Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

SHARIAH FINANCIAL SYSTEM: AN ALTERNATIVE LIFELINE FOR THE LESS-PRIVILEGED FARMERS? By Julhusin B. Jalisan3

It is already indubitable that most farmers are trapped in the vicious labyrinth of perpetual poverty. Due to their depressed conditions, many of them consider farming as just a hand-to-mouth existence, or perhaps their decisions to stay on and take farming as a livelihood could also mean a number of things perseverance, resilience and/or resignation. The farmers are poor because the economic activity that they are in has been underfunded. The absence of sufficient working capital curtails their output and further demonstrates the inability of the government to even liberalize the loan policies of its financial institutions. A number of studies have been conducted pointing to the availability of credit facilities as one of the vital factors influencing farm production output. Among these studies, as cited by Mioza (12-13), are those of Kimpo (1962) and Lu (1973). Moreover, in a study of farming in Argentina, small-scale farmers appeared as marginal operators due to their limited farm holdings and scarce capital. In effect, they remained as subsistence farmers with limited areas of improving their production (Fogg 271). Presidential Decree (PD) 717 Despite the formulation of various policies and programs geared towards helping the farmers increase their production, additional capital remains a major problem. In previous agricultural development programs,
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Former Research & Graduate School Coordinator, Foundation University. 7

Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

provisions for credit allowed the farmers to acquire additional inputs that significantly helped increase their productivity. Foreign borrowings have been utilized to strengthen the credit aspect of agricultural production programs. Presidential Decree 717, more precisely known as the Agri-Agra law, was also issued by the Marcos government primarily to mandate banks to set aside 25 percent of net funds generated for agricultural loans (15 percent) and for agrarian reform beneficiaries (10 percent). Pursuant to its original provisions, financing under the 15-percent agri component includes loans and advances for activities that cover production, processing, marketing, storage and distribution. For the 10-percent agra complement, PD 717 identifies tillers, tenant-farmers, settlers, agricultural lessees, amortizing owners, owner-cultivators, farmers cooperatives and compact farmers as agrarian reform beneficiaries. For the financing to be Agri-Agra eligible, beneficiaries must use the funds for the acquisition of work animals, farm equipment, machinery, inputs as well as in the operations of the different phases of the economic cycle (Ravalo C3). Although the government has put in place other agricultural credit programs since then, the Agri-Agra law unmistakably continues to be the most prominent. It continues to be the largest source of funding for agriculture-related activities. The delivery of credit program to the rural areas has always been the primary concern of the Land Bank of the Philippines (LBP). LBP is supposed to promote countryside development, farmers' prosperity and landowners' involvement in productive enterprises through credit delivery, investment recovery, and institutional development. In the province of Negros Oriental alone, LBP has four branches that are located in Guihulngan and the cities of Bais, Bayawan and Dumaguete. Despite these LBP branches and the presence of other banks and financial institutions, farmers continued to struggle just to stay afloat, so to speak.

Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

Situational Analysis The author, in his dissertation, provided some insights on the state that palay and corn farmers are currently in. He found out that among the sample palay farmers of the Bureau of Agricultural Statistics (BAS), only about 28 percent were able to avail of the agricultural loans with an average amount of P4,060 per farmer, and only about 32 percent of the sample corn farmers were able to utilize the loaning scheme of various financial institutions with an average amount of P820 per farmer. By source of loan, the author further unveiled that cooperatives appear to be popular among palay and corn farmers, considering that 9 percent of the sample palay farmers obtained their loans from these sources with an average of P4,350. Although the amount of loan lent by cooperatives to corn farmers averaged only P570, roughly 22 percent of the sample corn farmers acquired their loans from these sources. In contrast, few farmers preferred to borrow from government sources. Of the total sample palay farmers, only 4 percent borrowed funds from the Department of Agriculture. Likewise, about 3 percent of the sample corn farmers sought the financial help of the said department. Land Bank, as stated earlier, the government bank tasked to help the plight of the poor farmers has not been serving the very purpose of its existence. While it has made available some money for granting production loans to farmers, only about less than one percent of both palay and corn sample farmers were able to avail of loans. Indeed, this finding reinforces the farmers' allegations that many of them were having difficulty securing loans from government financial institutions. As a consequence, the productivity of the farmers and the agricultural sector, in general, has been severely curtailed. Perhaps, the government should now begin to realize that the Agri-Agra Law is but a mere residue of the past political age and should be amended if it is really bent in uplifting the lives of the poor farmers. This is because the law has been a failure, to say the least, in bringing credit facilities due to various loopholes. The law allows diversion of the required allocation for the
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Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

agrarian sector into investments in treasury bills as alternative compliance. This means fewer funds are available for the agricultural sector, and worst, big borrowers like plantations get the lions share of the allocation for agriculture, depriving the target beneficiaries of the much-needed funds. As a consequence, many of the farmers who could hardly qualify to borrow money from government financial institutions had to resort to loan sharks. While it may be true that the presence of LBP-financed cooperatives has somehow helped the farmers in their economic endeavor, these cooperatives charge them with exorbitant interest rates. The Shariah Financial System Considering the foregoing circumstances, would it not be prudent on the part of the government to study the feasibility of adopting a scheme similar to the Shariah financial system as a possible alternative lifeline for the less-privileged farmers? The basic principle of the Shariah system is the prohibition of usury or interest. The system may not be a substitute for conventional commercial banks, with their extensive branch networks and wide range of services, but it holds a number of advantages especially for small farmers, most of whom lack assets to back their loan applications. The big attraction is that this system does not require collateral, and lenders are prohibited from collecting interests on their loans. Under Islamic laws, financial institutions make money through a system of profit sharing from returns and approved investments. Malaysian Prime Minister Mahathir, in an address to about 1,000 delegates from around the Muslim world last November 3, 2002, said a hallmark of the Islamic system is that risk is equally shared between the lender and the borrower. The international banking system stacks deals heavily in favor of lenders, he said, and some countries end up in "debt slavery". "They are not going to lend if they cannot gain control over their borrowers in order to recover their loans, irrespective of the misery this
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Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

might cause," Mahathir further said (Islamic finance ends debt slavery Malaysian PM). Shariah System vs. Western Concept On the practical level, according to Makarram Abdul Hakeen, the Shariah practices differ markedly from the Western business concept, which regards loan as an investment transaction producing a net gain to the lender. In contrast, the Shariah system considers loan as a form of charity. Therefore, any benefit to the lender as a result of making the loan, or any increment in repayment over and above the amount lent, disqualifies the transaction as a loan. Instead, borrowing money from a Shariah financial institution is viewed as a partnership, wherein both the parties share the risks and the profits. With the setup, a poor farmer will not be locked into paying a set amount representing interest on the money borrowed. The amount to be paid instead depends on the revenues generated, which the author believes can effectively cushion the poor farmers from economics ups and downs. However, farmers must be prepared for closer and more regular scrutiny of their operations than in the conventional system. Having your lender look over the shoulder every now and then can be a little daunting if one is not used to this, but it could be well worth it. Another sharp contrast with the western practice is that Shariah banks do not grant overdrafts on current accounts and any loans they make are from depositors' funds, so there is no overall increase in money supply according to Jamal al Din Attiya as quoted by Makarram Abdul Hakeen. In the western banking system, bank loans and overdrafts are the chief source of new money, ie. credits created under the "fractional reserve" system, and hence the basis of bank profits. On the issue of stability of the Shariah system, Bank Islam quoted the report from the January 6 issue of Newsweek as follows:
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Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

Islamic banks proved to have some structural advantages over their conventional competitors during the Asian financial crisis in 1997. The Shariah banks survived because they did not have to pay such a high interest rate to their customers, since the return on deposits always reflects the profitability of the bank. Clearly its sometimes wise for investors to take an interest in more than interest. Today, there are about 200 Islamic banking institutions in at least 48 countries with combined assets of about $170 billion.

Can a system similar to the Shariah be an alternative lifeline for the poor farmers? Will it work in the Philippine setting? Only time can answer these questions. But as William James explained the philosophy of pragmatism: Anything that makes a difference makes a difference. Works Cited Belshaw, H., Agricultural Credit in Economically Underdeveloped Countries, Italy: FAO, 1959. Chapin, A. F. and Hasset, G. Jr., Credit and Collection Principles and Practice, 7th Edition, New York: McGraw-Hill Book Co., Inc., 1960. Fajardo, Feliciano R., Agricultural Economics, 3rd Edition, Manila: Rex Book Store, 1992. Fogg, C.R., Economic and Social Factors Affecting the Development of Small Holder Agriculturist in Eastern Australia, Economic Development and Cultural Change, Vol. 13, No. 3, April 1, 1965. Ravalo, Johnny Noe E., Philippine Daily Inquirer, December 6, 1999.

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Shariah Financial System: An Alternative Lifeline for the Less-Privileged Farmers?

Kimpo, Eva, Changes in Rice Farming in Selected Areas of Asia: Pigcawayan, Cotabato, Philippines, International Rice Research Institute, Los Banos, Laguna, 1962. Lu, Hsueh-yi, Some Socio-Economic Factors Affecting the Implementation at the Farm Level of a Rice Production Program in the Philippines, 1973. Islamic Finance Ends Debt Slavery - Malaysian PM. 3 Nov 2003 http://www.zambezi.free.fr.html Makarram Abdul Hakeen. Islamic http://www.thirdway.org Versus Western Banking.

News Week. 6 Jan. 2003. http://www.bankislam.com.htm

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