Artikel 3

Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics)
Volume 11 (2), July 2019

P-ISSN: 2087-135X; E-ISSN: 2407-8654
Page 223 - 246
The Implementation of Salam-Contract For Agriculture

Financing Through Islamic-Corporate Social Responsibility
(Case Study of Paddy Farmers in Tuban Regency Indonesia)
Ahmad Hudaifah1, Bambang Tutuko2, Tjiptohadi Sawarjuwono3
Abstract. This research is aimed at discovering a stable financial scheming

formula or model that would be compatible with the natural characteristics of
a paddy farming cycle in Tuban. The qualitative research employs the use of an
active participatory community through the means of a focus group discussion, an
in-depth interview and face to face interviews with respective stakeholders and
key informants. The Salam contract, which is highly beneficial is a prospective
financial scheme that terminates the long business chain found in most businesses
in Indonesia. The Corporate Social Responsibility which is managed through the
Syariah approach (I-CSR) from a company, can become the solution to bridge
the gap found in the implementation of funds for a Salam contract. The Salam
contract applicability is dependent on the Islamic farmer cooperatives (BMT), a
unit of joint venture organization serving as the key players in the execution of
the function of a paddy warehouse-trading agent and direct financing to farmers.
Strong support also comes from the zakat, infāq, and shodaqoh institution (LAZ)
whose role is educating and encouraging the paddy farmers’ skills and competency,
especially to enable them access end-user markets using the aid of information
technology.
Keywords: Salam, I-CSR, Cooperative, Farmers
Abstrak. Penelitian ini betujuan untu menemukan formula skema pembiayaan

pertanian yang stabil sesuai dengan karakteristik alamiah pertanian padi
di Kabupaten Tuban. Metode penelitian kualitatif dipergunakan dalam
menyelesaikan penelitian ini dengan partisipasi aktif komunitas melalui
media diskusi kelompok, wawancara mendalam tatap muka dan observasi
kepada informan kunci dan pihak yang terlibat secara langsung dalam tata-
niaga pertanian padi di Kabupaten Tuban. Kontrak salam adalah skema
pembiayaan yang sangat menguntungkan bagi petani dan pada aplikasinya
mampu mengambil peran pembiayaan distributor dalam tata niaga pertanian
padi. Islamic Corporate Social Responsibility (I-CSR) yang dikelola berdasarkan
prinsip ekonomi Syariah dari perusahan yang beroperasi di wilayah Tuban bisa
menjadi solusi dana yang dikembangkan untuk pembiayaan pertanian yang
dihindari oleh perbankan karena siklus bisnis yang berbeda. Keberlangsungan
Department of Islamic Economics, Universitas Internasional Semen Indonesia

1, 2, 3
E-Mail: 1ahmadhudaifah@gmail.com, 2bambang.tutuko@uisi.ac.id, 3tjiptohadi@uisi.ac.id

224 Vol. 11 (2), July 2019
kontrak salam pertanian untuk komoditas padi akan bergantung pada koperasi
petani yang terdiri dari koperasi simpan pinjam Syariah (BMT), gudang padi,
penggilingan padi dan unit perdagangan yang kesemuanya disebut sebagai KUB
(Kelompok Usaha Bersama). Dukungan yang kuat juga berasal dari Lembaga
zakat, infāq dan shodaqoh, yang memiliki peran untuk melakukan pelatihan
keahlian petani dan membantu memenuhi kebutuhan dasar petani yang menjadi
anggota dalam KUB.
Kata kunci: Salam, I-CSR, Koperasi, Petani
Introduction
From the perspective of the Indonesian Islamic banking, the implementation
of the Salam contract financing as stipulated in Fatwa DSN MUI No. 5/2000 for
the agricultural and plantation sector is a very much challenging and uneasy task.
Based on the Indonesia Financial Service Authority (OJK/Otoritas Jasa Keuangan)
report, the Salam contract for agriculture, one of the most minority products
provided by the Islamic banks of Indonesia, constitutes less than 1 percent of the
Islamic banking financing. The main problem of executing and structuring a Salam
contract for Islamic banking in Indonesia is the distinction found in the business
cycles of the banking business and farming activity. Banks as financial merchants
must have their work ethics conform with the nature of financial services and be
ready for cash flow availability regularly, which could be daily or monthly. As part of
the consequences, employing the Salam contract requires a monthly payment of a
fixed or negotiable amount of money. From another angle, when the Salam contract
is executed through a single process; involving the Islamic bank and the farmers
only, the Islamic bank would have to deal with the challenges involved in the storing
and trading process of agricultural products.
The existence of a flexible third-party fund in terms of its usage compatibility
and profit-sharing responsibility is also a research issue which must be dealt with
in the analysis. Another reason is that the bank is usually unable to structure and
offer the salam contract because of the liability attachment to its customers. They
should be ready to entertain any cash withdrawal and transfer from customers at any
time of the request. In addition, the bank must enforce profit-sharing regularly as a
banking common financial behaviour. In reality, farming nature cycles such as paddy
for instance, in reality, takes more than a month to give the farmers opportunity to
monetize their harvests after selling to middlemen or the markets. The nature of the
agricultural business proses runs for a longer period, usually, four months involving
cultivation, fertilization, harvest and vending.
http://journal.uinjkt.ac.id/index.php/iqtishad
https://dx.doi.org/10.15408/aiq.v11i2.10933
Ahmad Hudaifah. The Implementation of Salam 225
Based on the statistical data from the application of agricultural financing

by the Islamic bank, murabahah or Muḍārabah contract is more reliable from the
banks perspective. Usage of these two contracts also demands collateral in the
form of land ownership certificate or motor vehicle ownership certificate as well
as regular payment. Those requirements are authorized by the DSN MUI fatwa
Number 7/2000. Unfortunately, it is incompatible and unsuited for the nature of
the agricultural business process, particularly for small and micro-scale farmers. In
the implementation, based on the observations from several regions and discussions
with Islamic bank practitioners, farmers must collateralize their land and valuable
asset such as jewellery or vehicles when they are proposing a financing schemes
to Islamic commercial banks, Islamic rural bank or Islamic cooperatives for the
purpose of having a working capital in their planting phases. However, farmers are
expected to pay back a financing scheme on a monthly basis after 3 to 4 months
as regards to receiving income from selling their harvested products. In cases of
small and micro-scale farmers, taking a financing contract or scheme from Islamic
banking is difficult to achieve due to the lack of valuable collateral.
Tuban Regency is selected with a reasonable background as one administrative
area located in north coastal line of Java Island with agglomeration of less developed
farming and growing farming industry. According to statistical data issued by Tuban
local government in 2017, the contribution to the GDP for Tuban economy is
dominated by the manufacturing industry and the agricultural sector accounting
for 28.32 percent and 21.33 percent. One of the agricultural economic sector which
seems to be more common in Tuban Regency is rice or paddy farming. There is not
only land suitability for paddy farm, but it also goes in line with the national food
security program that enables Tuban to become one of national paddy producers.
Tuban rice production reaches about more than 588 thousand tons with the land
farming productivity abound 62 quintals per hectare. Local potency with expansive
government program in paddy farming is supposed to be a gateway for farmer’s
economic welfare. Thus, it is expected that with a good financing mechanism and an
effective agricultural modified program, farmers can ignore taking financing scheme
from money lender, loan shark and middlemen buying the harvest with lower price.
Unfortunately, many paddy farmers, due to the shortage of cash flow, can barely
finance their living cost. Lack of personal finance management has forced them to
take any loan available to them and also sell their harvest to middle man.
In line with the growth of the manufacturing industry, Tuban regency as
a national pillar of paddy producers with negative social impacts such as carbon
pollution as well as deteriorating urban planning tends to be compensated with the
226 Vol. 11 (2), July 2019
corporate social responsibility fund. The CSR fund from companies runs under
a mandatory of Act Number 40/2007, which stipulates an obligation from any
liable business entities to allocate their CSR fund as a means of environmental
and social compensation. The majority of CSR funds goes to charity program and
local infrastructural development and does not require a longer term of productive
allocation. The reason why CSR fund is directly spent on society is attributable to
two major reasons: the surrounding pressures and the company objectives. Such
CSR fund allocation programs are designed to cater to several programs like free
medical treatment for the poor and building roads or monuments. One feature
program that seems to have a wider reach is the training of vulnerable residents
with skills and capacity, such as pastry and cooking training and online marketing
through social media for small and micro-enterprises.
CSR fund is a source of free, flexible and cheap internal financing designed
specifically for agriculture salam contracts. A portion of CSR fund allocation, for
example, 10 up to 20 percent, is needed to support these financing schemes. The
majority of CSR fund as a strategic social communication for the corporation
should be utilized for infrastructures and direct disbursement. The CSR fund
allocated for agricultural financing has to be managed by professional Islamic
financial intermediaries such as Islamic commercial banks, Islamic rural banks,
and Islamic cooperatives (BMTs). Optimization of productivity for the CSR fund
can be attained by employing an Islamic-CSR Model that involves forward and
backward linkage under Islamic permissible contracts and screening process. As an
obligatory condition, CSR funds should be managed productively and prudently.
The availability of flexible free fund can help to overcome the tough challenge of
salam contracts implementation for small and micro agriculture. The development
of a productive CSR fund may bring about benefits and support to enable the
creation of welfare for farmers in Tuban areas.
Literature Review
Financing with salam contract is an appropriate financing model for
agriculture. Farmers receive money (fund) as initial payment or down payment
for cultivating clearly stated quantity and quality of farm products between the
contracting parties (Al Zaabi, 2011). Salam contract is considered the most suitable
Islamic banking products for agricultural sectors, compared to other products
(Ehsan dan Shahzad, 2015). Qustonoah (2016) has done a critical analysis of the
implementation of salam financing contract for the agriculture sector in Indonesia.
The incredible development of Islamic banking industry does not encourage the
various products for society. Islamic banking has been placed in a safe position by
offering low-risk products dominated by murabahah, Muḍārabah, and fee-based
income with regards to securing and channelling funds. The research has concluded
that the Islamic bank industry should start developing a salam financing contract
as financial responsibility to realize the variety of financing contracts available for
society. The existence of salam contract scheme is expected to discontinue any
agriculture business chain that many intermediaries have benefited from so that
farmers can have direct access to the end-users in the market.
From the company’s perspective, CSR is defined to have an inherent benefit
to boost company performance (organizational performance). Thorne and Farrell
(2008) declared that the importance of CSR role is enhancing the relationship
between stakeholders and company, empowering performance and creating benefits
in all aspects. They also explain that restraint on CSR at leash brings about four
advantages for the company which includes; customer and employee trust, customer
satisfaction, employee commitment, and investor loyalty, whereas such four factors
affect the company’s performance. Charles J. Fombrun (1997) constructed the
implementation stage of CSR theory which was proposed by Carrol A.B. (1991)
to engage all stakeholders to support the company for better performance. Social
responsibility has to be a strategic planning scheme for companies. To achieve
strategic objective, social responsibilities should involve all stakeholders starting
from the employees to investors, customers, business partners, communities,
government and environment.
The development of the corporate social responsibility concept in Islam has a
comprehensive principle meaning. To manage a business, a company is essential to
maintain environmental quality, pay employees very well, observe regulations and
be responsible for the vulnerable surrounding society particularly surrounded by
the poor (Taman, 2011). The fundamental concept of CSR, though been developed
by the western social scientist and modern company, is in line with the Islamic
economic principles. Company or business individual who holds Islamic principles
to high esteem must engage in programs and activities influencing the vulnerable
society. In the Quran, the basic principle of CSR is postulated in several verses
such as Quran surah al-Baqarah: 177, al-Taubah 71 [QS.9: 71], an-Nahl:90, and
al-Ma’un:1-7. The Islamic-CSR concept is considered to be holistic and integrated
because of the engagement of other Islamic economic entities such as the zakat
institutions and Islamic cooperatives along with the farmers’ groups. The primary
task of the Islamic social system is to determine the relationship between humankind
and God from the beginning of inter-human relation (Akhtar, 2007).
228 Vol. 11 (2), July 2019
To mention some of the many studies, the application of the concept of CSR
in Islam began with Akhtar (2007) who tried to bridge the gap of CSR development
theory in the western perspective and Islam. This research is written in a doctoral
dissertation in striving to build a conceptual framework for CSR in Islam. The
CSR concept is not alien and would not be new in Islam when implemented in
the right direction. Islam obliges individuals as well as companies to not only to
seek profits but also care about the environment and the society before gaining any
financial profit. Companies and organizations applying the basic Islamic principles
are certainly in line with the primary principles of CSR depending on the level of
their economic operation. In Islam, a company should not expect to gain financial
profit when practicing the principles of CSR because when they are preserving the
nature by reducing or recycling waste in the right manner is also part of social
responsibility. The distinctive principles between the western and Islamic CSR
perspective lie in reputation and image aspect rather than the priority of religious
objectives. Islamic CSR concept strives to achieve more religious dimension as well
as company’s image.
The application of salam contract financing (Bay’ salam) is established and
offered by several Islamic banks in Pakistan. A study conducted by Kaleem dan Wajid
(2009) shows that the salam contract was very popular for use in the agricultural
financing products in Pakistan. Employing primary data using the questionnaire
survey in Punjab state, the study shows that the majority of farmers need financing
at the beginning of their cultivating period to settle the cost of farming such as
buying seeds and fertilizer. The application of salam financing contract will help
farmers to avoid money lenders and intermediaries with excessive lending rate to
farmers.
Empirical research conducted through a direct questionnaire survey by Adi
Fajar (2013) about the salam contract acceptability for farmers financing in Bogor
regency concludes that majority of farmers can comprehend the salam contract as
a mode of financing. This study uses behavioural analytical approach, subjective
norm, and comparison between bay al-salam acceptability and the moneylender
with farmers as the object of consideration. The finding explains that whenever
salam financing scheme is offered, farmers will consider the contract. Their open
views begin with the farmer’s negative perspective on the money lending schemes
in financing agricultural production as the bondage system that excessively exhausts
the farmer’s harvest selling. The research has also concluded that the application of
the salam contract application will improve farmers’ income because of the free and
fair agricultural pricing system. Farmers can patiently wait and see the trade from
their agriculture harvest in order to reach a higher price and also proceed with more
added-value.
A study by Rozik et al. (2014) with a sample of farmers from Jember regency
shows that salam financing contract was not proposed by Islamic cooperatives
and Islamic banks. The research finding has emphasized information and data
that shows salam financing contract as the most voided product offered by the
Islamic finance and banking industry. This problem is rooted in the difficulty of
the Islamic banking and finance industry to structure and secure salam contract
into a reliable product. Such challenge for the industry is due to the intermediary
function of the banking and difficulty in extending the bank service into trading
unless the bank forms a subsidiary or special unit. One possible solution to
implement salam contract is to develop a parallel contract engaging other trader
parties, but unfortunately, none of the Islamic banks in Jember is interested in
structuring these products.
The Central Bank of Indonesia (2015) released a recommendation for an
agriculture financing scheme that requires all process in the agricultural financing
to follow the nature of the agribusiness chain rather than the commercial banking
sector. Every agricultural business research should refer to the three key factors
that surround the value chain of agribusiness. The first being the involvement of
value chain players, namely producers, group of producers, rural logistics company,
suppliers, rice mill unit, traders (exporters, retailers, manufacturers). Secondly,
modern markets are particularly seen as a top priority in the agriculture value
chain of financing. Thirdly, the production system facility spread around the order
penetration area or customer order to decouple the points. The agriculture financing
scheme has to look at the whole aspect of the business chain.
Research Method
The research methodology involved in undertaking and developing the
findings of the research paper combines three steps of approaches; Literature
study, (2) FGD (Focus Group Discussion), and (3) Interviews. The first step is to
build a conceptual and thinking framework which would interact with the salam
contract financing and the Islamic-CSR model. To achieve these goals, a desk
study is conducted by examining the literature collection, then the feasibility of the
conceptual implementation is tested using the FGD and interview steps with key
informant and stakeholders on this research. To sharpen the analysis and come up
with a holistic solution, the case study needs to be selected (Yin, 2009).
230 Vol. 11 (2), July 2019
Graph 1: Desk Study Process Diagram
The next important stage in constructing this research about agriculture

financing by using salam contract integrated with the Islamic-CSR concept is to
proceed with FGD and in-depth interviews. Determining the key informants is more
crucial due to the scientific degree of competence and the level of decision making.
FGD and interviews are intended to facilitate the dialogue process on the theoretical
framework coming from the outcome of the desk study. On this phase, the essential
fact and information are derived in order to obtain and shape the secondary data
analysis coming from desk study. The key informant on FGD and interviews are
selected to represent stakeholders such as local government policymakers, financial
service authority, and company disbursing CSR and Islamic bank and Islamic
cooperative (BMT). Zakat institutions are also involved in the process of secondary
data by discussing about their role in order to screen and monitor the recipients
of the farmers salam contract recipients. The research will extend its critical and
analytical part through the direct observation of farmers’ activities, especially the
farmer group organization as a prominent object in ensuring the work-ability of the
salam contract.
Table 1. The Key Informants in FGD and Interviews

No Representation Relevancy Key Informants
1. Local Government 1. Policy Makers
2. Program Supervisors Tuban Trade Service
3. Responsibility and Duty
2. Companies Located at 1. CSR Fund Owner CSR Division of PT.
Tuban 2. Social Responsibility Semen Indonesia
3. Paddy Farmers in 1. Object of Study Paddy Farmers in Tuban
Tuban Regency Regency, surrounding
cement factory
4. Islamic Bank 1. CSR Fund-Channeling Bank Syariah Mandiri and
Institution Bank Muamalat
5. Farmers Group 1. The Main Players of Salam Paddy Farmers Group at

Organization + Contract Widang District Tuban
BMT Cooperatives 2. Salam Contract Guarantor regency
3. Buyers and Managers BMT Mandiri Sejahtera
6. Zakat Institution 1. Supporting intuition that LAZNAS Al Azhar
screens and supervises the Indonesia
program
7. Indonesia Bureau of 1. Paddy Warehouse and Trading PT. BULOG Tuban
Logistics Unit
2. The Ultimate Buyers of Paddy
Production
8. The Key Informants Determined in the interviews
such as Intellectuals, Sigit Iko Sugondo (Director of LAZNAS Al Azhar Indonesia)
Experts and Ulemas in Bambang Tutuko (Hedging Analysis Expert)
The Field of Study
There are several reasons why researchers choose to explore the mechanisms
of applying agricultural financing contracts concerning farmers in Tuban Regency:
1. Tuban Regency is one of the three Muslim populated cities with the neighboring
territory: Gresik (Sunan Giri and Maulana Malik Ibrahim), Lamongan (Sunan
Drajad), and Tuban (Sunan Bonang). Thus, the nuances of Islams can be said to
be inherent in the activities of the local communities in the trade of agricultural
commodities.
2. There is an active commodity warehouse running a Warehouse Receipt System
(SRG) for grain and corn commodities (Bappebti, 2016). This SRG warehouse
activity can be used as an indicator of the commodity trading activity in the area.
3. Grain Commodity is a commodity with the largest number of warehouse
receipt transaction until the year 2016 was 2,124 receipts, 73,026,16 ton, and
total financing value IDR 224.813.412,230 (Bappebti, 2016).
4. Tuban Regency has become the location for facilitating the operations of various
large companies such as PT. Cement, Indonesia and PT. Holcim Cement which
has CSR potential funding due to its activities that changes environmental
contours.
5. Various activities of farmers through the organization of farmer groups
(GAPOKTAN) has been running in Tuban Regency.
6. Islamic financial institutions such as sharia banks and cooperatives and BMT
have been in existence and operated in the Tuban Regency.
232 Vol. 11 (2), July 2019
Discussion and Analysis

The Farmers’ Difficulty to Access Islamic Banking Products
The need to obtain cash during the planting period is very important for
farmers. This is because farmers have various needs like the daily needs of their family
and the additional cost of farming, during the planting period. When farmers are
unable to obtain financing facilities to maintain cash flows before harvest, they tend
to seek obtainable funds from other parties. The need for a quick loan is the weak
point of bargaining power for the farmers. The situation would be more difficult if
the lending party has the intentions to trap the farmers by purchasing the harvest at
lower prices, in this case, the so-called loan-sharks who want to buy farmers’ harvests
at low prices. Farmers who are already tied to the loan from money lenders will find
it difficult to hedge their crops. The sale of paddy grain at harvest time should go to
the loan-sharks because such transaction for farmers is a payback of the debt, so it is
a form of debt repayment using wet rice. Farmers who need quick money will find
it difficult to refuse such an easy strategy.
Farmers’ efforts to apply for a financing product from their official banking
institutions including Islamic banks, cannot be accomplished due to the absence
of tangible collateral such as land ownership certificate and motor vehicles in
order to meet the banking requirements for the collection of loans. When such
collateral is available, the farmers must then follow the banking preconditions with
the murabahah or Muḍārabah contracts that enforce monthly fixed instalments and
payments on instalment. In contrast, farmers’ income from producing new paddy
grain can be monetized after a harvest time of 4 months. Moreover, farmers should
accept paddy grain prices that tend to decrease when the harvest period comes, and
relatively agricultural costs remain fixed and even can rise. Farming jobs focusing
on the process of production and sales directly will tend to lose and not become
profitable. Islamic banks are not interested in opening agricultural financing because
they consider agricultural business as a non-profit business at small scale level.
The Implementation Challenge of Islamic Bank Financing in Agriculture Sector

through Salam Contract
Salam contract financing still faces several issues related to risk and risk
management. The salam contract risk to be paid by any financial institution is usually
in the form of the farmers’ default due to the crop failure. The only guarantee of
having the financial institutions to secure and pay bank financing is dependent on
the delivery of the harvest when it matures. In cases of problems of harvesting or
crop failure, the financial institution would experience a default risk. The solution to
channelling the salam contract financing scheme to the farmers offered by financial
institutions relies on a judicious process of finding ways to justify the risks of crop
failure. Changes in the outlook of both banks and non-banks financial institutions
are urgently needed to reduce the risk of financing this salam contract so that it can
be used by farmers who can eventually use it to increase their bargaining power in
hedging and to postpone selling action when harvest prices fall.
The Challenges of Distinctive Business Cycle between Farming and Banking

Under certain idyllic conditions, the combined capital called the gapoktan,
gained from the members of the farmer groups (farmer group organization, called
gapoktan) that have the joint business groups is contributed from the member
farmers. However, under special situations, the condition of most of the farmers
who are mostly still mustahik (groups receiving zakat, considered the poor), are
given by the gapoktan in order to get support as another source of income for capital.
Gapoktan requires a capital source whose financing scheme is in agreement with the
agricultural scheme. Islamic banks are usually the first alternative considered as a
source of capital for the Gapoktan. However, the incompatibility of the Islamic
bank financing schemes following the required bankable” and monthly payment
contradicts the agricultural cash flow scheme (cash inflows 3-4 months) which
could cause problems for farmer groups and farmers.
Graph 2: The Distinctive Business Cycle between Banking and Agriculture
234 Vol. 11 (2), July 2019
The capital and financing problem for farmers shows that there is no
agreement between the agricultural business payment scheme and the Islamic
bank financing scheme. It is good in terms of the potential products been
offered to the public. The expansion of agricultural products creates room for
opportunities for an alternative source of capital sources to support farmers.
From the discussion, the result shows incompatibility between the farmers
(gapoktan) and Islamic banks due to regulations of the commercial banking
which are usually very rigid and organized under the Banking Act. The solution,
therefore, lies in the existence of an alternative source of capital sources that
are not bound by banking regulations. These source of financing which is not
attached to the central bank regulations is the third party fund coming from
the society through proper campaigning for the zakat, infāq, sadaqah (ZIS),
cash waqf (cash waqf ), as well as all other sources of financing such as CSR
productively.
Islamic CSR Model as an Answer for Agriculture Financing Scheme

The key to the proper implementation of the salam contract in order
to improve the welfare of farmers in Tuban Regency is making available
cheap and flexible funds to the farmers. The funds must be well managed
and channelled professionally and productively through the existing Islamic
economic institutions. CSR funding is considered one of the most acceptable
alternatives needed for businesses operating in Tuban regency. The allocation
of most of the CSR funds from the companies is necessary and expected to be
a new source of financial support for the farmers. These funds are most likely
to be applied as part of agricultural financing, which has the highest degree of
flexibility. They also become a potential productive cash waqf contributed by
the company. Compared to the cash waqf, it is expected to increase in value
as the productive CSR funds can be managed at the same amount of time.
Companies issuing CSR fund is expected to release corporate zakat or zakat
income for their employees. These CSR funds are different from the zakat fund
in the Islamic economics terminology.
Table 2. The Comparison between the CSR Fund, Waqf, and ZIS
Aspects CSR Waqf ZIS (Zakat, Infāq, and Shodaqoh)
Fund Owner Company Society Muzzaki (Zakat Payers)
Potency
Beneficiary Society (The Poor) Society Mustahiq (8 Zakat Recipients)
Precondition Government Syariah Syariah Guiance
Regulation Guidance
Perpetuity of Fund Not an obligation, An Fully Allocated, Ineligible
but a benefit to obligation
society

Graph 3: The Islamic CSR Model
The Conceptual Scheme of Islamic-CSR Integration and Agriculture Financing

with Salam Contract
The financial application of the salam contract for farmers in Tuban Regency
works gradually with two pillars; the first is a third party supporting fund while the
second is a professional management institution. The Islamic-administered CSR
would become an immediate source of funding and implementation process for a
salam contract. While the organization of the farmer groups (gapoktan) is a legal
entity of Islamic cooperative, in reality, the business unit of the paddy mill and the
trading aspect is the key to run the salam contract. The participation of the Islamic
banks in the party who absorbs CSR funds is used as a third party fund with a
financing scheme to the agricultural industry. The farmer group organization is the
body responsible for the management of the bank’s financing channel, which would
236 Vol. 11 (2), July 2019
be used in the agricultural financial products. Not only can the gapoktan become
fund managers, but it must possess the ability to process and sell products harvested
from farmers in order to return funds obtained from the Islamic banks.
All necessary bodies involved in the process of integrating the process
of the Islamic-CSR and salam contract for the farmers will collect incentives.
Companies contributing towards the CSR funds through the Islamic banks
would most definitely have their CSR funds managed productively, and in
return, generated funds from the Islamic banks can be used for various social
programs. Instead of direct program which engages farmers, allocating CSR fund
through the Islamic banking channel is preferred because of their knowledge
and professionalism in the management of fund institutions. Islamic banks will
have a share of Muḍārabah financing for Gapoktan. For such CSR funds, the
treatment has enabled the flexibility of a structured financing scheme as the
fund is not a subject of a high margin or profit-sharing rate with rapid return
period. For gapoktan, the CSR funds mostly provided by the Islamic banks are
linked to the farmers applying the financing with a salam contract. Gapoktan
receives two benefits; profit-sharing from managing a productive salam financing
and income from milling the grain paddy harvest into the white rice and even
vending directly to the end consumer.
Graph 4: Operationalization of the Concept of Islamic CSR Model and

Agriculture Financing
Operationalization of Islamic Cooperatives (BMT) and Farmer Group

Organizations to be Joint Ventures or Business Groups
As a non-bank financial institution, Bait al-Māl wa Tamwil (BMT) has a
very crucial role to play in providing Islamic financing, in order to act as a support
system on the cash flow of the farmers, before the harvest time. Financing facility
for the farmers before the harvest time will be able to cut off the dependence of the
farmers on the so-called middlemen or loan sharks. When the farmers become non-
dependent on debt to the middlemen, they can safely secure their harvested crops
and paddy by delaying the sales at a lower price. This condition enables the farmers
to patiently wait so they can sell their crops at better prices. In the operation of the
salam contract and a precondition, the farmers trade their crop to joint venture
group. BMT as a non-bank financial institution that is not bound by banking
regulations, which requires the assurance of assets and conditions of bankable
farmers, is expected to be very flexible in order to properly channel financing for
farmers.
Salam contract financing from BMT (part of KUB, Joint Venture or Business
Group) to farmers is the best solution to break the attachment of farmers to mediators.
With salam contract, farmers can get two benefits in two ways; obtaining the cash
before the harvest time so they can finance their personal needs and obtaining the
certainty of selling at an agreed contract price contract. Risk mitigation of crop
failure is one problem which could be encountered and can lead to a default in risk
for gapoktan and BMT.
From these in-depth interviews, it shows that by establishing these Islamic
cooperatives which consists of farmers and the farmer groups, KUB can have an
independent fund from non-binding members or external parties and this condition
can become more flexible so as to support salam financing, where its pattern uses
cash flow cycle for agriculture based on the harvest season and not monthly as the
bank rules. In addition to achieving financing harmony on the needs of farmers, the
distribution of salam financing through KUB is to be the best solution due to the
obligation from Gapoktan (KUB) to buy crops as at the time of maturity, which
cannot possibly be done through the Islamic banks due to its regulation boundaries
on banking business nature.
KUB and BMT established by farmer groups would become a means of risk
mitigation for the salam financing distribution. Since the capital of BMT comes
from the farmers, it has been channelled back to the needs of the members of the
group and the sustainability of the BMT activities will become a joint responsibility.
The results of these interviews show that the feasibility study on member farmers
238 Vol. 11 (2), July 2019
taking salam contract financing will be shared by other farmer members; in other
words, it will become a collective appraisal process. With an assurance from the head
of the farmer group, the BMT Board will be able to obtain accurate data from each
of its member from their production and the financial track record and farmers'
production interested in applying for financing.
Graph 5: The Model of Joint Venture Group
The farmer, who proposes the financing, will feel a great deal of responsibility
to complete the salam contract well in accordance with the stated agreement in
order to protect his good name and also protect his family from the preying eyes of
other farmers in the community/group. On the other hand, if farmers who apply
for salam financing experiences crop failures, it becomes the responsibility of the
other members to help the farmer return the loan to KUB and BMT (collective
guarantee).
Collective appraisal and collective guarantee must be a condition for the
approval of salam financing contract from BMT. If both of these requirements are not
met, the farmer is considered not to be qualified to meet the requirements necessary
to receive the financing. This collective responsibility is a way of mitigating the salam
contract risk borne by BMT, which is established by farmers group organization. As
initial information on farmers' production and financial records, the head of the
farmer group indirectly acts as a personal guarantor to ensure that the group is ready
to bear the risks arising from the salam contract. Thus, the BMT established by the
farmer group becomes an instrument for farmers to unify their goals and protect
their common welfare.
In the absence of a warehouse, KUB can cooperate with the musharakah

based-Warehouse Manager (Indonesia Bureau of Logistics, BULOG) on a profit-
sharing system, where the manager gets a portion of the profit as benefits for storing
of the grain paddy, and selling after its prices increasing. The grain paddy from KUB
as an example goes into the warehouse (BULOG) of 100 tons (100,000 kg) at a
price of IDR 4.500, - per kg, it is then stored and sold 40 days later at the price of
IDR 5.500, -, the warehouse manager will benefit a share of the percentage of the
agreed net profit on sale, as calculated below:
Net Profit Sale = ((IDR 5.500 - IDR 4.500) x 100,000 kg) - operating costs delay
(transportation costs, storage costs, warehouse administration costs).
Revenue Sharing for Warehouse Manager = X% x Net Profit Selling after
Postponement.
Graph 6: Operationalization of the Joint Group Organization (KUB)
Why use a profit-sharing system? With the revenue-sharing system, the

warehouse manager is able to receive a better profit-sharing portion rather than
by charging daily or weekly fees. In addition, KUB can also benefit from cash flow
where the operational costs of postponement of sale are not fully charged but are
shared with the warehouse manager as the cost of the musharakah cooperation
between both parties.
In addition to selling more crops in the form of dried grain or paddy, KUB
can make other alternatives that are also profitable, like self-processing of dried
grain or paddy into ready-to-sell rice to end consumers/users. By selling directly to
consumers, they can benefit from the added-value, wherein real fact, this practice
240 Vol. 11 (2), July 2019
is been done by middlemen who buy the grain and paddy at a lower price from
farmers and sell it in the form of white rice, especially when there is an increase in
price increases. To enable them to sell in the form of rice, KUB could set up a Rice
Processing Unit which would have a rice milling machine and a storage warehouse.
They can also cooperate with other Rice Processing Units with musharaka-based on
agreement. The profit-sharing between KUB and Rice Processing Unit is calculated
based on agreement in the form of a certain percentage of the added value generated.
Here is the profit-sharing calculation for the Rice Processing Unit based on Added
Value from grain to rice:
Added Value (Grain to Rice): ((rice selling price-grain price entered
machine) x total kg of rice sold) - operating costs (processing, packaging,
until rice sold).
Revenue Share for Rice Processing Unit: X% x Added Value
(Grain to Rice).
The advantage of KUB by selling the crops in the form of rice is certainly
higher than selling the crop in the form of grain or paddy due to the emergence of
added significant value-added. Thus, the principle can conclude that the business
to provide value-added in commodities is also a means of hedging. Bait al-Māl wa
Tamwil (BMT) established by the farmer group organization is to become a solution
so that farmers can hedge against fluctuations in grain prices, especially during the
harvest.
Salam financing designed by the BMTs to the farmers allows them to release
their financial attachment to the middleman or loan sharks, thus having to give
them the option to postpone the sale during the harvest. Additionally, farmers can
shorten the supply chain between themselves and the final consumer through BMT
and, therefore, they can enjoy the benefits of the sale of end products like the white
rice, which is only enjoyed by middlemen. The scheme is possible via KUB (joint
venture group) which manages the paddy farming business cycle from its backward
and forward linkage. This mechanism still leaves one important problem, which
is about how BMT would ensure the sale of the final product. Without a clear
target market, BMTs that are part of KUB are still uncertain about getting cash as a
payback mechanism, starting from Islamic financing to farmers, buying their crops
and selling them into the market.
The Paddy Hedging: Selling Postponement and Improving Value Added

Non-banking nature of the Islamic financing for farmers is a critical solution
to farmers' problems. The salam contract is the most appropriate type of Islamic
financing for farmers. Such financing is done with the aid of a flexible contract,
where KUB acts as the buyer of the farmer’s products. Salam attachment is in a
buying and selling contract whereby the buyer makes payment in full before getting
the product while the seller, in this case, the farmer, will deliver the goods in the
future as agreed by both parties. KUB and farmers will agree ahead of time on the
price, quality, quantity, and delivery time of commodities (crops) in the future.
Price agreements play an important role in salam financing, as it a determining
factor on the number of funds provided by the financial institutions to farmers.
The agreed price must be beneficial to both parties, having KUB as buyers and the
farmers as sellers. If the prices are determined based on a lower estimation especially
during the harvest period, then the farmers will suffer heavy loses, because there will
be no much difference between the finance made available to the farmers by the
middlemen and the financial institutions. Financial institutions should, therefore,
be more "aligned" with the farmers by reaching an agreement on mutually beneficial
prices.
With the salam financing, farmers can get some benefits such as:
1. Obtaining cash before harvest, with the guarantee of delivering the crops.
2. The certainty of the sale of crops because salam is a contract of sale and purchase;
bay al-salam, where the buyer gives advanced payment in full to the farmers,
and later the farmer will deliver the crop to the buyer.
The Intervention of Zakat Institution and its Instruments

From the in-depth interview results, it can be interpreted that the Islamic
social fund (zakat, infāq, sadaqah, and waqf) managed by the Zakat Institutions
plays a role as a “kaffah” solution (from upstream to downstream), ranging from
empowering farmers, production, capital BMT farmer, storage, rice processing, to
sales. The involvement of Zakat Institutions integrated with CSR, for example,
the PT. Cement Indonesia (Persero) Tbk. will provide opportunities to manage
corporate social funds and religious, social funds to be more integrative and
productive.
The support of ZIS and Waqf Institutions for the welfare of the farmers is by
channelling ZIS (zakat, infāq, sadaqah and waqf) to support the capital of farmer
groups and KUB. In addition, the cooperation between farmer groups, ZIS and
242 Vol. 11 (2), July 2019
Wakaf Institutions can act as a solution to several difficulties in collecting ZIS and
Waqf. In fact, the main focus of the zakat institutions is to find muzakki (ZIS
donors). The encouragement of ZISWAF (zakat, infāq, halaqah, and waqf) programs
by the ZISWAF and BMT Institutions for the welfare of Indonesian farmers, within
the framework of KUB, will provide clarity to the muzakki on who will become the
mustahik on the right profile. By learning more closely its mustahik, the muzakki
would certainly be more motivated to pay ZISWAF. Through this program, zakat
funds are distributed by the ZIS Institutions to farmers, who are classified asnaf
(zakat recipient / the poor) so much that they can fulfil their daily needs. At a
later stage, the poor and needy farmers are ready to be empowered in commercial
agriculture.
Conclusion And Limitation of the Study

Conclusion
The ability of farmers to raise funds towards their planting period or before
their harvest period is determined by the process involved in the production.
This is mostly because farmers have different needs during the production
period, such as family needs and the cost of planting during the production
period. They seek to obtain financing from informal sources rather than official
banking institutions, including sharia banks. However, this is mostly due to the
lack of collateral, such as land and motor vehicles necessary to meet banking
requirements. Even when physical security is available, farmers must still follow
the banking conditions of murabahah or Muḍārabah engagement with monthly
fixed instalments.
Salam financing designed especially for agriculture, has still faced lots
of problems in its implementation, especially in relation to risk management
for financial institutions. The biggest risk exposed by the financial institutions
is in the failure to harvest. These financial institutions avoid contracts of
agricultural financing with salam contract. To develop agriculture financing
products, the combined capital of the farmer groups (gapoktan) is key solution
to the problem. The condition of farmers who are still mostly mustahik have
as consequences; they need support from other sources of capital. The capital
problem for farmers indicates that there is a conflict in the agricultural business
payment scheme and the Islamic bank financing scheme, which on the one
hand, is an important opportunity for them. The effectiveness is by opening an
opportunity for alternative capital sources to help support farmers. CSR funds
provided to Islamic banks can eventually become an alternative productive cash

waqf or could remain corporate CSR funds in the implementation process of
the salam.
The key to the implementation of the salam contract in regards to improving
the welfare of farmers in Tuban Regency is through the availability of cost-effective
and flexible funds which must be managed professionally and productively
through the sharia economic institutions that are actively functional. The financing
application with the salam contract for farmers in Tuban Regency deals with two
pillars; a supportive third party fund that supports the farmers and the second is
a professional management institution. The Islamic-administered CSR will be the
fastest source of fund that supports the realization of the salam contract. Furthermore,
the organization of farmer groups as a legal entity of Islamic cooperative with the
business unit of rice processing and trading is the key to the field of salam contract
operationalization.
Limitation of the Study

Research on the implementation of salam contract for agricultural financing
is very important in developing an Islamic agribusiness value chain. Beneficiaries
and parties involved include companies, Islamic banking institutions, farmer group
organizations, traders and Islamic cooperative communities (BMTs). The research
involving the agricultural finance system has evolved from intangible roots and
evaluation analysis towards application. Where the conceptual implementation of
the salam contract that is combined with the management of CSR, more detailed
and measurable experimental research is needed so funds can be examined with the
involvement of real funds as the pilot project and when a conceptual experiment is
conducted in a given period of time involving limited funds within a period of 1
year which is a 2-3 times the planting season, possible obstacles can be identified.
Hence, research on the implementation research of the salam contract for farmers
will become more accurate and well structured.
Acknowledgement
Special thanks from the Author to the Ministry of Research, Technology and
Higher Education of the Republic of Indonesia for the 2017 research grant which
contributed to making the study possible.
244 Vol. 11 (2), July 2019
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Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics)

Volume 11 (2), July 2019

The Implementation of Salam-Contract For Agriculture

Ahmad Hudaifah1, Bambang Tutuko2, Tjiptohadi Sawarjuwono3

Abstract. This research is aimed at discovering a stable financial scheming

Abstrak. Penelitian ini betujuan untu menemukan formula skema pembiayaan

Department of Islamic Economics, Universitas Internasional Semen Indonesia

E-Mail: 1ahmadhudaifah@gmail.com, 2bambang.tutuko@uisi.ac.id, 3tjiptohadi@uisi.ac.id

Based on the statistical data from the application of agricultural financing

Graph 1: Desk Study Process Diagram

The next important stage in constructing this research about agriculture

Table 1. The Key Informants in FGD and Interviews

5. Farmers Group 1. The Main Players of Salam Paddy Farmers Group at

Discussion and Analysis

The Implementation Challenge of Islamic Bank Financing in Agriculture Sector

The Challenges of Distinctive Business Cycle between Farming and Banking

Graph 2: The Distinctive Business Cycle between Banking and Agriculture

Islamic CSR Model as an Answer for Agriculture Financing Scheme

The Conceptual Scheme of Islamic-CSR Integration and Agriculture Financing

Graph 4: Operationalization of the Concept of Islamic CSR Model and

Operationalization of Islamic Cooperatives (BMT) and Farmer Group

Graph 5: The Model of Joint Venture Group

In the absence of a warehouse, KUB can cooperate with the musharakah

Graph 6: Operationalization of the Joint Group Organization (KUB)

Why use a profit-sharing system? With the revenue-sharing system, the

The Paddy Hedging: Selling Postponement and Improving Value Added

The Intervention of Zakat Institution and its Instruments

Conclusion And Limitation of the Study

provided to Islamic banks can eventually become an alternative productive cash

Limitation of the Study

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