Agriculture Financing Through Bay Salam In Islamic Banking Institutions: Theory And Practice

Abstract

The agriculture sector is backbone of Pakistan economy, but the sector is facing various problems. In this scenario there is a need to find out appropriate alternatives to the existing interest-based system of agriculture credit in the light of Shariah guidelines. With this backdrop, the current study tries to explore suitable financial tool in the light of Islamic Shariah addressing the credit issues and enabling the recovery of ailing agriculture sector. Islamic finance is one of the possible alternatives available to address the burning issues faced by agricultural credit seekers. During the last few decades, the share of Islamic finance has rapidly increased, and it has been accepted as an alternative financial system throughout the world and London (UK) has emerged as a hub of Islamic finance (Wilson[i], 2000). Islamic Banks (IBs) and Islamic Financial Institutions (IFI) have been established both in Muslim and non-Muslim countries. Pakistan has also witnessed a substantial jump in the Islamic finance during last few years and the assets of IBs have gone up from Rs. 477 billion in CY 10 to Rs.1,610 in CY 15 and share in bank deposits during the same period rose from 7.2 percent to 13.2 percent (Pakistan Economic Survey, 2015-16; SBP Annual Report, 2015-16). In the recent years Islamic banks have also initiated agricultural finance and its share is gradually increasing however, share of Salam financing is still insignificant and some banks are at the planning stage. Although in the private sector some entities consider Salam and Islamic Microfinance a suitable alternative and have taken a successful start.