Crafting the Agricultural Product and Loss Sharing (aPLS) in the Place of the Profit and Loss (PLS) for Islamic Agricultural Finance

Abstract

In Sharia, charging interest (riba) and all transactions involving risk and gambling (maysir) or uncertainty (gharar) are absolutely prohibited. Consequently, the Islamic financial solution, regularly referred to partnership contracts, proposes an equitable sharing of risks and profits between the involving parties in a financial transaction. The partnership contract in the discussion on Islamic banking and finance is closely related to the principles of al-mudaraba and al-musharaka. In contrast, there are also partnership contracts which are classified to be used in agricultural land development, namely al-muzara'a and al-musaqa. In general, the contracts of al-muzara'a and al-musaqa have a resemblance to the contracts of al-mudaraba and almusharaka. However, the similarity of al-muzara'a and al-musaqa to al-mudaraba and almusharaka is not in substance but is in concept of the contract. This is because the al-muzara'a and al-musharaka contracts focus in agriculture, while al-mudaraba and al-musharaka are more suited to trade and commercial contracts. Therefore, al-muzara'a can be identified as "agricultural product and loss sharing" (aPLS) and al-mudaraba and al-musharaka as "profit and loss sharing" (PLS). As a result, an Islamic partnership contract by the financial institutions for agricultural land development ought to implement aPLS which is based on the principles of almuzara'a and al-musaqa.