Wednesday, June 13, 2012

Financing food and agriculture through Islamic finance

The Islamic Development Bank's (IDB) Islamic Corporation for the Development of the Private Sector (ICD) announced that it is partnering with fund manger Robeco to launch a $600 million agriculture private equity fund, $350 million of which will be raised by the end of the year.  The fund's investment focus is to "invest in projects that promote steady food supply [by making] private equity investments in food and agriculture projects as well as companies across various target countries in a Shariah-compliant way".  The CEO of the ICD, Khalid Al-Aboodi, said that the fund would "address the inefficiencies and wastage facing the food and agricultural sector throughout our member countries".  

The fund idea sounds to me like a great way to encourage Islamic financial institutions to finance projects which benefit a much larger number of people than building luxury resorts.  Food security is one of the most important issues facing many countries with high levels of poverty, so dealing with the issue using Islamic finance would be a way to demonstrate that Islamic finance does "get it" that financing activities that benefit people at all income levels is part of its ethical mandate. 

It is important, however, to clearly define the areas where the fund will focus, and identify investments at weak points in the food growing/distribution network so that it will accrue benefits to the investors as well as the people living in countries where financing is directed.  In particular, the fund should put a focus on not funding 'white elephant' projects that create a profitable cash flow for investors (e.g. from contracts with local governments to pay for services, but which are unable to provide a benefit to the population because other complementary infrastructure is absent). 

Addressing 'food and agriculture' sounds like a simple, narrow area, but it is easy to define investments in other areas that can be instrumental in reducing wastage, for example, in the food distribution process that could lead to significant 'mission creep' for the fund which would dilute its effectiveness.  For example, ensuring a reliable supply of electricity in rural areas where food is grown allows for refrigeration and freezing of food, which allows it to be distributed more widely, opening up markets for farmers.  From another direction, without a reliable supply of electricity, efforts to increase agricultural productivity in rural areas will accomplish little if most of the expanded productivity is lost to waste since it cannot be refrigerated or frozen and transported to the markets where it will be consumed.  

It is good to see the IDB's ICD put a focus on directing investors towards the Shari'ah-compliant financing of an area that can be hugely beneficial for the poor, while also having potential to deliver return to investors if it is done correctly. 

1 comment:

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