B. Y. Muhammad
Agriculture is the backbone of many African economies, contributing approximately 23% of the continent’s GDP and employing nearly 60% of its workforce. With over 60% of the world’s uncultivated arable land, Africa has immense potential to become a global food basket. However, the continent continues to struggle with food insecurity, low agricultural productivity, and heavy reliance on food imports.
According to the Food and Agriculture Organization (FAO), nearly 282 million people in Africa suffer from undernourishment. The situation is worsened by climate change, poor infrastructure, low mechanization levels, and, most significantly, inadequate funding of the agricultural sector. Africa imports over $50 billion worth of food annually, highlighting a critical gap between production and demand.
The Role of Agricultural Financing and Its Challenges
One of the biggest obstacles to agricultural transformation in Africa is poor financing. Despite agriculture’s economic significance, it receives less than 5% of total commercial lending in many African countries. The reasons for this include:
- High Interest Rates on Agricultural Loans: Many farmers and agribusinesses cannot afford credit due to exorbitant interest rates, sometimes exceeding 25% per annum in some African countries.
- Collateral Requirements: Smallholder farmers, who produce the majority of Africa’s food, lack the necessary assets to secure loans.
- Short-Term Financing Models: Conventional agricultural loans often have short repayment periods, which are unsuitable for agricultural cycles that require long-term investments.
- Risk Perception: Financial institutions perceive agriculture as a high-risk sector due to climate variability, pests, and diseases.
Sukuk: An Alternative Mechanism for Agricultural Development
Sukuk, or Islamic bonds, offer a Shariah-compliant financing mechanism that can effectively address Africa’s agricultural funding challenges. Unlike conventional bonds, Sukuk are asset-backed and do not involve interest (riba). Instead, investors earn returns from profits generated by the underlying asset or project.
How Sukuk Can Boost Agriculture in Africa
- Long-Term Investment – Sukuk structures can provide long-term financing, allowing agricultural projects to mature and become profitable.
- Asset-Backed Financing – Sukuk are linked to tangible assets such as farmlands, irrigation projects, and agro-processing plants, ensuring funds are directly invested in productive assets.
- Risk Sharing – Unlike conventional loans, Sukuk structures involve risk-sharing between investors and project owners, reducing the financial burden on smallholder farmers.
- Infrastructure Development – Sukuk can be used to finance critical agricultural infrastructure such as irrigation systems, storage facilities, and transportation networks, which are essential for improving productivity and reducing post-harvest losses.
- Affordable Financing – Since Sukuk does not involve interest, it can provide cheaper financing compared to conventional high-interest loans, making it accessible to more farmers and agribusinesses.
Success Stories of Sukuk in Agricultural Development
Several countries have successfully employed Sukuk to finance agricultural projects. Some notable examples include:
1. Nigeria: FGN Sukuk for Rural Infrastructure
Nigeria has issued multiple sovereign Sukuk to finance infrastructure projects, including roads leading to key agricultural zones. These projects have enhanced market access for farmers, reducing transportation costs and post-harvest losses.
2. Malaysia: Sukuk for Palm Oil and Rice Farming
Malaysia has successfully used Sukuk to fund large-scale agricultural projects, including palm oil plantations and rice farming. This has led to increased productivity and strengthened the country’s position as a major agricultural exporter.
3. Sudan: Sukuk for Agricultural Development
Sudan has utilized Sukuk to finance large-scale irrigation projects and mechanized farming, significantly boosting agricultural yields and improving food security.
Recommendations and Way Forward
To harness the full potential of Sukuk for agricultural development in Africa, the following strategies should be implemented:
- Government and Institutional Support – African governments should create enabling policies for Sukuk issuance, including regulatory frameworks and tax incentives.
- Public-Private Partnerships (PPPs) – Collaboration between governments, financial institutions, and private investors can enhance Sukuk financing for agriculture.
- Capacity Building and Awareness – Financial institutions and policymakers need training on Sukuk structuring to optimize its use in agriculture.
- Regional Cooperation – African countries should collaborate to develop a continental Sukuk market to attract more investors and scale up agricultural financing.
Conclusion
Sukuk presents a transformative solution to Africa’s agricultural financing challenges. By providing affordable, long-term, and asset-backed financing, Sukuk can unlock Africa’s vast agricultural potential, enhance food security, and reduce dependence on food imports. With the right policies and implementation strategies, Africa can leverage Sukuk to build a more resilient and prosperous agricultural sector.
B.Y. Muhammad is the President of the Africa Islamic Economic Forum, Tamale, Ghana.
