Unveiling the importance of Islamic agro-banking in Sri Lanka by Muath Mubarak

Muath Mubarak is a Director of Studies and Corporate Strategy for First Global Knowledge Centre (FGKC), a Sri Lanka-based conglomerate of companies involved in the Islamic finance industry. Previously he was working for Barwa Bank, a newest fully fledged Islamic Bank in Qatar.

He is an Associate member of Chartered Institute for Securities & Investments (CISI) – UK and an Associate Fellow Member of the Institute of Islamic Banking and Insurance (IIBI) – UK, where he has successfully completed the Post Graduate Diploma in Islamic Banking and Insurance. He is also a final level student of Chartered Institute of Management Accountants (CIMA) – UK.

Muath is also an Islamic Banking and Finance Trainer and lectures on various topics on Islamic Banking and Finance for students following the Islamic Finance Qualification (IFQ) course (which is offered by CISI – UK), i-Banker and Diploma in Islamic Banking and Finance courses at First Global Knowledge Centre, Colombo, Sri Lanka and also he is an external subject matter expert for the Bankers’ Academy – USA for Islamic Banking and Finance.  He is a freelance writer on various topics relating to Islam as well as Islamic banking and finance.

The global financial system is progressively moving from conventional banking to pure Sharia compliant and ethical banking practices since modern Islamic banking was invented three decades ago. Currently, the Islamic banking and finance has grown tremendously leaving its legacy in each and every region.

The emergence of Islamic finance has not only brought in Islamic banking activities, but rather it contains various industry segments such as takaful (Islamic Insurance), investment banking, mutual funds, trusts,  project financing, Islamic indices, capital markets, insurance, wealth management, micro finance and many more.

Islamic finance is also keen on agriculture related financing and encourages growth in the provision of this source of financing for this purpose. There are some initiatives have been taken in Gulf Cooperation Council (GCC) countries including the Islamic Development Bank Group for agriculture sector financing but mainstream Islamic finance institutions have no direct involvement yet.

There is an increasing demand for agriculture financing globally and Islamic finance cannot escape from this market demand. Most of the big Islamic banks also consider agro-financing as one of the vital product for its portfolio.

This largely untapped market can be catered to by different Islamic finance techniques. These Islamic finance techniques will facilitate Sharia compliant transactions for the agriculture sector in any country irrespective of the race and religion. Agricultural financing could be performed under the following models (as in the diagram) of Islamic Finance principle.


  • Trade based Islamic financing techniques provides financing through goods and commodities with some basic classical concepts such as Murabaha, Musawamma and Salam
  • Rental-based Islamic finance products for the agriculture sector are products where the bank or financial institution will purchase assets or required equipment and offer those to customers / farmers on a rental basis via the Islamic finance concept called Ijara
  • The ideal mode of financing for the agriculture sector is participatory mode of financing. This is where both the parties get involved based on participation in profit and loss. The main products are Musharaka, Mudaraba, Musaqaha, Muzara’a and Mugharasa

The ideal participatory mode of financing for the agriculture sectors can be described as follows:

Musaqaha (irrigation): This is a partnership that depends on one party presenting designated plants/trees that produce usable goods to another in order to work on their irrigation in exchange for an agreed share in fruits. This mode of financing is very effective for the agriculture (orchards / trees) sector where a specified share of output will go to the labor and the other portion will go to the institution / enterprise. The Accounting and Auditing Organisation for Islamic Financial Institutes (AAOIFI) has approved the Musaqaha related Sukuk (Islamic bond) for trading.

Muzara’a (share cropping): This partnership is in crops where primarily two or three parties are involved. One party presents land to another for cultivation and maintenance in exchange for an agreed share in the crop. In the case of three parties being involved in Muzara’a, one party will provide the land, second party will provide the input (seeds, chemicals, etc) and the third party may provide the labour for production. AAOIFI has permitted Sukuk for this and it is tradable. This can be used for a relatively short period time when financing agricultural products.

Mugharasa (Agricultural): This is a legally viable option for financing of tree cultivation. This is a partnership in which one party presents a plot of land without trees to another to plant trees on it on the condition that they share the trees and fruits in accordance to a defined percentage. Mugharasa Sukuk also can be traded and this is used for longer time period of financing where farmers need the highest duration for repayment based on the harvest.

The agriculture sector is a vast area with different sub-sectors.  This sector can be divided in to two namely, the agricultural farm sector (crops, horticulture, floriculture, etc) and agricultural-off farm sector (dairy development, livestock, poultry, water management, etc). This agriculture sector has got issues such as finance institutions being very reluctant to offer facilities due to various reasons.  One of the main issues is collateral where small farmers and business people will not have any acceptable collateral and they are not educated or illiterate in terms of financials and banking transactions.

There are many other reasons why a financial institution is not ready to deal with the agriculture sector and these are the main weakness of the agriculture sector:

  • very limited access to farmers and non-availability of the right information about the financing facilities 
  • collateral or security which is not acceptable
  • formal financing is more expensive than the informal methods such as getting a loan from a wealthy person from villages
  • lack of awareness and education about banking among village farmers
  • farmers being unskilled, and the absence of usage of modern technology in production
  • difficulty of obtaining basic requirements such as water, crops, proper soil, fertilizer, etc
  • no market-focused approach, no communication and preference to over- produce 
  • storing of the seeds, chemicals, fertilizers, harvested items  and transportation issues to areas where demand arises
  • disorganised and non-documented sector. Needs / Requirements and production values not registered.
  • lack of insurance policies for uncertainties and  hazards.

The end of three decades of civil conflict has resulted in new hope and incredible opportunities dawning for Sri Lanka to realize its development potential and to build a strong foundation for long term peace and prosperity.

Sri Lanka is a tiny beautiful island of 65,610 square km’s located in the Indian ocean with a population of approximately 20 million in 2010. Over 70% of the rural population in Sri Lanka is dependent on cultivation, livestock raring or fishing for food and their livelihood. Sri Lanka’s economy is dominated by agriculture (approximately 13% of GDP in 2010) where it produces plantation crops like tea, rubber, coconut, cocoa and spices for the export market.

The Sri Lankan budget for 2012 has highlighted many incentives and tax benefits for the agriculture sector (KPMG, 2011). These include the following:

  • having a vision towards becoming a self sufficient economy by improving agriculture productivity in terms of rice, coconut, tea, rubber and spices
  • depreciation of the currency by 3% in order to increase the price competitiveness in the global market
  • tax removed for rice mills using modern technology and for production of coconut, palmyrah and Kithul
  • developing four rice exporting centres (South, East, Rajarata and North).

It is clear there is an untapped demand for agricultural financing and the government is also very optimistic in this regard, so it is highly advisable that Islamic Finance Institutions (IFIs) in Sri Lanka concentrate in this area rather than depending only on basic transactions and products.

The policy makers and finance service providers must create an opportunity for farmers throughout the country by active participation of IFIs for agricultural financing. This will definitely create some success stories and bring changes in the farmer’s lives whilst enhancing cultivation.

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