A farm worker collects harvest at a rice paddy in Lebak, West Java, on April 8, 2020. (Antara Photo/Muhammad Bagu Khoirunas)
Indonesia’s Food Insecurity and Islamic Finance
BY :ALI CHAMANI AL ANSHORY, WAHYU JATMIKO
AUGUST 24, 2022
The invasion of Russia on Ukraine slows down global economic recovery. The war rages the food shortage, creating crises in many countries.
The two countries are not only dominant producers of energy but also major breadbaskets to the world, providing for over one-tenth of all calories that the world consumes. Russia is also the biggest producer of fertilizer, which means the export ban of the country makes agriculture production vulnerable globally.
In response, many countries implement protective policies to ensure the local food supply. Indonesia, for instance, imposed exporting ban on its palm oil.
However, Indonesia remains vulnerable to food shortages. The country faces a sky-rocketing price of main food commodities such as eggs, chili, and many others.
There is an imbalance in the market where the inadequate food supply accompanies the rising demand due to the economic recovery. This ends the country’s low inflation regime that in May 2022 reached 3.55 percent, the highest since December 2017.
Indonesia was proclaimed as an agricultural country due to its tropical climate and significant farming population. Nevertheless, according to Global Food Security Index, the food security performance of the country is worrying, which is 59.2 or lower than the previous year. On the index’s natural resources and resilience dimension, Indonesia ranked 113 over 113 countries.
Despite being recognized for its fertile land and high rainfall, the poor performance implies that the sustainability of food security and its independence are weak, not to mention additional layers of complexity posed by climate change.
The war and protective policy which disrupt the supply chain may end, but a strategy to strengthen food security should be formulated.
The foundation of food security is farmers, institutions, and finance. In contributing to the latter, the food security project needs a financial institution designed to create social impact.
Islamic Finance’s Role in Food Security
Islamic finance is articulated to fulfill the promise of maqasid sharia or the objective of Islamic law. The ruling is revealed to serve the interest of all human beings and to save them from harm.
The classical scholars of Islamic jurisprudence delineated the goals which, in order of importance, are preserving religion, human life, intelligence, progeny, and wealth.
In other words, the distinction of Islamic finance is not merely on the legal aspect of Islam but also social dimension for the betterment of stakeholders. To preserve human life, ensuring food security is considered highly essential.
From the Islamic perspective, food security is defined as a situation when the right to halal (allowed) and tayyib (good) food for everyone is fulfilled, so no one is hampered from worshiping Allah because of starvation.
As the basic needs also entail other essentials of sharia to function, the promotion of human well-being is not merely emphasized but valued as part of worship.
Nevertheless, the percentage of agricultural financing is at a negligible level in Islamic banks, which reach merely 5.4 percent, compared to 19.5 percent for real estate and 12.3 percent for retail trade sectors.
Undoubtedly, financing agriculture is challenging due to its high-risk-low-return nature. Therefore, the classic Islamic financial contract provides salam as a financing product designed to increase the food supply.
Salam happens when two parties enter into a contract of sale of agricultural commodities that will be delivered in the future, for which the price for the goods is paid in cash on the spot at the time of the contract signing.
Generally, this setting of delayed delivery of the product is prohibited under Islamic law because it entails gharar (excessive uncertainty). The exception that salam granted is articulated to assist farmers and hence, implies the importance of food security in Islamic finance.
However, the reality is far from the desired framework. According to the Financial Services Authority (OJK), salam is not employed by any Islamic bank in Indonesia.
In contrast, murabaha, a mark-up sale, is dominantly utilized at 56 percent, which may explain the public accusation of Islamic banks replicating conventional products.
That raises an intriguing question of whether the classical Islamic finance contract like salam is still applicable in the modern economy?
Innovation is indeed the need of the hour. Among the way forwards is the blended Islamic finance combining salam financing and waqf. The endowment is utilized to insure the agriculture project, yielding a lower risk borne by the bank.
In conclusion, food security and independence are worrying problems that Indonesia should encounter. The availability of enough quantity and quality food is needed for the country’s wellness.
Islamic finance has social and financial roles in participating to ensure everybody can secure their primary need. Without genuine innovations, however, fulfilling the maqasid sharia will always remain a promise the industry cannot keep.
Ali Chamani Al Anshory is a researcher at the Center for Islamic Economics and Business, Faculty of Economics and Business Universitas Indonesia (PEBS FEB UI).
Wahyu Jatmiko is currently the head of the behavioral studies research cluster at the Center for Islamic Economics and Business, Faculty of Economics and Business Universitas Indonesia (PEBS FEB UI). He is also a lecturer in finance at the same university and serves as the Indonesian Association of Islamic Economists (IAEI) executive secretary.