Improving Institutional Capacity:

Strengthening Farmer Organizations in the OIC Member Countries

One interesting focus for such an examination is in the Islamic finance sector. It is of course not

required for banks to practice Islamic finance in order to effectively serve farmer organizations

– many examples of non-Islamic banks serving farmer organizations can be found, including

the example of OFID and Standard Bank’s guarantee fund for small-scale agricultural credit,

discussed above in Section

2.2.2.

However, the Islamic finance sector has been receiving a

great deal of attention and provides some useful examples of FO-supportive financial services,

especially given the sector’s prominence within the OIC. Based on responses to a CGAP survey,

there are 255 financial services providers offering Sharia-compliant microfinance products

across the world

, with approximately 92% concentrated in two regions: East Asia and the

Pacific, and the Middle East and North Africa.

Several types of Sharia-compliant microfinance products exist, although the most relevant for

the purposes of this analysis is the

Salam

, which is an advance payment against future delivery.

Because the terms of the product are tied to the delivery of tangible products on a certain date,

it is often used in agriculture to allow farmers to finance production in exchange for a future

delivery of output. In this context, it is worth looking at some interesting and innovative

models emerging in the OIC member countries. The first example of pro-FO finance is the

Baitul Mal Wat Tamwil in Indonesia.

These are microsavings and credit cooperatives

formally registered with the Ministry of Cooperatives and Small and Medium Enterprises, and

are not treated as financial service providers

. The Bank of Indonesia’s Islamic Banking

Division estimates that there 100,000 such banks in Indonesia, with assets of US$ 145m. BMTs

offer microfinancing, social welfare funds (

zakat

) and entrepreneurship trainings.

Another example is that of the

Bank of Khartoum in Sudan

. The Bank believes that Islamic

microfinance can effectively reach smallholder farmers and organizations through customized

products tailored to their needs. The bank reaches farmers through a series of capacity-

building projects and developing tools such as group financing schemes, cooperative and

product risk guarantees, and crop insurance products targeted at small farmers. The bank has

also developed a Farmers2Markets project called

Maringa & Jatropha,

with the following

elements



Urban-rural leasing mechanisms.

Farmers in many parts of Sudan have access to land

but not to finance and/or markets. For example: a rural farming household with only two

able-bodied members may have access to more land but a lack of resources to invest in

either land preparation or weeding limits the extent of their cultivation to five acres. This

leaves the family in a vulnerable state and food insecure. Conversely, poor, urban farmers

have no access to land, or it is too expensive for them to own; these challenges have the

same result. In response, the project has developed a micro-leasing product to link urban

and rural farming households and – through shared knowledge and resources – ensure

livelihood improvements for both.



Microinsurance and financing of risk guarantees.

Maringa & Jatropha is working with

insurance companies to offer insurance products that can unlock capital for smallholder

farmers. The concept covers part of large losses for any bank providing finance to small

farmers, thus increasing banks’ likelihood of lending to such clients. Banks are further

El-Zoghbi,M and Tarazi, M.

Trends in Sharia-Compliant Financial Inclusion.

CGAP Focus Note No.84 March 2013

Ibid

All discussion in this section is adapted from El-Zoghbi,M and Tarazi, M.

Trends in Sharia-Compliant Financial Inclusion.

CGAP Focus Note No.84 March 2013