The agriculture sector can be a precarious industry with exposure to potential failures such as commodity price uncertainty or inefficient management. If farmers or firms were to encounter such difficulties, they may not be able to fulfill loan payments and would bear the entirety of the accompanying financial risks. The conventional system does not include any means of sharing the burden of loss.
Therefore, the banking and financial system must discover suitable financing alternatives for the agricultural industry. An up-and-coming financing approach is Islamic financing, which is in accordance with Muslim needs and Shariah principles. In this system, losses are shared between lenders and borrowers in the event of business losses. Additionally, contracts are transparent and clear. Although it is crucial, few studies have explored the use of Islamic instruments in agriculture financing.
It is possible that the dominance of traditional c
...oncepts in Malaysia's banking and financial system since its early development may be responsible for this issue. Islamic banks prioritize financing for the commercial, finance, and service sectors over agriculture, despite the latter being a crucial contributor to both the economy and social development. Previous research indicates that the agriculture sector is vulnerable and subject to failure due to various factors. Additionally, many farmers lack strong business proposals, making financial institutions hesitant to lend them money.
Islamic countries, including Pakistan, Saudi Arabia, and Indonesia, have conducted extensive research on Islamic financing for the agriculture sector. The State Bank of Pakistan has established guidelines on Shariah-compliant agricultural financing to assist banks in creating their own products. Despite Malaysia being an Islamic country that practices an Islamic banking system, research on agricultural financing in
Islamic banking remains limited and requires improvement. To increase the national income generated from the agriculture sector, the government aims to meet the growing demand for agricultural loans from farmers and businesses. As a result, Islamic financing is a preferred option for farmers and businesses to obtain business financing.
Although the current conventional financing system operates under the assumption that contracts are Shariah compliant, it heavily relies on interest for borrowing and lending. This approach conflicts with Islamic financing principles, which prohibit interest due to the increased income and wealth disparities it creates. Consequently, this research aims to enhance comprehension of Islamic financing methods in the agriculture sector, specifically through the implementation of Bay Al Salam contracts as a feasible alternative.
The study contributes to the knowledge of Islamic agricultural finance by investigating a contract that involves prepayment for the sale of goods to be delivered at a later date. It also aims to encourage financial institutions such as banks and intermediaries to promote and implement Islamic financial products in their financing systems.
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