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SBP issues ‘Guidelines on Islamic Financing for Agriculture’

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Points of Essence:

  • State Bank of Pakistan issues the first of its kind Guidelines on Islamic financing for agrigulture. The Guidelines will assist banks to devise shariah compliant products to cater to the agricultural needs. Riding on the most acceptable concepts of Islamic financing, the Guidelines will make it possible for Islamic finance to penetrate into the potential demand of the agriculture sector in Pakistan. Pakistan’s Online News has the report.

KARACHI: The State Bank of Pakistan today issued “Guidelines on Islamic Financing for Agriculture” to help banks develop specific Shariah compliant products in order to meet the financing needs of the farming community. These Guidelines have been developed in consultation with stakeholders while keeping in view the potential and demand for Islamic banking products in the field of agriculture.

The Guidelines broadly cover Islamic modes of financing like Murabaha, Ijara, Musawamah, Salam, Istisna, Musharaka, Diminishing Musharaka, Mudaraba, Muzara’a, Musaqat, and Mugharasa that can be used for meeting the financing requirements of farm and non farm sector activities including livestock, fisheries, poultry, orchards etc. In addition to these financing needs, IBIs may also refer to SBP guidelines and instructions for crop and non crop sector activities like guidelines on 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 State Bank has advised all the banks to use these guidelines for developing their own Shariah compliant products for extending finance to agriculture sector according to their policy and operational & market requirements, subject to compliance with SBP regulations and approval from their Shariah Advisor. The Guidelines will facilitate Islamic Banking Institutions (IBIs), particularly those who are extending their branch network and outreach in the rural areas, to develop their own products to meet the financing needs of agri/rural community in a Shariah compliant manner. The conventional banks with Islamic Banking Branches may offer these products through Islamic Banking Windows by using their conventional branch network.

Under the Guidelines, individuals/ 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 to traders and intermediaries engaged in trading/ processing/ grading/packaging/marketing of agricultural commodities. Such financing will fall under Corporate/ Commercial or SME financing and will be subjected to compliance of corporate/ commercial/ 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% of their own horticulture produce. Financing facilities may be extended, provided IBI is satisfied with the capacity of the customer /sponsor to manage and run the horticulture activities subject to 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/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.

Source: http://www.onlinenews.com.pk

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Written by Suapi Shaffaii

February 4, 2009 at 10:34 am

2 Responses

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  1. These guidelines on “Islamic Agricultural Financing” in combination with the “Branchless Banking Regulations” issued by SBP last year provides an opportuniy for phenomenal growth.

    The basic idea is to have “low investment”, “service centres” in rural localities, manned by staff residing nearby. This will create a huge “employment generating boom”. The bank undertaking this venture has to do a lot of training after hiring the locals for this project and is required to send some of it’s seasoned staff on a weekly basis to do monitoring & on-the-job training to the new hires.

    The bank has to portray a truly Islamic image through these service centres to gain customers’ confidence, e.g., the branch manager has to be punctual in offering Salah on time and better lead Salah with all other staff following the Jamaat. No human figure to be used in any marketing material. All marketing material to be in local regional languages. The branch managers should be made accountable to engage the local community in teaching the difference between conventional & Islamic banking philosophy. the results should be verified by independent surveyor asking questions from locals residing in the vicinity of the bank (not necessarily bank customers).

    The bank should offer Islamic trade-based financing to farmers for purchase of seeds, fertilizers, pesticides, etc. by purchasing their yields in advance {Salam}; Islamic leasing solution to farmers for purchasing agricultural machienery like, plougher, tube-well pumps, tractors, harvestors, thrashers, etc. {Ijara and Ijara muntahia bi tamleek}; Participatory financing for packaging & exporting fruits, vegetables, seafood, etc. The possibilities are endless…

    Shahood Alam, HSBC Pakistan

    February 24, 2009 at 5:04 pm

  2. Please replace the earlier comment with the following one, I’ve corrected the spelling mistakes now:

    These guidelines on “Islamic Agricultural Financing” in combination with the “Branchless Banking Regulations” issued by SBP last year provides an opportunity for phenomenal growth.
    The basic idea is to have “low investment”, “service centres” in rural localities, manned by staff residing nearby. This will create a huge “employment generating boom”. The bank undertaking this venture has to do a lot of training after hiring the locals for this project and is required to send some of its seasoned staff on a weekly basis to do monitoring & on-the-job training to the new hires.
    The bank has to portray a truly Islamic image through these service centres to gain customers’ confidence, e.g., the branch manager has to be punctual in offering Salah on time and better lead Salah with all other staff following the Jama’at. No human figure to be used in any marketing material. All marketing materials need to be in local regional languages. The branch managers should be made accountable to engage the local community in teaching the difference between conventional & Islamic banking philosophy. The results should be verified by independent surveyor asking questions from locals residing in the vicinity of the bank (not necessarily bank customers).
    The bank should offer Islamic trade-based financing to farmers for purchase of seeds, fertilizers, pesticides, etc. by purchasing their yields in advance {Salam}; Islamic leasing solution to farmers for purchasing agricultural machinery like, plougher, tube-well pumps, tractors, harvesters, thrashers, etc. {Ijara and Ijara muntahia bi tamleek}; Participatory financing for packaging & exporting fruits, vegetables, seafood, etc. The possibilities are endless…

    Shahood Alam, HSBC Pakistan

    February 27, 2009 at 6:30 pm


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