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RISK‐SHARING AND THE SUPPLY OF AGRICULTURAL CREDIT: A CASE STUDY OF ISLAMIC FINANCE IN SUDAN
Author(s) -
Elhiraika Adam B.
Publication year - 1996
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/j.1477-9552.1996.tb00700.x
Subject(s) - moral hazard , agriculture , adverse selection , agrarian society , profit (economics) , yield (engineering) , islam , islamic finance , economics , business , profit sharing , finance , monetary economics , financial system , incentive , microeconomics , ecology , philosophy , materials science , theology , metallurgy , biology
The prohibition of interest‐bearing credit and its replacement with a profit and loss sharing (PLS) system that accords with Islamic injunctions has been associated with remarkable increases in formal lending to agriculture. A model is used to show that the PLS mechanisms may reduce adverse selection and moral hazard effects as returns to both lenders and borrowers are not fixed but dependent on the actual results of credit‐financed projects. Survey data is utilised to demonstrate that the instruments employed by banks in agrarian finance provide higher returns than non‐agricultural loans, and are hence attractive despite the yield and price uncertainty characteristic of agricultural production.