Exploring the feasibility of Muzara’ah based Islamic running finance model as an alternative for agriculture credit

Abstract

Purpose

This study aims to highlight the issues encountered by Islamic Banking Institutions (IBIs) while financing the agriculture sector and explore the feasibility of Muzara’ah (crop sharing contract on partnership basis) model based on the concept of revolving credit as an alternative to current models.

Design/methodology/approach

To validate the proposed model and gauge the feasibility of Muzara’ah contract, a qualitative research method is applied based on 10 in-depth interviews with qualified industry experts and practitioners. These interviewees are selected following the purposive sampling method, and they belong to Sharīʿah board members of banking institutions, banking industry professionals engaged in agriculture lending, financial regulators (i.e. central bank personnel) and the farming community. Thematic analysis was applied to analyze the data.

Findings

The findings of this study document that Muzara’ah can be a useful alternative/solution for the growth of agriculture sector portfolio of financial institutions. Muzara’ah is cost-effective than other Islamic products, including Salam (a kind of sale in which payment is made on the spot while the delivery of the goods is deferred), and carries the features of revolving credit as offered by conventional banks/counterparts.

Research limitations/implications

The main limitation of the study is that only 10 in-depth interviews are conducted.

Practical implications

The application of the Sharīʿah compliant Muzara’ah model based on the concept of revolving credit could help increase agricultural productivity and revenues and reduce poverty and food insecurity. The research will help IBIs to develop products on the concept of Muzara’ah for farmers and other sectors of the agriculture industry.

Originality/value

To the best of the authors’ knowledge, Muzara’ah contract is not offered by formal banking institutions in Pakistan. Hence, the findings contribute to the existing literature and facilitate the policymakers and practitioners in implementing this financial product for the growth of the agriculture sector.