Application of Islamic banking instrument (Bai Salam) for agriculture financing in Pakistan

Abstract

PurposeIslam prohibits interest as a source of income or profit. The purpose of this paper is to explore the possible application of Bai Salam contract (forward sale agreement) as an alternative financial instrument in the agriculture sector of Pakistan.Design/methodology/approachA survey was conducted in four districts of the Punjab with a specifically designed questionnaire. A convenient sampling technique was used to gather farmers' concerns related to crops inputs, output and credit requirements.FindingsEmpirical findings conclude that agriculture income represents only up to 60 percent of the income of an average farm household. About 70 percent of farmers participate in the credit market. They need money to purchase crops inputs, to pay the labour and to hire rental machinery. Farmers believe that they can save up to 25 percent in costs if they purchase inputs on cash. The survey also discloses that middlemen are the larger financers and buyers of crops in the rural economy whereby only 10 percent of transactions are conducted on a purely cash basis. Farmers usually return the money after the sale of the crop.Research limitations/implicationsThe concept of the paper can be extended to areas where large landlords dominate the scene. Alternatively, it can be extended towards non‐farm activities such as cattle raising and poultry.Originality/valueThe paper is a first comprehensive effort to explore the possible application of an Islamic banking instrument in the agriculture sector of Pakistan. It also suggests three possible models for financing under a Bai Salam contract. Some policy recommendations are also given.