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Agricultural finance is the backbone of the Indian economy. Yet the sector remains plagued by deep-seated issues, including chronic farmer distress, high non-performing asset (NPA) rates, and a heavy reliance on interest-based credit structures (Riba). Against this backdrop, this article investigates the potential of establishing non-interest alternative banking models in India, focusing specifically on the Murabaha contract as a scalable and ethical mechanism for agricultural finance. Using Agrobank's successful transformation and financial performance in Malaysia as a blueprint, this analysis demonstrates how an asset-backed, fixed-cost financing approach could offer a more stable and transparent alternative to current debt-based systems, paving the way for greater financial inclusion and modernization for Indian farmers.

1. Need for Alternative

The current conventional credit system in India, while vast, faces inherent structural flaws that often end up in farmer suicides. The Reserve Bank of India’s (RBI) Internal Working Group (2019)^[2] has highlighted the need to review and restructure agricultural credit mechanisms to improve outreach and efficiency. A significant challenge is the high rate of Non-Performing Assets (NPAs) of farm loans. According to a 2020 study, the ratio of NPAs in agricultural loans remains a significant concern, often fluctuating at higher levels than other sectors, driven by factors like crop failure, market price volatility, and policy risks.^[3]

Crucially, conventional finance relies on a fixed-return interest model, which mandates repayment irrespective of the farmer's yield or profit. This debt-centric model exposes farmers to significant moral and financial hazard, especially during climate shocks or poor harvests.^[4]The uncertainty of collateral, compounded by the fear associated with aggressive recovery processes, pushes many small and marginal farmers toward informal, usurious money-lenders.^[5] Therefore, the proposed solution must move away from the debt-centric, fixed-interest paradigm to a more equitable, asset-backed system. Here comes the scope for Non-Interest Alternative Bank (NIAB) to finance the Indian agriculture sector.

2. Murabaha: Cost-Plus Contract

Non-Interest Alternative Banks (NIABs) are to be built on principles that prohibit Riba (interest) and speculation (Gharar), advocating risk-sharing and asset-backed transactions. Among the various non-interest instruments, Murabaha stands out as the most widely used and conceptually straightforward contract for asset financing. It is a cost-plus-profit sale, focusing on the sale of a tangible asset rather than a loan of money.

3. Structure of Murabaha for Agriculture Finance

The Murabaha contract provides a structured, fixed-cost method for farmers to acquire essential assets, avoiding the uncertainty of floating interest rates found in conventional loans. There are 4 Steps for this contract to be made:

1. Request and Promise: The farmer requests the NIAB to purchase a specific, identified asset (e.g., machinery, inputs) from a third-party supplier. This is a request, not a legally binding purchase order.
2. Purchase and Ownership: NIAB legally purchases the asset from the Supplier at the Cost Price, acquires legal and constructive ownership, and bears the associated risks (such as damage or loss) until the subsequent transfer. This transfer of risk is fundamental to the contract's Shariah compliance.
3. Murabaha Sale and Mark-up: NIAB sells the now-owned asset to the Client at a fixed, total Deferred Price. This price is calculated as the original Cost Price plus a transparent, pre-agreed Mark-up (profit). The total price is disclosed and fixed upfront.^[6]
4. Deferred Payment: Farmer accepts the agreed-upon Deferred Price and agrees to repay it in fixed installments over a defined period. The repayment schedule is constant throughout the term, providing stability.

This structure ensures that finance is always tied to a real economic transaction, adhering to the principle that profit is a reward for risk borne, a key ethical distinction from conventional interest systems.

4. Application of Murabaha in Agricultural Finance

The Murabaha contract can be strategically applied in agricultural finance to support the entire value chain through two key mechanisms: working capital and capital expenditure. For working capital, it finances rapidly consumed inputs such as seeds and fertilizers by requiring the financier to purchase the physical goods directly, thereby preventing cash diversion and aligning repayment schedules with the farmer's harvest revenue, thereby mitigating short-term stress. For capital expenditure, Murabaha facilitates the acquisition of large, long-term assets, such as machinery and infrastructure (e.g., cold storage), through a fixed-cost structure. This structure inherently reduces financial risk for the farmer by eliminating exposure to floating interest rates, ensuring the financing is tied to a tangible, productive asset, and incorporating ethical debt management in which late fees are channeled to charity rather than compounding the debt burden.

5. Malaysian Agrobank: Model for India

The transformation of Agrobank in Malaysia offers a compelling and scalable case study for the applicability of non-interest models in agricultural finance. Agrobank transitioned from a conventional to a full-fledged Islamic bank by 2015, operating entirely on non-interest principles. Agrobank’s success lies in its adoption of the Agricultural Value Chain Finance (AVCF) model, which looks beyond the farmer as a single entity to consider the entire chain: input suppliers, farmers, processors, and retailers.^[7]

Within this AVCF framework, Murabaha is deployed strategically to:

• Risk Mitigation: The bank leverages its position in the value chain to purchase bulk assets (inputs or equipment) and transfer them, thereby enhancing risk mitigation, as the bank's own success is linked to the stability and productivity of the entire agricultural ecosystem.
• Strategic Deployment: Enable the acquisition of large farm machinery or processing equipment through transparent, cost-plus sales and facilitate input financing via the exact mechanism.

Analyzing Agrobank's financial reports from 2021 to 2023^[8] provides concrete evidence of the Murabaha contract's scalability and dominance as a financial instrument in the agricultural sector. The bank's financial strategy reveals that Murabaha Gross Financing served as the core mechanism for asset deployment, demonstrating stability and institutional confidence. The financing amount grew consistently, increasing from a strong base of RM 10,750,715 thousand in 2021 (a 7.5% increase) to RM 12,028,879 thousand in 2022 (a 11.9% increase). This trend continued into 2023, where the figure exceeded RM 13 billion (RM 13,006,206 thousand), affirming the structural expansion and overall robustness of the non-interest model in funding diverse agricultural requirements. To put this scale in an Indian context, the increase in Murabaha financing over these two years alone represents approximately 4,000 crore rupees (using an approximate exchange rate of 1 MYR ≈ 18 INR), powerfully illustrating the model's significant financial capacity.

6.Practical Scope in India

The possible adoption of a pure non-interest model in India, such as NIAB, faces regulatory hurdles, primarily due to India's unstable political economy and the risks banks would face, such as the SLR (Stationary Liquidity Ratio). On the other hand, the existing Banking Regulation Act, 1949, does not explicitly accommodate the operations of pure interest-free banks.^[9]

However, the path to implementation remains open. The Indian Center for Islamic Finance (ICIF) in Delhi, under Mr. H. Abduraqeeb and Dr. Javed Ahemed, has previously proposed the feasibility of initiating non-interest banking services within the extant legal framework by creating specialized "Interest-Free Windows" inside existing commercial banks.^[10] This approach, also suggested by the RBI Working Group Report (2006), ^[11] chaired by Anand Sinha, would allow banks to offer non-interest products such as Murabaha without requiring a complete overhaul of the banking law.

Conclusion

Challenges in Indian agricultural finance demand innovative, alternative credit mechanisms. The Murabaha contract, as an asset-backed, cost-plus sale, offers a structurally sound and ethically aligned alternative to conventional interest-based lending. The Malaysian Agrobank model provides a working blueprint, demonstrating that an agricultural focus, combined with non-interest finance and a value-chain approach, can be successfully executed and scaled, as evidenced by its consistent financial growth in Murabaha financing between 2021 and 2023. By embracing the transparent, stable Murabaha contract—initially perhaps through "Interest-Free Windows"—the Indian economic system can unlock new avenues for capital flow, mitigate financial risk for its farmers, and foster a more equitable and sustainable agricultural economy.

About the author:

Mohammed Imran^[1] is a Post Graduate Scholar, Dept. of Islamic Economics and Finance, Darul Huda Islamic University, Kerala, India

References

Bank Pertanian Malaysia Berhad (Agrobank). (2021). Annual integrated report 2021: A resilient tomorrow: Recovery & accelerating transformation. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2022/12/ShareAR-ENG-Agrobank-AIR2021.pdf

Bank Pertanian Malaysia Berhad (Agrobank). (2022). Annual integrated report 2022: Mainstreaming food security. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2024/01/ShareAR_EN-Agrobank_AIR2022.pdf

Bank Pertanian Malaysia Berhad (Agrobank). (2023). Annual integrated report 2023: Catalysing sustainable agriculture, supporting food security. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2024/12/ShareAR_EN-Agrobank_AIR2023.pdf

Hawaldar, I.T. et al. (2020). Analyzing non-performing assets in agricultural loans: A case study of India. Revista de Ştiinţe Politice, 65, 42-53.

ICIF (Indian Center for Islamic Finance). Interest-Free Banking Window in Existing Commercial Banks: A Paper Presented to RBI.

Muttaqin, A.A. et al. (2021). Developing an Islamic Business Model: A Case for Agricultural Value Chain Finance in Agrobank, Malaysia. Journal of Islamic Financial Studies.

Nomani, A. & Khan, W. (2021). Analysis of Islamic Finance as an Alternative Method for Agricultural Financing. Article, October 2021.

RBI (Reserve Bank of India). (2006). Report of the Working Group to examine financial instruments used in Islamic Banking.

RBI (Reserve Bank of India). (2019). Report of the Internal Working Group to Review Agricultural Credit.

Saeed, A. (2023). Transparency and Fixed Pricing in Murabaha: A Comparative Analysis for Asset Acquisition. Global Finance Journal, 4(1), 60-75.

Singh, R. et al. (2018). Islamic Banking in India: Challenges And Remedies. Asian Journal of Management Applications and Research, 8(1).

Sultana, S. (2021). Risk Amplification and Conventional Credit: Analyzing Agrarian Distress in Climate-Volatile Regions of India. Agricultural Economics Review, 12(4), 345-360.

Citations:

[1] Post Graduate Scholar, Dept. of Islamic Economics and Finance, Darul Huda Islamic University, Kerala, India

[2] RBI (Reserve Bank of India). (2019). Report of the Internal Working Group to Review Agricultural Credit.

[3] Hawaldar, I.T. et al. (2020). Analyzing non-performing assets in agricultural loans: A case study of India. Revista de Ştiinţe Politice, 65, 42-53.

[4] Sultana, S. (2021). Risk Amplification and Conventional Credit: Analyzing Agrarian Distress in Climate-Volatile Regions of India. Agricultural Economics Review, 12(4), 345-360.

[5] Nomani, A. & Khan, W. (2021). Analysis of Islamic Finance as an Alternative Method for Agricultural Financing. Article, October 2021.

[6] Saeed, A. (2023). Transparency and Fixed Pricing in Murabaha: A Comparative Analysis for Asset Acquisition. Global Finance Journal, 4(1), 60-75.

[7] Muttaqin, A.A. et al. (2021). Developing an Islamic Business Model: A Case for Agricultural Value Chain Finance in Agrobank, Malaysia. Journal of Islamic Financial Studies.

[8] Bank Pertanian Malaysia Berhad (Agrobank). (2021). Annual integrated report 2021: A resilient tomorrow: Recovery & accelerating transformation. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2022/12/ShareAR-ENG-Agrobank-AIR2021.pdf

Bank Pertanian Malaysia Berhad (Agrobank). (2022). Annual integrated report 2022: Mainstreaming food security. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2024/01/ShareAR_EN-Agrobank_AIR2022.pdf

Bank Pertanian Malaysia Berhad (Agrobank). (2023). Annual integrated report 2023: Catalysing sustainable agriculture, supporting food security. Retrieved from https://www.agrobank.com.my/wp-content/uploads/2024/12/ShareAR_EN-Agrobank_AIR2023.pdf

[9] Singh, R. et al. (2018). Islamic Banking in India: Challenges And Remedies. Asian Journal of Management Applications and Research, 8(1).

[10] ICIF (Indian Center for Islamic Finance). Interest Free Banking Window in Existing Commercial Banks: A Paper Presented to RBI.

[11] RBI (Reserve Bank of India). (2006). Report of the Working Group to examine financial instruments used in Islamic Banking.