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Islamic financial institutions distinguish themselves in the arena of supply chain financing, carving a unique niche compared to their conventional counterparts. This analysis aims to unravel the intricate involvement of Islamic banks in supply chain financing, shedding light on the pivotal aspects of ownership, possession, and risk management inherent in asset-based contracts.
Beyond monetary loans: A deeper engagement
Islamic banks transcend the conventional role of merely providing monetary loans. The Islamic banking model necessitates a more profound integration into the supply chain, driven by the imperative of ownership and possession in trade and lease contracts. Noteworthy Islamic financing contracts such as Murabaha, Ijarah, and Diminishing Musharakah place the onus of asset ownership risks squarely on the shoulders of the Islamic bank, often for extended durations.
Risk mitigation strategies
In the pursuit of securing transactions and ensuring Shari’ah compliance, Islamic banks employ risk mitigation strategies. Unilateral undertakings from clients serve as a protective measure, rendering Islamic financing seemingly as secure as its conventional counterpart. However, critics posit that this safeguarding approach may inadvertently lead to outcomes and economic effects resembling those of conventional banking.
Challenges in product structures
A critical limitation in Islamic finance emerges in the form of a scarcity of product structures. This dearth impedes the provision of financing to financially distressed firms grappling with working capital needs. While financing modes such as Salam and Istisna offer viable solutions for working capital, their overall contribution to financing remains minimal, primarily catering to more stable corporations.
Inclusivity concerns in Islamic banking
A comparative analysis of Islamic banks reveals a notable discrepancy in financing allocation. These institutions allocate less financing to agriculture and SMEs compared to their conventional counterparts. This raises concerns about the inclusivity and effectiveness of Islamic banks in addressing market concentration and navigating supply chain bottlenecks.
Debt-based financing dilemma
Delving into the prevalent use of debt-based financing in Islamic banks, questions arise regarding its effectiveness in managing supply chain issues. A pertinent case study is the circular debt conundrum in the energy sector. The issuance of Sukuk and other debt-based financing instruments has not proven more effective in liquidity management compared to conventional banking methodologies.
The way forward: Proposing distinct structures
Acknowledging the challenges, the paper advocates for further research in the realm of Islamic finance. Proposals for distinct structures within Islamic finance emerge as a beacon of hope. The integration of social finance structures, such as Waqf, with equity-based modes is posited as a transformative approach. This envisions a more inclusive and egalitarian financial system, bridging gaps and fostering sustainable economic growth.
Future research avenues
As the paper lays the groundwork for continued exploration, future research avenues come into focus. The potential of Islamic banking in value-based intermediation beckons further scrutiny. Additionally, examining the role of Islamic banks in global value chains presents an intriguing area for research, opening new frontiers in understanding their impact on the broader economic landscape.
Conclusion
In conclusion, the analysis of Islamic banks in supply chain financing underscores their distinctive role, marked by ownership, possession, and risk-taking obligations. While challenges exist, the paper advocates for innovation within Islamic finance, offering a vision of a more inclusive and egalitarian financial system. Future research endeavours are poised to unravel untapped potential, guiding the evolution of Islamic banking in the complex landscape of supply chain financing.
The writer is the additional managing director and chief credit officer of The Premier Bank PLC. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.
Messenger/Fameema
