Murabaha Financing in Agriculture: Development and Limitations.
In Islamic Finance, Murabaha is a financing method that involves a cost-plus price imposed by the bank on its clients. To put it simply, the bank agrees to buy certain assets from the supplier for its clients, and sells them at a price above the original price as part of its “service pay”. The payment options are flexible, whether by lump sum (one-time transaction) or through instalments (periodically, the most practised way to settle payments).
Unlike conventional bank interest practices (as many critics pointed out due to near similarities in adding certain value to set price), the murabaha-imposed asset’s price is a set price and no further price change in the future period, even if the late payment happens from the borrower. However, the bank might be allowed to impose a penalty for the late payers under the condition that the bank must spend the penalty for preferred ways in Islamic law and socially beneficial, such as donations and charity.
Terminologically, murabaha is taken from the root word r-b-h (ربح: profit). Semantically, one particular party (in which the bank) took some additional profit from an additional lump sum from the asset bought by its client. In practice, this transaction method is widely used in Islamic banking for practical reasons and can be used for various assets, including tangible agricultural commodities and assets, which became the author’s justification for choosing the topic of murabaha contributions on agricultural sector growth.
The topic mainly focuses on the real-life application and methodological limitations, theoretical and practical.
Practical Development
Murabaha in agricultural practices can be done mainly in these three forms: through banking options, investments, and financial aid.
For banking options, the best example comes from the ZamZam Bank in Ethiopia, which specifically offered the murabaha options for various agricultural financing processes. Such specified options should not be a surprise due to the vast agricultural sector contribution to the national GDP (around 35%) and population living hood (80% of the population’s income source), according to the Food and Agriculture Organisation (FAO).
In investment contexts, a Nigerian agribusiness company, Olam International, was granted US$625 million in 2024 to establish its own murabaha financing facilities from various banks across the world, including the Muslim-majority countries such as Malaysia and the United Arab Emirates.
Another practical example is that recently, in September 2025, the Organisation of Petroleum Exporting Countries (OPEC) Fund for International Development granted around US$2.5 million for fertiliser import facilities for Bangladesh through murabaha schemes, with the facility support from the International Islamic Trade Finance Corporation (ITFC), Saudi EXIM Bank, and Bangladesh Agricultural Development Corporation (BADC), to import the fertiliser that crucial for agricultural development in Bangladesh, contributing to the food security in the country.
In Indonesian cases, Utama, Suwarsi, and Listiono (2019) suggested that murabaha is the popular choice among the financing options in Islamic banks, with around 57% compared to others such as mudharaba, bai’ as salam, and muzara’ah. This correlates with the fact that many extensive studies on murabaha effectiveness in agricultural settings have been conducted in various regions, such as at Jember (2019), Jambi (2023), and Bone (2025). However, most of the mentioned studies concluded that murabaha did not advantage the farmers in most situations, which I will discuss after this.
Theoretical Limitations
Despite those, the murabaha in agriculture method came with several theoretical limitations.
The first limitation is murabaha’s mismatch with the volatility of the agricultural nature, causing it to potentially misalign with the risk-sharing principle (profit-and-loss sharing). In this case, the bank secured a fixed, predetermined profit despite the farmer’s crop or farm results. The farmer, however, bears most of the operational risks, whether it is due to crop failure, pests, or price change. As Habriyanto and Pratiwi (2023) suggest, this type of structure makes the contract “not appropriate to be applied to the agricultural sector” because it potentially creates a disparity between the lender parties and those who lend.
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To explain it a bit technically, here is how murabaha is financially not viable for this case:
- Cash Flow Disarray: Agriculture usually generates income in lump sums after harvests, but Murabaha repayments are typically structured as instalments (as mentioned earlier). This creates a cash flow disarray for farmers, especially if the crop failure happens, which is practically burdened with sudden debt during periods of no income, directly increasing the “default risk” (chance of the borrower's inability to repay, leading to the bad debt).
- Rigidity to Contract: The price is predetermined based on the contract and cannot be adjusted for changes in production costs or output; it fails to offer flexibility to the farmer that aligns with the volatile reality of agriculture.
Back to Utama & Suwarsi (2019), imbalances in risk-bearing between contracting parties, cash flow misalignment, and contract inflexibility were enough to create a perception of murabaha as a high-risk option.
References
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Grosvenor, J. (2024, January 15). Islamic Finance: an introduction to Murabaha . Retrieved from trowers.com: https://www.trowers.com/insights/2024/january/islamic-finance-an-introduction-to-murabaha
Habriyanto, S., & Pratiwi, R. (2023, April). Analysis of implementation of murabahah contract in agricultural financing at Indonesian Sharia Bank Branch Office Jambi (hybrid contract model as alternative solution). In ICIFEB 2022: Proceedings of the 3rd International Conference of Islamic Finance and Business, ICIFEB 2022, 19–20 July 2022, Jakarta, Indonesia (p. 143).
A. Kasmianti, Abdulahanaa, & Shadriyah. (2025). Analysis of the Implementation of Murabahah Contract in Fertilizer Payments with a Post-Harvest Payment Scheme from the Perspective of Islamic Financial Institutions. Jurnal Ekonomi, Manajemen, Bisnis Dan Akuntansi Review, 5(1), 11. https://doi.org/10.53697/emba.v5i1.2435
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Olam Agri. (2024, April 2024). Olam Agri secures inaugural US$625 million Shariah-compliant financing facility. News Release. Singapore.
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The OPEC Fund for International Development. (2025, September 10). OPEC Fund contributes US$25 million to fertilizer import facility to bolster food security in Bangladesh . Retrieved from opecfund.org: https://opecfund.org/media-center/press-releases/2025/opec-fund-contributes-us-25-million-to-fertilizer-import-facility-to-bolster-food-security-in-bangladesh
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