The role of İslamic finance in agricultural and rural development: Somalia

This research evaluates and sheds light on the role of Islamic Finance in agriculture and rural development in Somalia. Agriculture (Arable and Pastoral) is the fundamental economic resource in Somalia. It highly contributes to the national GDP and is the main employment factor. Therefore, improving the sector is enhancing the economies at large. Somalia is in an inching process shifting from prolonged informal economies. For nearly a decade Somali economies have gone a major transformation, local and international investments started flowing into the country. However, these investments were focused on other industries such as hotels, real estate, commercial banks, etc. Despite its remarkable contribution, agriculture is declining in Somalia, due to different reasons, mainly lack funding and limited irrigation system. This research is conducted to identify the relationship between farmers and financial institutions and to show how Islamic Finance can positively contribute to agricultural and rural development in Somalia. Islamic Finance, has financing methods tailored for agricultural investment such as Salam, Istisna, Mazara', and Musaqa and the well known Islamic finance mechanism of profit and loss sharing. The profit and loss sharing mechanism encourages both parties to work hard and it eliminates negligence and misconduct since the profit depends on the success of the business or project. Islamic finance was previously used for rural and agricultural development and produced favorable yields in Sudan and Pakistan. Somali commercial banks are all fully-fledged Islamic Banks but have minimum relations with the agricultural sector. The banks are providing investments to less risk and more profit-generating projects, and their relationship with the farmers is substandard. During this research, it was discovered that commercial banks have minimum relations with farmers due to farmer's lack of proper documents, the high risk involved in the sector. Also, commercial banks don't have the capacity to provide funding to all sectors. The commercial banks offer Islamic microfinance i.e. Qard-Hassan to the fishery and Mudaraba financing to the large-scale farmers. apart from this, commercial banks have no involvement in agriculture. The financial institution offers investment to large-scaled farmers. However, 65% of farmers in Somalia are smallholder farmers and have no access to financial support from the government and they are not accessible to credits offered by the financial institutions due to the required collateral. On the other hand, most farmers are unaware of investment potentials. During the research, it was realized that some of the farmers are either unaware or misunderstood financial institutions to a scam to take over their property. Farmers in developed and developing countries are supported by their governments. In the case of Somalia, the government doesn't directly involve in the farming process. However, the farmers are in need of legal protection, funding, Irrigation, training on the modern agricultural systems, implementing a value chain system to advance the quality of the products, and creating potential international markets.