Factors Influencing the Low Demand for Salam Financing Contracts in Indonesia – Concept Paper

Abstract

Salam financing is significant in the agricultural sector, especially for seasonal food crops. It has many benefits for the community, particularly for poor farmers, and it is appropriate in the agriculture sector. This paper aims to discuss the factors influencing the low demand for Salam financing contracts that are impactful to either buyer, the bank, or the seller, the farmer. This study adopts a qualitative approach, which includes reviews and analysis of secondary data in relevant literature and documents relating to Salam financing contracts in the Indonesian banking industry. The significant findings of this study are the identification of human resources in Islamic banks that should be improved in terms of their knowledge of Islamic banking products. It is crucial also to know how to innovate for a sustainable and implementable product. In order to address the challenges in Salam financing, it is proposed to reduce internal and external issues with Salam financing. This study adds new knowledge to the existing literature by optimizing the Salam contract in Islamic banking to overcome capital problems in the farming sector and collaborating with agricultural insurance to cover capital costs that farmers cannot pay when crop failure occurs. This study will recommend the methods to overcome the problems stated faced by Islamic banking, including using fintech to counter the issues.

Sharia Banking Contract Model: Alternative Financing For the Agricultural Sector in Indonesia

“…So then the a need for several aspects that need to be considered to form a concept and model of financing contracts in Islamic banking, namely: first, consumer segmentation. Segmentation for greeting contracts is farmers based on characteristics such as micro, medium, or large and based on crop turnover, crop failure risk to calcification based on plant type (Isahak et al, 2023).…”

“…Seventh, key activity relates to the core activity of what needs to be done by a business entity whose purpose is that the business model can be run optimally to obtain the desired results. Of course, the activity of greeting financing will depend on several parties such as the socialization of greeting products to farmers (banks or government) (Isahak et al, 2023), assessment of feasibility and risk by agricultural experts or bank risk management, and synergy with the Sharia Supervisory Board so that actions are by the activities carried out.…”

“…High expectations for Sharia banking as a financing institution cannot be separated from a Muslim's understanding of Sharia. This means that Sharia banking requires the trust of Muslims and is also an embodiment of social justice (Isahak et al, 2023). To meet this goal, Islamic banking formulates a wide range of products tailored to Sharia principles and innovative to meet the needs of the market as a whole (Askari, 2019).…”