Improving Food Security through Islamic Finance

Islamic Finance

By Ali Chamani Al Anshory and Wahyu Jatmiko

Food insecurity gets intense attention, thanks not only to COVID-induced supply chain disruptions but also the Russian invasion of Ukraine. The two countries are among the major contributors to the global breadbasket in the increasingly interconnected world, contributing 30 per cent of world wheat and sunflower oil production1. To respond, countries like India and Indonesia imposed export bans on wheat and palm oil, respectively, to protect their local supplies.

This shortage demonstrates the vulnerability of the global food supply. The war and all the protective economic policies may end, but the concern about hunger should be discussed by all stakeholders, as 193 million people are acutely food-insecure, a situation that was already worrying before the conflict. The number of people in need of urgent assistance has increased by 80 per cent since 20162.

The effect of climate change is a further obstacle to food production. The anticipated harsh climatic conditions of high temperatures, droughts, and floods will alter the global agriculture system. It is expected that millions of people in Asia and Africa might starve by 2050, because of the increasing prices of basic foods to more than double their current price. The poor will be the most affected.

Islamic finance aims at supporting the objectives of Islamic law (Maqasid Sharia). Its purpose is to serve the interest of all human beings and to save them from harm.

Among the most food-insecure regions is that of Muslim-majority countries. Global Report Food Crisis 2022 shows that OIC countries comprised seven out of ten countries with the highest number of people in crisis for food insecurity, which are Afghanistan, Ethiopia, Yemen, Nigeria, Syria, Sudan, and Pakistan3.

Ironically, those territories also have a high food waste per capita, according to the UN Environment Programme. At a time when about 11.2 per cent of the population in the Arab region is undernourished (79.4 million), the average food wasted by each Arab country is estimated at 250 kilograms per year, compared to approximately 70 kilograms in other regions4.

These insufficient food supplies and production issues make them dependent and vulnerable to global volatility. Between 40 and 90 per cent of the goods imported by Arab countries are consumed foodstuffs, which makes them the world’s largest food importer.
Many hope that Islamic finance’s emergence in the above regions can help them to get into developmental parity with the rest of the world. However, despite the inequality of food supply happening in these predominantly Muslim countries, the Islamic financial industries tend to overlook food insecurity as the main issue to solve.

Islamic Finance as Instrument of Maqasid Sharia

On the one hand, many argue that avoiding the Islamic prohibition on financial transactions is not necessarily essential for Islamic finance. On the other hand, scholars stress the necessity of embedding social impact as a core value of Islamic teaching to be complied with by Islamic finance.

Islamic finance aims at supporting the objectives of Islamic law (Maqasid Sharia). Its purpose is to serve the interest of all human beings and to save them from harm. Leading classical scholars of Islamic jurisprudence delineated a further five essentials advanced by Islamic law. These are, in order of importance, safeguarding faith, human life, the faculty of reason, progeny, and material wealth.

The objective of Islamic ruling demonstrates that, beyond money, Islamic finance should not only adhere to the legal aspect of Islam but also promote the betterment of society. The promotion of human well-being is not merely encouraged but understood as part of worship in Islam.

From the Islamic perspective, food security can be seen as a situation when the right to halal (allowed) and tayyib (good) food for everybody is fulfilled, so nobody is hampered by hunger in worshipping God. Under this concept, the issue of food insecurity is not merely a consequence of limited resources, but is related to the distribution and management of food for everyone. As preserving human life is regarded as the essential value of Islamic teaching, equity in food supply should be achieved, especially since this basic need entails other objectives of Sharia to function.

In other words, it is the main framework of Islamic finance as one instrument of Maqasid Sharia to respond to and contribute to the security of food for everyone. Therefore, the industry should pursue not only the interest of the shareholder but also the stakeholder, including equity of food supply.

The Bitter Reality

The Islamic economy has hitherto been dependent on the charity Waqf (endowment) and Zakat (almsgiving) instruments for any non-business initiatives. The above discussion suggests that the Islamic commercial industry is also expected to get involved in the development of the agriculture sector as far as the Maqasid Sharia is concerned.

Unfortunately, only 4 per cent of the global Islamic banks’ financing is channelled to the agriculture sector, compared to 27 per cent for household and 26 per cent for the wholesale and retail trade sectors5. There is no doubt that financing agriculture is challenging. The high-risk, low-return nature of the business is a perfect recipe for highly non-performing financing.

This issue is not overlooked in Islamic finance. For instance, the classic Islamic financial contract offers Salam as a financing product focused specifically on assisting the food supply. Salam allows two parties to enter into a contract of sale of agricultural goods for future delivery, while the price is paid in advance. This setting of delayed delivery of the product is generally prohibited under Islamic law, as it contains gharar (or excessive uncertainty). The exception under which Salam is granted is to assist farmers, reflecting the importance of food security in Islamic teaching.

However, the reality is far from fulfilling the objectives. In relation to ensuring the food supply, the percentage of a Salam contract is at a negligible level in the Islamic bank, reaching a mere 4.1 per cent. In contrast, the markup sale facilities of Murabaha and the later commodity Murabaha or Tawaruq (synthetic loan) are dominantly utilised at 47.4 per cent and 25.7 per cent6. Despite criticism by scholars, as both contracts reflect Islamic banking attempts to replicate the conventional products, Murabaha and commodity Murabaha remain the backbone of Islamic finance.

While its contribution to economic growth is obvious, Islamic finance has yet to promote just socio-economic development as far as agriculture is concerned. Islamic finance may fulfil the “form” or the legal injunction of ensuring that their financial product is Islamically accepted, yet the substance of the Islamic economy in the industry remains to be questioned.

Way Forward

Innovative products with high societal impact orientation are the need of the hour in order for Islamic finance to fulfil the objective of the Sharia. Among the main issues with the agriculture sector in the Muslim-majority territories is the absence of a safety net for the farmer. This discourages bright and skilled labour from entering the industry. An insurance scheme is needed to mitigate the probability of crop failure due to many reasons, including the climate crisis. This is where the blended Islamic finance can seek to contribute the most.

For instance, Islamic finance can combine the Waqf and Salam financing. The Waqf fund is employed to insure the agriculture project that is financed by the Islamic bank employing a Salam contract. After the commodities are delivered in the future, farmers supply them to the bank, which already has stand-by buyers. Of course, the Waqf and Zakat funds could also purchase the commodities to feed the poor in order to ensure the sustainability of the project. As the project is insured by the Waqf fund, the bank sustains a lower risk, and hence can offer the product at a competitive rate.

In conclusion, food insecurity can be managed if the contributing factors are systematically mitigated. The above is only a small example of this. According to the higher objective of Sharia, the Islamic economy has a social and financial role in ensuring that the agriculture ecosystem can provide the basic need for society until food security can be attained for everyone. The availability and accessibility of enough quality food is required for the wellness and health of every human being.

About the Authors

Ali Chamani Al AnshoryAli Chamani Al Anshory is currently a researcher at the Center for Islamic Economics and Business, Faculty of Economics and Business Universitas Indonesia (PEBS FEB UI). A graduate of the International Islamic University Malaysia and Durham University, he is interested in Islamic social finance and the halal industry.

Wahyu JatmikoWahyu Jatmiko is currently the head of the behavioural studies research cluster at the Center for Islamic Economics and Business, Faculty of Economics and Business Universitas Indonesia (PEBS FEB UI). He is also a lecturer in finance at the same university and serves as the executive secretary of the Indonesian Association of Islamic Economists (IAEI). His research interest covers development finance, ethical finance, and sustainable development.