Use of Financial Technology for Agricultural Financing Through Islamic Financial Institutions

Abstract

Financial technology and digitization are an essential part of the financial sector in the recent age, especially for Islamic Financial Institutions (IFIs), who offer a variety of products and services to the different sectors/segments of society. Demand for food is rising, but agricultural productivity is reducing worldwide. The reason behind this contraction is the decreasing trend of investment in agriculture due to the shortage of credit and financing facilities. IFIs promised to provide financing, and Fintech is considered as an opportunity to manage this problem. The study aims to explore challenges for the small farmers regarding agricultural financing through IFIs in the presence of conventional financing sources to find out a solution with the help of Fintech integration. This study was undertaken to collect data through focus group and in-depth interviews. Population of the study is small farmers of agriculture sector in the Gujranwala region. A sample of 70 people were chosen based on purposive sampling to create focus groups (seven focus groups) and in-depth interviews of the selected respondents. The sample size of the study was decided based on the territorial classification of the selected area of the Gujranwala region to approach the maximum number of target audiences for this study. Moreover, unstructured in-depth interviews were carried out to collect data from small farmers. Individual farmer is the unit of analysis for this study. Interviews were transcribed and coded to develop the themes to conclude the results. Findings of the study indicate that conventional banks don’t provide loans to vulnerable small farmers due to risk burden and high interest; collateral requirements; bribery, and lengthy procedure for financing that discourage the small farmers to approach these banks. However, IFIs especially Islamic banks provide interest-free but offer very limited financing products/services to small farmers. Moreover, these financing facilities are not accessible to small farmers. Therefore, the use of financial technology with value chain financing emerged as a viable alternative that can tackle the financing issues by integrating small farmers and other stakeholders with IFIs. This study has several implications for IFIs, policy makers, and other stakeholders.