Food Security, Affordable Housing, and Poverty by Ahmet Suayb Gundogdu

Author:Ahmet Suayb Gundogdu
Language: eng
Format: epub, pdf
ISBN: 9783031276897
Publisher: Springer Nature Switzerland

4. Financing the Trade of Agricultural Commodities

Assuring demand-side stability

Ahmet Suayb Gundogdu1

(1)Istanbul Sabahattin Zaim University, Istanbul, Turkey

Ahmet Suayb Gundogdu

Email: [email protected]

Keywords

Islamic trade financeMurabahaRisk managementAsset-backed MurabahaExport receivable financingWarehouse receipt financingMargin callIslamic derivativeFuture Islamic contracts

To assure demand-side stability and move commodities forward across borders, trade finance is much needed. However, the issue of risk associated with agricultural commodity finance is challenging. Hence, many financial institutions shun proper engagement in the sector. Proper engagement means taking collateral in a way that aligns with the transaction. For instance, asking for mortgages as collateral for agricultural commodity trade is inappropriate. This is because it fuels real estate prices as it gets an additional feature of financialization and does not force banks to work with the best traders and trade deals due to the availability of lien on real estate.

The main risk factor in agricultural commodity trade is price risk. Many traders fail and cannot fulfill their commitments toward banks during price plunges, while traders keep hoping for an upside turn. The banks can manage such risk by a margin call, yet price volatility is a systematic risk fueled by speculation via conventional options and future contracts. Islamic restrictions provide a blueprint of a Shari’ah-compliant future contract that stabilizes market participants’ prices and hinders speculation. The margin call and Islamic future contract are the subjects of this chapter. Before going into technical details of risk associated with price and addressing the issue with margin calls and future Islamic contracts, the following section elaborates on risk while employing Islamic trade finance contracts. Grasping the risk aspect of these contracts is key to appreciating the subject of margin calls and Islamic future contracts for the agricultural sector.

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