Content uploaded by Muhammad Hakimi Mohd Shafiai
Author content
All content in this area was uploaded by Muhammad Hakimi Mohd Shafiai on Jun 21, 2016
Content may be subject to copyright.
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 43
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
Fitting Islamic Financial Contracts in Developing
Agricultural Land
Muhammad Hakimi Mohd Shaai (Corresponding author)
Faculty of Economics and Management, Universiti Kebangsaan Malaysia,
43600 Bangi, Selangor, Malaysia
Tel: +603-89213758 E-mail: hakimi@ukm.edu.my
Mohammed Rizki Moi
Faculty of Economics and Management, Universiti Kebangsaan Malaysia,
43600 Bangi, Selangor, Malaysia
Tel: +603-89215733 E-mail: rizkiukm@gmail.com
Abstract
The Islamic nance industry is one of the fastest
growing industries in the world. However, many
potential Muslim customers, particularly in rural
areas, have unfullled banking needs and lack
access to nancing. Meanwhile, entrepreneurial
projects in the agricultural sector are presumed
to optimize economic growth. In addition, some
scholars have expounded that the nancial
problems faced by the agricultural sector are
caused by the risks of debt nancing and lack of
access to the capital market. In Islamic law, al-
muzara’ah and al-musaqah can be considered
as forms of partnership contract in farming.
Therefore, using descriptive analysis, this
paper attempts to portray how Islamic nancial
principles are closely related to the agricultural
sector in developing Islamic agricultural nance.
This study found that the application of the
modes of Islamic nancing in the agricultural
sector through nancial institutions could be
very effective in providing nancing to ensure
that the partnership progresses effectively
and efciently. As a result, there is an urgent
need to develop a sound agricultural nancial
system based on Islamic contracts in order to
increase and sustain the income of farmers and
landowners and to reduce poverty.
Keywords: Agricultural land development;
al-muzara’ah; al-musaqah;Islamic nancial
contracts; Islamic partnership
Introduction
It is undeniable that many Islamic countries in
these days have rural economies. In general,
small farmers in a lot of Islamic countries are in
thorny circumstances. For instance, they suffer
from liquidity problems, which greatly reduce
the efciency of their farms. In addition, they
also do not have huge access to organized credit
markets. Consequently, it is not surprising that
an informal credit market, which charges a much
higher interest rate, exists alongside the formal
credit markets (Hoff et al., 1995).
Besides that, it is also a matter of fact that
the development of agricultural land requires
huge capital injections that normally exceed
farmers’ income. Financial capitals are essential
to nance agricultural infrastructure including
the purchase of seeds, machinery, irrigation and
fertilizers. In the meantime, Islamic banking and
nance institutions are growing rapidly in these
days. However, there are still many potential
Muslim customers, particularly in rural areas,
whose nancial needs are not being met. Under
these conditions, the introductions of a nancial
system which can grant special facilities to the
small farmers are needed, as well as improving
the availability of agricultural nance in order
to help farmers to increase their agricultural
production activities (Hughes et al., 1986).
Thus, this paper attempts to portray how Islamic
nancial principles, particularly those contracts
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 44
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
that are closely related with the agricultural
sector, may create an alternative in developing
Islamic agricultural nance. Furthermore, the
suitability of Islamic agricultural nance and
the proposed schemes of Islamic partnership
contract to develop agricultural land are also
discussed.
Prospects of Islamic Partnership Contract
in Agriculture
Agricultural land is valueless unless it is worked
to convert it into the productive input. Therefore,
ow resources such as labour, machines or
tools, and seeds are needed. Sometimes, due
to the absence of one or more of the input
of productions, the issues of idle land might
arise. In addition, there are also some authors
in their theories of agriculture role, claim that
agriculture is a default source of employment
and a pool of reserve of labour. Meanwhile,
it is indisputable that the agricultural sector
especially requires long-term nancing due to
the long duration from sowing to harvesting
(Hughes et al., 1986).
On the other hand, Islamic commercial law of
the shari’a visibly encourages the scheme of risk
and reward sharing in the society. Conventional
forms of loan put the mass of risk on the
borrower and not the institution, in which low-
income person can end up in debt, worsening
their situation and making it impracticable for
them to improve the community.
Islamic financial scheme was originally
created on the prohibition of predetermined
payment or receipt and guaranteed rate of
return. The theory of interest and debt-based
instruments are eliminated in Islamic nance as
the system encourages risk-sharing, promotes
entrepreneurship, discourages speculative
behaviour and emphasizes the sanctity of the
contract (Iqbal, 1997). The constructive purposes
available in Islamic nance, in addition to the
expansion of the products to the poor, could
be an effective development tool (Alasrag,
2010).In the meantime, Aggarwal and Yousef
(2000) divided prot and loss sharing, which are
anchored in the principles of al-mudarabah and
al-musharakah, into both long-term nancing
and the principles of bayal-salam and al-ijara,
while always linking them in the short-term
nancing.
Consequently, Hoshmand (1995) anticipated
that Islamic banking principles such as prot
and loss sharing or partnership contract might
offer a solution to the problems of credit
availability, as well as reduce the risk of debt
nancing in the agricultural sector. Two reasons
can be given in support of this statement. Firstly,
banks would not risk their funds for highly
speculative activities, and secondly, banks
would have the essential incentives to promote
the projects’ protability as they would be acting
as the shareholders in the projects that they are
nancing (Crane &Leatham, 1993).
The Concept of Al-Muzara’ah and Al-
Musaqahas Forms of Partnership Contract in
Agriculture
In addition to the principles of al-mudarabah
and al-musharakah that are widely discussed
under partnership contract in Islamic banking
and nance, there are also partnership contracts
that are strictly related to the agricultural land
development, which are al-muzara’ah and al-
musaqah. Al-muzara’ah is a trade transaction
between a capital owner and a trader, while al-
musaqah is an agricultural partnership between
a landlord and a farmer (Shaai, 2011).
In general, al-muzara’ah is derived from the
word zara’a, which means crop (Ibrahim,
1983). Therefore, it can be dened as a contract
made between two people; a landowner and a
farmer, whereby the landlord gives his land
to the farmer to plant, maintain and cultivate
against a specied joint share of the crops (Al-
Syarbini, 1997; Al-Kasani, 1968; Al-Syawkani,
1985; Hasan, 1998; Bal, 2001).
Meanwhile, al-musaqah contract is derived
from saqa, which means to water or irrigate
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 45
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
the land (Ibrahim, 1983). Technically, this
principle can be dened as a contract between
the landowner of some trees and the farmer, who
treats, services, irrigates and cares for the shade
trees, and stipulates that the crop produced is to
be shared between them (Al-Syarbini, 1997).
Nevertheless, there is a dispute among Islamic
jurists that both al-muzara’ah and al-musaqah
resemble leasing (al-ijara) or partnership
contract (al-mudarabah). In the earlier
concept of al-muzara’ah, Imam Abu Hanifah
suggested that this principle is invalid and only
acknowledged the concept of al-ijara (leasing).
Imam Abu Hanifah, Imam Malik and Imam
Sha’i made it clear that with regard to arable
lands, they considered accepting the contract
of al-ijara (Johansen, 1988).
On the other hand, later scholars such as Imam
Abu Yusuf, Muhammad al-Shaybani, Ahmad
IbnHanbal (Nyazee, 2002) and contemporary
scholars like Muhammad Baqir Sadr (Al-
Sadr, 1982) and Seyyed MahmoodT aleqani
(Taleghani, 1983) proposed that this principle
was similar to the partnership contract and
permissible. Therefore, the jurists who attribute
this principle as partnership agreement view it as
similar to the al-mudarabah contract (Nyazee,
2002).
After reviewing all arguments from classical and
contemporary scholars, it can be concluded that
these principles are more similar to partnership
contract in farming. The principles of al-
muzara’ah and al-musaqah can be considered as
a joint venture between the landowner owning
the property (agricultural land) and the farmer
doing the work. The land and seeds belonging
to the owner are viewed as the capital, and these
can also be considered as a factor that enables
production.
Furthermore, in a partnership contract, the prot
or loss, as well as risk are shared by both parties.
If there is no crop, the loss is borne equally; the
landowner will lose his seeds and the farmer
will lose his work. Thus, neither will it be in a
position to the appropriate prot exclusively.
The landowner risks the enjoyment of his land,
which he could have leased out for a determined
rent guaranteed by a lessee, but he preferred to
take risk in the hope of making prot. At the
same time, the farmer risks his work, as he could
cultivate the crop, but it might not yield any
produce or only give a little output. He could
have hired out his services for a determined
and xed wage to be paid by the landowner,
but he preferred to take the risk of the benet
of his labour in the hope that he would gain
more prot.
Comparing al-Muzara’ah and al-Musaqah
Principally, the contract of al-muzara’ah is
similar to al-musaqah. The contract of al-
muzara’ah can be described as a partnership in
farming, whereby the landlord provides the land
and the farmer provides work and management
from early work until harvesting. In contrast,
al-musaqah is in the case of trees that have
already sprouted (before the contract) and have
grown strong, and the landlord is unable to
irrigate the plants and is incapable of working
the land (Shaai, 2011).
According to Wahbah al-Zuhayli, all the
relevant conditions of al-muzara’ah apply
to al-musaqah. Furthermore, it was ruled by
the scholars that al-musaqah is similar to al-
muzara’ah, except for the tiny procedural issues
due to diverse opinions among Islamic jurists
(Al-Zuhayli & &Eissa, 2003). Therefore, it can
be concluded that al-muzara’ah is a contract
in partnership between the landlord and the
farmer in developing an agricultural land from
the beginning until cultivation process. On
the other hand, al-musaqah is more on the
partnership in cultivating an orchard. In short,
the only difference between these two contracts
is the substances of ‘land’ (in al-muzara’ah)
and ‘trees’ (in al-musaqah).
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 46
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
Suitability of Islamic Partnership Contract
in Developing Agricultural Land
In general, the need for nancing is universal
in human beings, whether or not it is based on
non-Islamic or Islamic nance. It will need
to nance the purchase of assets, employing
workers and also to cover the operational costs.
However, this paper attempts to highlight two
main arguments supporting the suitability of
the Islamic partnership contract based on the
principles of al-muzara’ah and al-musaqah in
order to develop or nance agricultural land.
Shari’a Compliance
Shari’a compliant nance was invented to
facilitate Muslims in acquiring financial
products that conform to the system of belief in
their religion. Banking services such as savings
accounts, nancing for education, and home
loans are all required by Muslims just as non-
Muslims do.Historically, the establishment of
Tabung Haji in Malaysia in 1963 and the rst
Islamic bank in Egypt in 1963 (Wilson, 1983)
to the present day has proven the enormous
need for shari’a compliant banking or nancial
products in rural communities. In earlier years,
particularly those from rural areas, conventional
methods of saving money were used to avoid
riba and to enable them to perform hajj. They
accumulated money in pillows under mattresses
and this practice was very risky in terms of
security.
Furthermore, according to El-Gamal (2000), a
banking and nancial system based on Islamic
principles exists mainly to provide religiously
acceptable banking services to the Muslim
community. Islamic banks are also intended
to be the nancial institutions to assist Muslims
in keeping away from riba, gharar and maysir,
which are present in conventional banking
institutions.
Long Term Protability
Fundamentally, in Islamic banking systems,
banks are considered as organizations working
with their customers’ funds. Basically, Islamic
banks offer two ways of banking facilities. The
rst is xed prot facilities like hire purchase,
instalment sale at a xed rate of prot, which
is based on the principles of al-murabahah and
al-bay bithmanajil and the second is variable
prot facilities, which is based on prot and
loss sharing rooted in al-mudarabah and al-
musharakah principles (Iqbal& Llewellyn,
2002).
Chapra (2002) argued that the stability
characteristics of the nancial system could
be further enhanced by implementing more
partnership or equity nancing. Through these
risk-sharing contracts, nanciers would have a
greater incentive in both assessing risks at the
outset, and monitoring borrowers after nancing
has been provided (Chapra, 2002).
Therefore, based on the arguments by Siddiqi
(1983) and Chapra (1992), it was envisaged
that partnership contract should be the core
characteristic of Islamic banking nancing.
They have afrmed that Islamic banks will
denitely promote growth in Islamic countries
by providing long-term partnership nancing to
the developed sectors (Siddiqi, 1983; Chapra,
1992).
Proposed Schemes of Partnership Contract
for Agricultural Land Development
Basically, a nancing arrangement based on
al-muzara’ah and al-musaqah or partnership
contract for agricultural land development can
be initiated subject to joint partnership in the
mobilization of land, other physical inputs and
labour.In a contract based on al-muzara’ah,
various forms of partnership can be produced.
As a basis, the land and other physical factors
of production for the partnership come from
one party, and the labour comes from the other
party (Gulaid, 1995).
Alternatively, the land can come from one party,
while the other physical factors of production
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 47
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
and labour come from the other party. Besides
that, another alternative of al-muzara’ah is
that the land and labour come from one of the
contracting parties, while the other physical
factors of production come from the other
party (Gulaid, 1995). Incidences of a three-
party al-muzara’ah partnership, in which the
rst party provides land, the second provides
a combination of required physical inputs,
and the third provides labour, are common in
contemporary agriculture (Shaai, 2011).
Figure1: The Basic Schemes of Partnership Contract in Agriculture
between Landlord/Bank and Farmer (Shaai, 2011)
By using the forms of contract proposed by
Abu Yusuf, three schemes of partnership as
shown in Figure 1 are suggested in this paper.
First, the land (in al-muzara’ah) or trees (in
al-musaqah), tools, seeds and animals are
provided by the landowner, and the work (effort)
is undertaken by the tenant. Secondly, the land
(in al-muzara’ah) or trees (in al-musaqah) is
provided by the landowner, and the rest is
provided by the tenant. Third, the land (in al-
muzara’ah) or trees (in al-musaqah) and seed
are from landlord and the rest from the tenant.
From the bank’s perspective, the schemes of
al-muzara’ah and al-musaqah can be applied in
nancing the agricultural inputs for a specied
period. The bank will provide funds for the
agricultural investments, while the farmer will
provide the labour. Therefore, in this context,
al-muzara’ah and al-musaqah contracts can
be used for obtaining seeds, fertilizers, and
pesticides along with the needs for irrigation,
storage, and marketing activities of the
agricultural commodities (Shaai, 2011). Thus,
the bank can become the landlord through the
nancing scheme.
Besides that, there is also a possibility for the
bank to be the landlord. This can be done by
the buying of the land by the banks, which will
then be given to the potential farmer to cultivate
it according to the partnership principle. In
this case, the Islamic bank will play its role as
the landowners, and the bank will also have a
partnership with the farmers. Besides, in the
case of landless farmers, nancial institutions
could rst buy this land and then give it to the
potential farmer to cultivate according to the
principles of al-muzara’ah and al-musaqah. At
the end of the contract, it is also possible for
the farmer to become the landlord by making
payments to the nancier based on another
principle like al-ijara al-muntahia bi-tamlik. It
is also possible for Islamic banking institutions
to play the roles of landowners directly and
have a partnership with the farmers using the
principles of al-muzara’ah and al-musaqah.
Conclusion
Accordingly, from the perspectives of Islamic
banking and nancial institutions, the principles
of al-muzara’ah and al-musaqah have a high
potential to be formulated as Islamic modes of
partnership nancing for agricultural land. The
application of these modes in the agricultural
sector could be very effective, especially for
Scheme
1
Scheme
2
Scheme
3
Landlord / Bank
Landlord / Bank
Landlord / Bank
1. Land/Trees
2. Tools
3. Seeds
4. Animals
1. Land/Trees
2. Seeds
1. Land/Trees
1.Work
1. Work
2. Tools
3. Seeds
4. Animals
1. Work
2. Tools
3. Animals
Farmer
Farmer
Farmer
Partnership
Partnership
Partnership
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 48
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
orchard or agricultural land nancing. Financial
institutions could provide nancing either to the
landlord, the tenant or both parties to ensure
that the partnership progresses effectively and
efciently.
The suggestions provided for nancing the
agricultural land is not limited just to the
principles of al-muzara’ah and al-musaqah.
However, other principles such as al-ijara al-
muntahia bi-tamlik, al-murabahah and bay
al-salam can also be included. The current
Islamic banking institutions are inclined towards
implementing the two-tiered al-mudarabah,
instead of the one-sided al-mudarabah in
classical theory. In this principle, the banks
accumulate deposits from their customers and
invest it to the third parties. Hence, a proper
adjustment by the nancial experts to the
principles of al-muzara’ah and al-musaqah
is relevant to improve the practicality of the
transactions in Islamic banking and nancial
institutions. The required steps must be
defined from many parties, including the
academicians and practitioners for this product’s
improvements.
To sum up, it is necessary to make further
empirical studies to further clarify the above-
mentioned issues and eventually build a
framework for a partnership between the
landlord and the farmer from the perspective
of Islamic economics. Therefore, there is an
imperative need to develop a sound agricultural
nancial system based on Islamic contracts
in order to increase and sustain farmers’ and
landowners’ incomes and reduce poverty.
Acknowledgements
This project was funded by EP-2014-020
through the MPOB-UKM Endowed Chair
Grant.
References
Aggarwal, R. K., & Tarik, Y. (2000).Islamic
banks and investment nancing. Journal of
Money, Credit and Banking, 93-120.
Alasrag, H. (2010). Global Financial crisis
and Islamic nance. Munich Personal RePEc
Archive, MPRA Papers N. 22167, Munich
University Library, German.
Al-Kasani, A. B. M. (1968). Bada’i‘ al-Sana’i‘
Fi Tartib al-Syara’i‘. Qaherah: Matba‘ah al-
Imam Syari‘ MuhdKarimBilQalqa‘ah.
Al-Sadr, M. B. (1982). Iqtisaduna (Our
Economics). Dir al-Ta’aruf, Beirut.
Al-Syarbini, M. A. K. (1997). Mughni al-
MuhtajIlaMa‘rifatMa‘aniAlfaz al-Minhaj, vol.
2. Dar al-Ma ‘rifah, Beirut.
Al-Syawkani, M. A. (1985). Al-Sayl al-Jara’ir
al-Mutadaq ‘alaHada’iq al-Azhar, vol. 3. Dar
al-Kitab al-‘Ilmiyyah, Beirut.
Al-Zuhayli, W., & Eissa, M. S. (2003).Financial
transactions in Islamic Jurisprudence. Dar Al-
Fikr.
Bal, T. C. (trans.) (2001). Majalla Al-Ahkam
‘Adliyya (The Mejelle). The Other Press, Kuala
Lumpur.
Chapra, M. U. (1992). Islam and the economic
challenge. Islamic Foundation, Leicester.
Chapra, M. U. (2002). Alternative visions of
international monetary reform. Islamic Banking
and Finance, 11: 219.
Crane, L. M., & Leatham, D. J. (1993), Prot
and loss sharing in agriculture: An application
of Islamic banking. Agribusiness, 9: 403–412
El-Gamal, M. A. (2000).A basic guide to
contemporary Islamic banking and nance,
vol. 1. Rice University, Houston, Texas, USA.
Gulaid, M. A. (1995). Financing Agriculture
through Islamic Modes and Instruments:
Practical Scenarios and Applicability. Research
GJAT | JUNE 2015 | VOL 5 ISSUE 1 | 49
ISSN : 2232-0474 | E-ISSN : 2232-0482
www.gjat.my
This journal is a member of and subscribes to the principles of the Committee on Publication Ethics (COPE)
Paper, No. 34, Jeddah: Islamic Research and
Training Institute, Islamic Development.
Hardesty, S. D. (1987). Hughes, D.W., Stephen
C. G, Peter J. B., & Michael D. B. Financing
the Agricultural Sector: Future Challenges and
Policy Alternatives. Boulder CO: Westview
Press, 1986, 200 pp. American Journal of
Agricultural Economics, 69(1):196-197.
Hasan Muhammad Ayub. (1998). Fiqh al-
Mu‘amalat al-Maliah al-Islam, vol. 1. Dar
al-Tawzi‘ wa al-Nasyr al-Islamiah, Al-Qaherah.
Hoff, K., Braverman, A., & Stiglitz, J. (1995)
The Economics of Rural Organization: Theory,
Practice and Policy. Oxford University Press
for the World Bank, Oxford, London.
Hoshmand, A. R. (1995). Prot and Loss
Sharing in Islamic Banking: Alternative
Financing for Agriculture in Developed and
Developing Countries. Journal of South Asian
and Middle Eastern Studies, 19(1):72-86.
Ibrahim, M. (1983). Majma’ al-Lughah al-
‘Arabiyah al-Mu‘jamWasit, vol. 3, Maktaba
Bi Sharika al-‘Ilanat al-Sharqiyya.
Iqbal, Z. (1997). Islamic nancial systems.
Finance and Development, 34: 42-45.
Iqbal, M., & Llewellyn, D. T. (Eds.). (2002).
Islamic banking and nance: new perspectives
on profit sharing and risk. Edward Elgar
Publishing.
Johansen, B. (1988). The Islamic Law on Land
Tax and Rent: The Peasants’ Loss of Property
Rights as Interpreted in the Hanate Literature
of the Mamluk and Ottoman Period. Croom
Helm London, New York, USA.
Nyazee, I. A. K. (2002). Islamic Law of
Business Organization: Partnership. The Other
Press, Kuala Lumpur, Malaysia.
Shafiai, M. H. M. (2011). Crafting the
Agricultural Product and Loss Sharing (aPLS)
in the Place of the Prot and Loss (PLS) for
Islamic Agricultural Finance. Kyoto Working
Papers on Area Studies: G-COE Series, 114:
1-28.
Siddiqi, M. N. (1983). Banking without interest
(Vol. 5). Islamic Foundation.
Taleghani, A. S. M. (1983). Islam and
Ownership.Jabbari Ahmad and FarhangRajaee
(trans.), Mazda Publishers, Kentucky.
Wilson, R. (1983). Banking and Finance in the
Arab Middle East. MacMillan, London.
