Islamic structured trade finance: a case of cotton production in West Africa
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 6 April 2010
Abstract
Purpose
The purpose of this paper is to show a creative way to fulfill financing needs of entities involved in pre‐ and post‐harvest production activities in extreme cases while mitigating inherent risks by Islamic structured trade finance from the real‐life case of cotton production in Burkina Faso.
Design/methodology/approach
The existing Islamic structured finance design for SOFITEX was analyzed in details so as to provide clear understanding of the subject matter. This structure was evaluated and a new design is proposed to better accommodate the financing need of SOFITEX.
Findings
There are some inherent drawbacks, explained in details, of the existing Islamic finance structure. Salam contract for pre‐harvest input financing in favor of farmers can, unlike existing structure, accommodate the complete supply chain financing solution, hence, support the whole production cycle from input procurement to the exports of cotton fiber. That is, it fits better for financing the agricultural sector.
Research limitations/implications
The case and the structure studied in depth are limited to the cotton sector. This could be widened in subsequent researches.
Practical implications
Islamic finance instruments provide us enough room to fulfill financing needs in extreme cases as a better alternative to conventional financing tools. A method of mark‐up calculation for structured cotton trade finance is developed for Murabaha and Salam contracts.
Originality/value
The paper sheds new light on how to finance the agricultural sector starting from input procurement to the sale/export by Islamic finance instruments. It also shows how to get guarantees in the form of commodities in warehouse rather than bank guarantees, mortgage, sovereign guarantees, etc.
Keywords
Citation
Suayb Gundogdu, A. (2010), "Islamic structured trade finance: a case of cotton production in West Africa", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 No. 1, pp. 20-35. https://doi.org/10.1108/17538391011033843
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited