What are the Benefits of Ijara Loans for the Agricultural Sector?
An attempt to study the benefits of ijara loans for the agricultural sector throws up some interesting and mindboggling statistics related to the Islamic banking sector as a whole.
In a global economy marred by recessionary trends, debt crises, and devaluating currencies, the steady rise and growth of Islamic banking products are indeed worth every bit of analysis and scrutiny they are currently being subjected to. According to Standard & Poor’s, this sector grew at a constant rate of 10-15% all throughout the last decade and the agency forecasts that this growth will not slow down in the years to come. What is more, the worth of Islamic banking assets, valued at around $500 billion in 2009 will also witness a steady rise in the next few years as more and more individuals, entrepreneurs, and business entities realize the benefits of these and make a beeline to secure them.
There are many forms of Islamic banking products—Musharaka, Murabaha, Mudaraba, sukuks, and ijara loans. Amongst these, ijara loans are widely held to be one of the most popular forms. Ijara contracts are entered into by many hundreds of individuals and businesses—large, medium, and small—every year and this number is not restricted to only Muslim countries. Ijara loans have gained acceptance and earned popularity in the United States, the UK, and countries of the European mainland as well. The widespread prevalence of ijara loans can be attributed to the myriad benefits that this form of Islamic financing provides to all the parties that have entered into the contract. An analysis of the benefits of ijara loans for the agricultural sector is a case that proves the point.
Before delving into the benefits of ijara loans for the agricultural sector, it is worthwhile to understand the nature of this sector, the dynamics of operations here particularly in the context of these turbulent economic times, and the challenges faced by an agricultural entrepreneur as he attempts to either start a venture or expand the productive capacity of his existing setup. A fair understanding of these is essential to be able to appreciate the benefits of ijara loans for the agricultural sector.
The Benefits of Ijara Loans for the Agricultural Sector: Overcoming the Challenges of the Sector
The benefits of ijara loans for the agricultural sector stem from their ability to overcome the unique challenges present in the sector itself. So, before trying to understand the benefits of ijara loans for the agricultural sector, here is a brief discussion of the challenges that beleaguer the agricultural sector.
Any agricultural entrepreneurial venture requires investments in machinery and equipment, some of which might be prohibitively expensive for a small farmer or an entrepreneur who is just starting out. Even entrepreneurs, who are not hard up on cash, are reluctant to invest dollops of amount in machinery particularly in tough economic times. Their only way out is to apply for loans to acquire the machinery and carry out production. Again, an entrepreneur may not always be keen to purchase a piece of machinery, simply because technological advances may render this material item worthless within a couple of years. It may also be that a particular piece of equipment has poor resale value and thus is not worth buying. Opening the door for conventional loan schemes do not resolve these issues. Herein arise the benefits of ijara loans for the agricultural sector.
One of the primary benefits of ijara loans for the agricultural sector is that the farmer or the entrepreneur can choose not to buy the piece of machinery at all. He can instead lease it from the bank or any other Islamic financial institution, in return for a fixed rental payment to be tendered at pre-determined intervals of time. The lessee gets to enjoy the right of usage right after making the first rental payment. In this way, he gets to reap dividends by channeling the asset to productive purposes without having to bear the risks and responsibilities associated with the right of ownership. These are some of the greatest benefits of ijara loans for the agricultural sector that have enabled entrepreneurs to not only carry on with production but also expand even during recession.
Some other benefits of ijara loans for the agricultural sector stem from an ethical perspective. Agricultural entrepreneurs who abide by the rules of the Sharia cannot enter into conventional interest-based loan arrangements. For them, ijara loans provide the ideal means to obtain approval for their cherished business projects to be funded and enjoy the benefits of ijara loans for the agricultural sector without violating their Islamic beliefs.
The above discussion of the benefits of ijara loans for the agricultural sector aptly proves why these Islamic financial products have almost come to be the mainstay of the sector, especially in fickle economies.