Salam-Based Microfinance by BoK ? III

Salam has traditionally been understood as a mode of agricultural finance. Indeed, as scholars point out, one of the reasons why salam is admissible as an Islamic mode, even while violating the basic Shariah rule of “do not sell what you do not have”, is because of its economic significance.  It provides a mechanism to meet the pre-cultivation financing needs of the farming community. And when salam is combined with several “smart” factors as is being undertaken by BoK, it becomes a tool of economic empowerment. The salam experiment by IRADA of BoK is being undertaken to open economic opportunities and empower 150 low-income rural families. The twin objectives are (i) to empower families and graduates in producing cash crops – alfalfa, moringa and jetropha – to increase their livelihood and (ii) to boost the production of cash crops, moringa and jatropha for domestic consumption and export.

The project consists of setting up 15 farms with annual productive capacity of 20 tons of the bio-energy products each within a land of 30 acres. It aims to efficiently utilize the land which was provided to 150 small farmer families by Ministry of Agriculture (3 acres each). The business plan involves assistance by IRADA to help these families commercialize the agricultural production, not just for subsistence by providing the necessary infrastructure and then facilitate their sale to a local company, Ishraga Khadra, dealing with Moringa products.

The Model

The model involves salam financing to groups of 10 farmers each at a large scale to purchase infrastructure in form of electricity (source and grids), water source and network, cultivation equipment and implements, service facilities, inputs (seeds, fertilizers, pesticides), and living allowance in form of 2 cows, livestock feed, and inputs for horticulture planting. The products once delivered are sold to the local company Ishraga Khadra.

The beneficiaries have been organized in a co-operative association/ solidarity groups with the right to practice business activities and avail from all legal & market facilities, the beneficiaries has been provided on job training and linked with a private company to facilitate marketing process.

Financing Method

The salam financing of SDG 11.00 million (USD 3.50 million) involved three cash-crops – alfalfa, moringa and jetropha – in a single contract with a maturity of three year and grace periods of – 9 months for alfalfa, and 18 months for moringa and jetropha between BoK and farmer groups of 10 farmers each. The salam delivery was 6 months for alfalfa, and 12 months for moringa and jetropha. A back-to-back salam was entered between BoK and Ishraqa Khadra Company. To provide for the basic subsistence of the farmers, they were also provided a murabaha financing for buying livestock. The financing is collateral-free. It may be noted that:

  • Cost of various support facilities (electricity, water, equipment and implements) is built into the salam price;
  • Cost of various agriculture inputs (seeds, fertilizers, pesticides etc.) is built into the salam price; and
  • Living expenses (vegetable cultivation and livestock breeding) is built into the salam price as well, which mean that part of the advance price was paid to farmers in kind as livestock.

Non-Financing Intervention/Services

Similar to Abu-Halima project, this initiative also involves a provision of a multitude of non-financing intervention/ services to the microentrepreneurs. These were provided entirely by the key partner on the project – Ishraqa Khadra Company. These may be listed as under:

  • Feasibility study for the project (with Bank of Khartoum)
  • Technical expertise to ensure production quality
  • Commitment to buy the products of the farmers
  • Guarantee of delivery of products by farmers

Risk Management

The major source of risk for the success of this project is of course, the possibility that the key partner – Ishraqa Khadra Company – may fail to honor its commitment to buy. This risk has been mitigated through a feasibility study on the acceptability of the cash crops in global markets.

Bok-chart-2

Arrows denote specific activities as follows:

  1. Grant of land by Ministry of Agriculture to farmers
  2. Feasibility study and agreement between BoK and Ishraqa Khadra
  3. Salam agreement between IRADA (BoK) and the farmers (payment of advance price that includes financing plus all support)
  4. Setting up of the farms to produce alfalfa, moringa and jetropha
  5. Technical consultancy to farmers by Ishraqa Khadra
  6. Guarantee by Ishraqa Khadra
  7. Delivery of output by farmers to BoK
  8. Sale of output by BoK to Ishraqa Khadra

 

Mohammed Obaidullah | October 11, 2014

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