31

21
st
December 2011
FEATURE
Modern Islamic banking practices in Sri
Lanka started their journey almost three
decades ago in the form of projects and
were later converted to fully-edged
Islamic commercial banks. This growth
of Shariah compliant nancial activities
has spread to investment banking,
project nancing, capital markets,
insurance, wealth management and
micronance. However, although
some initiatives have already been
undertaken in the GCC countries
(including the IDB Group) regarding
agriculture sector nancing, the
mainstream Islamic nance institutions
still have no direct involvement.
As the global economies witness an
increasing demand for agriculture sector
nancing, Islamic nance is no exception.
This demand can be treated by dierent
Islamic nance techniques to cater for the
market. Agriculture nancing could be
performed under various Islamic nance
principles including trade-based/rental-
based or participatory models.
Trade-based Islamic nancing
provides nancing through goods
and commodities using concepts such
as Murabahah, Musawwamah and
Salam.
Rental-based Islamic nance products
for the agriculture sector involve
the bank or nancial institution
undertaking the purchase of assets
and then oering these to customers/
farmers on a rental basis via Ijarah.
The ideal mode of nancing for the
agriculture sector is the participatory
model. This is where both parties get
involved based on joint participation
of prot and loss. The main products
are Musharakah, Mudarabah,
Musaqah, Muzaraa and Mugharasa.
The ideal participatory modes of
nancing for the agriculture sector can be
described as follows:
Musaqah (irrigation): This mode
of nancing is very eective for
the agriculture sector (especially
orchards/trees) where a specied
share of output will go towards
labor and the other portion will go
to the institution/enterprise itself.
This is a partnership that depends
on one party presenting designated
plants/trees that produce usable
goods to another in order to work on
its irrigation in consideration for a
common dened share in the fruits.
AAOIFI has approved Musaqah-
related Sukuk for trading.
Muzaraa (share cropping): This
partnership is based around crops,
with usually two or three parties
involved. One party presents the
land to another for cultivation and
maintenance, in consideration for a
common dened share in the crop.
Three parties can be simultaneously
involved in a Muzaraa where one
party provides the land, the second
party provides the input (seeds,
chemicals, etc.) and the third party
provides the labor for production.
AAOIFI has permited Sukuk for
this and it is tradable, albeit with a
relatively short tenor.
Mugharasa (agricultural): This
is a legally viable option for the
nancing of the development of the
trees. This is a partnership by which
one party presents a treeless piece
of land to another to plant trees in
on the condition that they share
the trees and fruits in accordance
with a dened percentage. Sukuk
Mugharasa can also be traded and
this usually has a long tenor.
As per Diagram 1, this sector is a vast
area with many dierent sub-sectors.
The agriculture sector has some issues
however, whereby nance institutions
are can be reluctant to oer facilities.
Banks rarely oer this kind of nancing
due to a number of reasons. One of the
main issues is collateral, as small farmers
and business people ofen do not have
any acceptable collateral and are also not
educated or nancially literate.
Over 70% of the rural population in Sri
Lanka depends on cultivation, livestock
rearing or shing for for their livelihood,
including food and income security. The
countrys economy is dominated by the
agriculture sector (approximately 13% of
GDP in 2010), and it produces plantation
Absence of Islamic agro-banks in Sri Lanka
As the global economies witness increasing demand for agriculture sector nancing, Islamic nance is no
exception. This demand can be met by various Islamic nance techniques. MUATH MUBARAK discusses.
continued...
The ideal mode
of financing
for the agriculture
sector is the
participatory
model
DiagramDivcrsicdagricu!tura!nancing
AgriIarmscctnr
Crops
Horticulture
(Cultivation of plant, garden, fruits, vegetables)
Floriculture
(Cultivation of oer for ornaental purposes)
Inputs
AgriOFFIarmscctnr
Dairy development
Livestock, goat & sheep.
oultry, sheries
Water management
Lending for farmers
Farm transport
32

21
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December 2011
FEATURE
crops such as tea, rubber, coconut, cocoa
and spices for export purposes.
The countrys budget for 2012 has
highlighted multiple incentives and
tax encouragements for the agriculture
sector. These include, among many more:
A vision to move towards a self-suf-
cient economy through improving
agriculture productivity in terms of
rice, coconut, tea, rubber and spices.
Depreciation of the currency by 3% in
order to increase competitiveness in
the global market.
Tax removed for modern tech rice
mills and production of coconut,
palmyrah and kithul.
Development of four rice exporting
centers.
Conclusion
It is clear that the policymakers and
nancial service providers must create
incentives for farmers by unlocking the
current framework and encouraging
Islamic nancial institutions to
accommodate this niche market.
Muath Mubarak is the director of studies and
corporate strategy at First Global Knowledge
Center, Sri Lanka and he can be contacted at
muath2015@gmail.com or muath@fgkcenter.
com.
Continued
The countrys
budget
for 2012 has
highlighted multiple
incentives and tax
encouragements
for the agriculture
sector
Why are the banks
not ready?
The banks issues
Farmers are
nancially illiterate
Lack of vision in this
sector
There is no collateral
or collateral is not
acceptable by the
bank
No innovative
products for this
sector due to lack of
technical knowledge
Limited automation
and few modern
techniques used
Lack of team
capacity/value-based
projects
Lack of awareness
about banking
practices
Lengthy process and
high operational
costs/lack of
specialization
Poor nancial
dealings and
management
structures
Di culty in
identifying and
oering products to
eligible customers/
lack of transparency
Creditworthiness
of customers and
capacity for the
cultivation
Monitoring and
recovery becomes
vital - must deploy
a special team/no
special applications
or sofware.
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