Guidelines on Islamic financing for agriculture

[LahoreEstate]

Guidelines on Islamic financing for agriculture



SBP says banks can develop Shariah-compliant products to meet farmers' needs

Wednesday, February 04, 2009
By our correspondent

KARACHI: The State Bank of Pakistan (SBP) on Tuesday issued guidelines on ‘Islamic financing for agriculture’ to help banks develop specific Shariah-compliant products in order to meet financing needs of the farming community.

“These guidelines have been developed in consultation with the stakeholders keeping in view the potential and demand for Islamic banking products in the field of agriculture,” said an SBP handout issued here on Tuesday.

The guidelines broadly cover Islamic modes of financing like Murabaha, Ijara, Musawamah, Salam, Istisna, Musharaka, Diminishing Musharaka, Modaraba, Muzara’a, Musaqat and Mugharasa that can be used for meeting financing requirements of farm and non-farm sector activities including livestock, fisheries, poultry, and orchards.

In addition to these financing needs, Islamic Banking Institutions (IBIs) may also refer to SBP guidelines and instructions for crop and non-crop sector activities like livestock, fisheries, poultry, horticulture, etc to make further progress on this front.

Moreover, the guidelines have also explained the application and procedure of the Islamic modes of financing. The SBP has advised all banks to use these guidelines for developing their own Shariah-compliant products for extending finance to the agriculture sector according to their policy and operational and market requirements, subject to compliance with SBP regulations and approval from their Shariah adviser.

The guidelines will facilitate IBIs, particularly those who are extending their branch network and outreach in rural areas, to develop their own products to meet financing needs of agri/rural community in a Shariah-compliant manner. Conventional banks with Islamic banking branches may offer these products through Islamic banking windows by deploying their conventional branch network. Under the guidelines, individuals and/or partnership concerns and all types of legal entities engaged in agriculture-related activities, having sufficient knowledge and relevant experience are eligible to get financing under the Islamic financing scheme.

As per prudential regulations for agriculture financing, these guidelines shall not include financing for traders and intermediaries engaged in trading, processing, grading, packaging and marketing of agricultural commodities.

Such financing will fall under corporate, commercial or SME financing and will be subjected to compliance with corporate, commercial or SME regulations.

However, financing under the guidelines can be extended to entities (including corporate firms, partnerships and individuals) engaged in farming activities as well as processing, grading, packaging and marketing of mainly 75 per cent of their own horticulture produce.

Financing facilities may be extended, provided IBI is satisfied with the capacity of the customer or sponsor to manage and run the horticulture activities subject to the following conditions. Customer should be a holder of computerized NIC while usual requirements for corporate clients would apply. Customer should not be a defaulter of any IBI / financial institution. This condition may be relaxed in case the IBI is satisfied with creditworthiness of the customer and that earlier default was circumstantial and not willful.

IBI is satisfied and feels comfortable with the farmer and guarantors (where applicable) identity character, reputation and creditworthiness. It is advisable that IBI should have detailed understanding and information about the customer, his or her capacity to effectively use and repay the debt from the projected cash flow, and/or any other possible income streams, according to the guidelines

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