and avoid exploitation of the financially disadvantaged groups. Islamic financial instruments, such as Bai Salam and Qard Al-Hasan, are viable alternatives for the interest-based loans as envisaged by the Islamic finance ecosystem (Obaidullah, 2015). If implemented correctly, Salam contract can help to alleviate poverty and potentially end hunger (Muneeza et.…”

“…There are several Islamic banks and financial institutions offer Salam financing to farmers, namely microfinance providers like Muslim Aid Sri Lanka and Wasil Foundation (Obaidullah, 2015). These microfinance providers offer a variety of Shariah compliant products (e.g.…”

“…In a study of bankers' perception towards Salam contract, Kaleem and Ahmad (2010, p. 223) reported that vast majority of the respondents consider it as "impossible for banks to be involved in the purchase of crops" due to limited understanding regarding the working mechanism of Salam contract. Under Salam contract, buyer (or financier) take possession of the crops, and sell the agricultural products to consumers (Obaidullah, 2015). Contemporary financier or banker typically prefer to dealing with money than commodities or crops (Kaleem and Ahmad, 2010).…”

Islamic Banks Concern with the Poor and Micro Businesses: An Evaluation on their Al Qard Hasan (Beautiful Loan)

“…The literal meaning of Al qard hasan is a beautiful loan and it is basically a loan or credit given by the lender without expectation to get return on the principal (Obaidullah 2015). This loan enables the fellow brethren to be financially assisted by the more fortunate Muslims (Saqib et al 2015).…”

Introduction of Islamic Banking and Finance in Ghana: Opportunities and Challenges

“…With the introduction of IBF in Ghana, more and more innovative business opportunities can be exploited and developed from the agriculture sector to boost national productivity in term GDP, and generate sustainable income for existing and potential agricultural practitioners, majority of whom are in the low-income earners' group. IBF would find more opportunities in the Ghanaian agriculture sector since IB concept of profit-Loss sharing could be successfully applied to agriculture-based business (Abdul Samad, 2014;saqib et al, 2015;Obaidullah, 2015).…”