How does Salam financing affect farmers’ income? A system dynamics approach

Abstract

Purpose This study aims to simulate and compare the effect of two financing schemes, Salam and conventional financing, on farmers’ cash flows. Design/methodology/approach The system dynamics simulation is used to conduct a multiple scenario-driven analysis to understand the behavior and the dynamic patterns concerning relationships among the variables in the model that are chosen and parameterized using both qualitative and quantitative data collected from West Java, Indonesia. Findings The authors affirm that farmers cannot rely solely on paddy fields and should seek other livelihoods to support their daily needs. The main finding is that the Salam scheme provides a higher income that can contribute to improving farmer welfare. The Islamic scheme also requires less adjustment than the standard scheme to meet the farmers’ needs. Research limitations/implications The probable effect of implementing the Salam method is not considered from the point of view of the financiers, as the scope of the study is limited to farmers. Furthermore, the implications of this study and recommendations for future research are presented. Originality/value To the best of the authors’ knowledge, this study adds to the extensive literature on Salam financing by being among the first to provide a quantifiable evaluation of the Islamic method compared to its conventional counterpart.