Islamic structured trade finance: a case of cotton production in West Africa

Abstract

PurposeThe purpose of this paper is to show a creative way to fulfill financing needs of entities involved in pre‐ and post‐harvest production activities in extreme cases while mitigating inherent risks by Islamic structured trade finance from the real‐life case of cotton production in Burkina Faso.Design/methodology/approachThe existing Islamic structured finance design for SOFITEX was analyzed in details so as to provide clear understanding of the subject matter. This structure was evaluated and a new design is proposed to better accommodate the financing need of SOFITEX.FindingsThere are some inherent drawbacks, explained in details, of the existing Islamic finance structure. Salam contract for pre‐harvest input financing in favor of farmers can, unlike existing structure, accommodate the complete supply chain financing solution, hence, support the whole production cycle from input procurement to the exports of cotton fiber. That is, it fits better for financing the agricultural sector.Research limitations/implicationsThe case and the structure studied in depth are limited to the cotton sector. This could be widened in subsequent researches.Practical implicationsIslamic finance instruments provide us enough room to fulfill financing needs in extreme cases as a better alternative to conventional financing tools. A method of mark‐up calculation for structured cotton trade finance is developed for Murabaha and Salam contracts.Originality/valueThe paper sheds new light on how to finance the agricultural sector starting from input procurement to the sale/export by Islamic finance instruments. It also shows how to get guarantees in the form of commodities in warehouse rather than bank guarantees, mortgage, sovereign guarantees, etc.