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“SALAM”
AS A MODE OF FINANCING
Introduction
 Islamic banking is a booming industry in the
world today.
 Less well understood is the term Salam and
conditions of the Salam contract. it raises many
questions within both the economic and the
Shari‘ah framework.
Definition of Salam
Salam is a contract where two parties enter into a
contract of sale of goods which would be delivered in
future for which the price for the goods would be paid
in cash on spot at the time of the signing of the
contract.
Means that it is a kind of sale in which payment is spot
while the delivery of the good is deferred.
It is also known as bay’ salaf or bay’ mafalis.
 When salam is mentioned, the foremost thing
which the majority of the people assume would be
about the risk involved in it.
 The application of salam as a form of financing
would indeed equilibrium the bank’s aim of
maximizing profit as well as achieving its’ role as a
communal institution helping the deprived.
Contract of Salam under
Islamic law
 Under Islamic commercial law, the general rule.
 Salam is an exception to this general rule.
 Like many other modes of sale this mode, too, was
prevalent even before the advent of the Prophet
(peace be upon him).
 According Qur'anic verse:
O ye who believe, when ye contract a debt for a fixed
term record it in writing. . . . (2:282)
 According to Hadith:
Narrated from Ibn ‘Abbas is the Prophetic hadith:
“When God’s Messenger came to Madinah, the people
were paying one and two years in advance for fruits, so
he said: ‘Those who pay in advance for anything must do
so for a specified weight and for a definite time.’”
Islamic Fiqah Point of view
Abu Hanifah
 Must be precisely fixed
 Clearly Enumerated
 Not uniquely identified underlying asset
 Full payment at the conclusion of the contract
Imam Malik
 Must be precisely fixed
 Clearly Enumerated
 Not uniquely identified underlying asset
 Could be deferred to three days or even more
Imam Shafi’ee
 Must be precisely fixed
 Clearly Enumerated
 Not uniquely identified underlying asset
 Full payment at the conclusion of the contract
Imam Ahmad
 Must be precisely fixed
 Clearly Enumerated
 Not uniquely identified underlying asset
 Full payment at the conclusion of the contract
Salam Glossary
Rabb-us-salam Buyer
Muslam ilaih Seller
Ra’s-ul-maal Cash Price
Muslam fih Purchased Commodity
Purpose of Salam
Meet up the necessitate of farmers who need
money to grow their crops and to feed their family
up to the time of harvest.
Aid the traders for import and export business.
Mechanism of Salam
Step 1 : Client sells commodity to Bank on forward
basis and receives financing normally for
purchasing agricultural inputs like
seed, fertilizer, pesticides, diesel for
tractor, payment of water charges, labor etc.
Step2: On due date, Client delivers commodities
to Bank.
Step3: Bank sells commodities in the market and
get profit.
DIFFERENCE BETWEEN SALAM SALE
AND ORDINARY SALE
SALAM SALE ORDINARY SALE
1. In Salam sale, it is necessary
to precisely fix a period for
the delivery of goods.
2. In Salam sale, the
commodity which is not in
possession of the seller can
be sold.
3. In Salam sale, only those
commodities which can be
precisely determined in
terms of quality and
quantity can be sold.
1. In ordinary sale delivery
date is fix.
2. In ordinary sale, it cannot
be.
3. In ordinary sale
everything that can be
owned is salable, unless the
Qur'an or the Hadith
prohibit it.
SALAM SALE ORDINARY SALE
4. A Salam sale cannot take
place between identical
goods, for example wheat for
wheat.
5. In Salam sale advance
payment should be made at
the time of making the
contract.
4. In ordinary sale it is
permissible.
5. In ordinary sale payment may
be deferred or may be made
at the time of the delivery of
goods.
DESCRIPTION OF FACTORS IN
SALAM
 CAPITAL
Capital in Salam should be known to both of the
parties involved in Salam sale agreement. Ideally it
should be in cash however it is allowed to supply the
capital in kind subject to: Quality & Quantity.
A debt receivable from customer cannot be converted
into Salam capital
COMMODITY
Only those commodities can be sold under bay' Salam
which can be precisely defined in terms of quality and
quantity.
SECURITY/SURETY
Security in Salam contract can be obtained through
guarantee, pledge or any other permissible mode of
security.
DISPOSAL OF COMMODITIES
Disposal of commodities involved in Salam contract is
not allowed prior to maturity of contract, however
replacement with other commodities, except with
cash, is allowed.
TIME OF PAYMENT
The buyer must pay the amount at the time of signing
the contract in that very meeting. Imam Malik allows
delay by two to three days in the case of handicrafts or of
manufactured goods.
THE PERFORMANCE OF SALAM CONTRACTS IS NOT
CONDITIONAL
The performance of any one of the Salam contracts is not
conditional to the performance of any other Salam
contract.
PRICE
It is not necessary that price be fixed in terms of money;
it may be in terms of goods as well, on the condition that
this should not violate the prohibition of riba' in barter
transaction as laid down in the Hadiths
THE PERIOD OF DELIVERY
Some jurists believe in precise fixation of the date on which
delivery is to be made while some others approve of a rough date
but a definite period or occasion of delivery; for example, on
harvest, or the beginning of Hajj season
REVOCATION OF THE CONTRACT
Once agreed upon, a Salam contract cannot be revoked
unilaterally by any party. It can be cancelled or partially cancelled
with mutual consent by returning the actual or proportionate
amount of price paid.
In case of Default
No penalty can be stipulated in the contract
Seller can undertake in the Salam agreement that in case of late
delivery of Salam goods, he shall pay to the charity account
Essential conditions in a Salam
contract
1. It is necessary for the validity of Salam that the
buyer pays the price in full to the seller at the time of
effecting the sale.
2. Only those goods can be sold through a Salam
contract in which the quantity and quality can be
exactly specified.
3. Salam cannot be effected on a particular commodity
or on a product of a particular field or farm.
4. All details in respect to quality of goods sold must be
expressly specified leaving no ambiguity, which may
lead to a dispute.
Essential conditions in a Salam
contract
5. It is necessary that the quantity of the commodity is
agreed upon in absolute terms. It should be
measured or weighed.
6. The exact date and place of delivery must be specified
in the contract.
7. Salam cannot be effected in respect of things, which
must be delivered at spot.
8. The commodity for Salam contract should remain in
the market right from the day of contract up to the
date of delivery or at least till the date of delivery.
Essential conditions in a Salam
contract
9. The time of delivery should be at least fifteen days or one
month from the date of agreement. Price in Salam is
generally lower than the price in spot sale.
10. Price in Salam is generally lower than the price in spot
sale, the difference in the two prices may be a valid profit
for the Bank.
11. A security in the form of a guarantee, mortgage or
hypothecation may be required for a Salam in order to
ensure that the seller delivers.
12. The seller at the time of delivery delivers commodities and
not money to the buyer who would have to establish a
special cell for dealing in commodities.
Types of Salam
1. Single Salam
2. Multiple Salam
3. Parallel Salam
1. Single Salam:
The total funds needed by the farmer will be
disbursed/credited to the farmer’s account in lump
sum.
2. Multiple salam:
The funds would be disbursed in tranches as and when
needed by the farmer by executing various/multiple salam.
Salam depending upon his/her convenience and preference.
3. Parallel salam:
In parallel, salam the bank would enter into a salam
contract with the farmer first and subsequently before
The goods are delivered to the bank, the bank would enter
into a wa’ad or a promise with a third party to buy the
goods immediately upon the delivery of it to the bank. This
would ensure the immediate selling of the goods upon the
delivery without bank in curring loss.
Examples:
 If ‘A’ has purchase from ‘B’ 1000 bags of wheat by way of salam to be
delivered on 31 december, ‘A’ can contract a parallel salam with ‘C’ to
deliver to him 1000 bags of wheat on 31 december. But while
contracting parallel salam with ‘C’ cannot be conditioned with taking
delivery from ‘B’. Therefore, even ‘B’ did not deliver wheat on 31
December, ‘A’ is duty bound to deliver 1000 bags of wheat to ‘c’. He can
seek whatever recourse he has against ‘B’ but he cannot rid himself
from his liability to deliver goods, which do not conform to the agreed
specification, ‘A’ is still obligated to deliver the goods to ‘C’ according to
the specifications agreed with him.
 ‘A’ has purchased 1000 bags of wheat by way of salam from ‘B’ a joint
stock company. ‘B’ has a subsidiary ‘C’ which is a separate legal entity
but is fully owned by ‘B’. ‘A’ cannot contract the parallel salam with ‘C’.
However, if ‘C’ is not wholly owned by ‘B’, ‘A’ can contract parallel salam
with it, even if some shareholders are common between ‘B’ and ‘C’.
• Goods received by
IFI from seller of first
Salam Contract
•Goods delivered by IFI to
the buyer of parallel
Salam contract
• parallel Salam contract
signed and payment
released by IFI
•Salam contract signed
and payment released by
IFI
step
1
step
2
step
3
step
4
Step.1.
Customer requests to an IFI for finance and sell the commodity
with deferred delivery hence Salam sales contract is executed
while payment is made by bank at spot.
Step.2.
IFI enters into contract of parallel Salam with another
party, receives the payment and signs contract of Salam with
promise to deliver the goods at a point in time in future.
Step.3.
Seller in first Salam contract delivers the goods to IFI on due
date to discharge his liability.
Step.4.
IFI delivers the goods to buyer in Parallel Salam contract hence
transaction closed on profit.
Conditions for Parallel Salam
1: There must be two different and independent
contracts, these two contracts cannot be tied up and
performance of one should not be contingent on the
other.
2: Parallel Salam is allowed with third party only.
Agency Agreement
1: If the bank has no expertise to sell the commodities
received under Salam contract, then the bank can
appoint the customer as its agent to sell the commodity
in the market/third party, subject to Salam agreement
and Agency agreement are separate from each other.
2: A price must be determined in agency agreement on
which the agent will sell the commodity but if the price
is increased, the benefit can be given to the agent.
Benefits of Salam
Salam is beneficial to the:
1: seller because the price is received in advance
2: buyer because the price in Salam is lower than the
price in spot sales.
Risk in Salam
1: Seller through Salam contract transfers the price risk
towards the buyer, while the
2: Buyer transfers the business risks to the seller
through guaranteed quantity and quality supply of
output at a predefined date and place.
Scope and potential of Salam
1: The Salam sale has the flexibility to cover the needs of various
sectors of people such as
farmers, industrialists, contractors, exporters or traders. It can be
used to meet the capital requirements as well as to meet the cost of
operations.
2: Salam sale is suitable to finance the agricultural operations
where the bank can transact with farmers who are expected to have
the commodity in penalty during harvest either from their own
crops or crops of others, which they can buy and deliver in case
their crops fail. Thus the bank renders great services to the farmers
in their way to achieve their production targets.
3: Salam sale is also used to finance the commercial and
industrial activities, especially in phases prior to
production and export of commodities and that is
purchasing it on Salam and marketing them for lucrative
prices.
4: The bank in financing craftsman and small producers
applies the Salam sale by supplying them with the inputs
of production as a Salam capital in exchange of some for
their commodities to market.
Salam

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Salam

  • 1. “SALAM” AS A MODE OF FINANCING
  • 2. Introduction  Islamic banking is a booming industry in the world today.  Less well understood is the term Salam and conditions of the Salam contract. it raises many questions within both the economic and the Shari‘ah framework.
  • 3. Definition of Salam Salam is a contract where two parties enter into a contract of sale of goods which would be delivered in future for which the price for the goods would be paid in cash on spot at the time of the signing of the contract. Means that it is a kind of sale in which payment is spot while the delivery of the good is deferred. It is also known as bay’ salaf or bay’ mafalis.
  • 4.  When salam is mentioned, the foremost thing which the majority of the people assume would be about the risk involved in it.  The application of salam as a form of financing would indeed equilibrium the bank’s aim of maximizing profit as well as achieving its’ role as a communal institution helping the deprived.
  • 5. Contract of Salam under Islamic law  Under Islamic commercial law, the general rule.  Salam is an exception to this general rule.  Like many other modes of sale this mode, too, was prevalent even before the advent of the Prophet (peace be upon him).
  • 6.  According Qur'anic verse: O ye who believe, when ye contract a debt for a fixed term record it in writing. . . . (2:282)  According to Hadith: Narrated from Ibn ‘Abbas is the Prophetic hadith: “When God’s Messenger came to Madinah, the people were paying one and two years in advance for fruits, so he said: ‘Those who pay in advance for anything must do so for a specified weight and for a definite time.’”
  • 7. Islamic Fiqah Point of view Abu Hanifah  Must be precisely fixed  Clearly Enumerated  Not uniquely identified underlying asset  Full payment at the conclusion of the contract Imam Malik  Must be precisely fixed  Clearly Enumerated  Not uniquely identified underlying asset  Could be deferred to three days or even more Imam Shafi’ee  Must be precisely fixed  Clearly Enumerated  Not uniquely identified underlying asset  Full payment at the conclusion of the contract Imam Ahmad  Must be precisely fixed  Clearly Enumerated  Not uniquely identified underlying asset  Full payment at the conclusion of the contract
  • 8. Salam Glossary Rabb-us-salam Buyer Muslam ilaih Seller Ra’s-ul-maal Cash Price Muslam fih Purchased Commodity
  • 9. Purpose of Salam Meet up the necessitate of farmers who need money to grow their crops and to feed their family up to the time of harvest. Aid the traders for import and export business.
  • 10. Mechanism of Salam Step 1 : Client sells commodity to Bank on forward basis and receives financing normally for purchasing agricultural inputs like seed, fertilizer, pesticides, diesel for tractor, payment of water charges, labor etc. Step2: On due date, Client delivers commodities to Bank. Step3: Bank sells commodities in the market and get profit.
  • 11.
  • 12. DIFFERENCE BETWEEN SALAM SALE AND ORDINARY SALE SALAM SALE ORDINARY SALE 1. In Salam sale, it is necessary to precisely fix a period for the delivery of goods. 2. In Salam sale, the commodity which is not in possession of the seller can be sold. 3. In Salam sale, only those commodities which can be precisely determined in terms of quality and quantity can be sold. 1. In ordinary sale delivery date is fix. 2. In ordinary sale, it cannot be. 3. In ordinary sale everything that can be owned is salable, unless the Qur'an or the Hadith prohibit it.
  • 13. SALAM SALE ORDINARY SALE 4. A Salam sale cannot take place between identical goods, for example wheat for wheat. 5. In Salam sale advance payment should be made at the time of making the contract. 4. In ordinary sale it is permissible. 5. In ordinary sale payment may be deferred or may be made at the time of the delivery of goods.
  • 14. DESCRIPTION OF FACTORS IN SALAM  CAPITAL Capital in Salam should be known to both of the parties involved in Salam sale agreement. Ideally it should be in cash however it is allowed to supply the capital in kind subject to: Quality & Quantity. A debt receivable from customer cannot be converted into Salam capital
  • 15. COMMODITY Only those commodities can be sold under bay' Salam which can be precisely defined in terms of quality and quantity. SECURITY/SURETY Security in Salam contract can be obtained through guarantee, pledge or any other permissible mode of security.
  • 16. DISPOSAL OF COMMODITIES Disposal of commodities involved in Salam contract is not allowed prior to maturity of contract, however replacement with other commodities, except with cash, is allowed. TIME OF PAYMENT The buyer must pay the amount at the time of signing the contract in that very meeting. Imam Malik allows delay by two to three days in the case of handicrafts or of manufactured goods.
  • 17. THE PERFORMANCE OF SALAM CONTRACTS IS NOT CONDITIONAL The performance of any one of the Salam contracts is not conditional to the performance of any other Salam contract. PRICE It is not necessary that price be fixed in terms of money; it may be in terms of goods as well, on the condition that this should not violate the prohibition of riba' in barter transaction as laid down in the Hadiths
  • 18. THE PERIOD OF DELIVERY Some jurists believe in precise fixation of the date on which delivery is to be made while some others approve of a rough date but a definite period or occasion of delivery; for example, on harvest, or the beginning of Hajj season REVOCATION OF THE CONTRACT Once agreed upon, a Salam contract cannot be revoked unilaterally by any party. It can be cancelled or partially cancelled with mutual consent by returning the actual or proportionate amount of price paid. In case of Default No penalty can be stipulated in the contract Seller can undertake in the Salam agreement that in case of late delivery of Salam goods, he shall pay to the charity account
  • 19. Essential conditions in a Salam contract 1. It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effecting the sale. 2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified. 3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. 4. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute.
  • 20. Essential conditions in a Salam contract 5. It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed. 6. The exact date and place of delivery must be specified in the contract. 7. Salam cannot be effected in respect of things, which must be delivered at spot. 8. The commodity for Salam contract should remain in the market right from the day of contract up to the date of delivery or at least till the date of delivery.
  • 21. Essential conditions in a Salam contract 9. The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. 10. Price in Salam is generally lower than the price in spot sale, the difference in the two prices may be a valid profit for the Bank. 11. A security in the form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller delivers. 12. The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealing in commodities.
  • 22. Types of Salam 1. Single Salam 2. Multiple Salam 3. Parallel Salam 1. Single Salam: The total funds needed by the farmer will be disbursed/credited to the farmer’s account in lump sum.
  • 23. 2. Multiple salam: The funds would be disbursed in tranches as and when needed by the farmer by executing various/multiple salam. Salam depending upon his/her convenience and preference. 3. Parallel salam: In parallel, salam the bank would enter into a salam contract with the farmer first and subsequently before The goods are delivered to the bank, the bank would enter into a wa’ad or a promise with a third party to buy the goods immediately upon the delivery of it to the bank. This would ensure the immediate selling of the goods upon the delivery without bank in curring loss.
  • 24. Examples:  If ‘A’ has purchase from ‘B’ 1000 bags of wheat by way of salam to be delivered on 31 december, ‘A’ can contract a parallel salam with ‘C’ to deliver to him 1000 bags of wheat on 31 december. But while contracting parallel salam with ‘C’ cannot be conditioned with taking delivery from ‘B’. Therefore, even ‘B’ did not deliver wheat on 31 December, ‘A’ is duty bound to deliver 1000 bags of wheat to ‘c’. He can seek whatever recourse he has against ‘B’ but he cannot rid himself from his liability to deliver goods, which do not conform to the agreed specification, ‘A’ is still obligated to deliver the goods to ‘C’ according to the specifications agreed with him.  ‘A’ has purchased 1000 bags of wheat by way of salam from ‘B’ a joint stock company. ‘B’ has a subsidiary ‘C’ which is a separate legal entity but is fully owned by ‘B’. ‘A’ cannot contract the parallel salam with ‘C’. However, if ‘C’ is not wholly owned by ‘B’, ‘A’ can contract parallel salam with it, even if some shareholders are common between ‘B’ and ‘C’.
  • 25. • Goods received by IFI from seller of first Salam Contract •Goods delivered by IFI to the buyer of parallel Salam contract • parallel Salam contract signed and payment released by IFI •Salam contract signed and payment released by IFI step 1 step 2 step 3 step 4
  • 26. Step.1. Customer requests to an IFI for finance and sell the commodity with deferred delivery hence Salam sales contract is executed while payment is made by bank at spot. Step.2. IFI enters into contract of parallel Salam with another party, receives the payment and signs contract of Salam with promise to deliver the goods at a point in time in future. Step.3. Seller in first Salam contract delivers the goods to IFI on due date to discharge his liability. Step.4. IFI delivers the goods to buyer in Parallel Salam contract hence transaction closed on profit.
  • 27. Conditions for Parallel Salam 1: There must be two different and independent contracts, these two contracts cannot be tied up and performance of one should not be contingent on the other. 2: Parallel Salam is allowed with third party only.
  • 28. Agency Agreement 1: If the bank has no expertise to sell the commodities received under Salam contract, then the bank can appoint the customer as its agent to sell the commodity in the market/third party, subject to Salam agreement and Agency agreement are separate from each other. 2: A price must be determined in agency agreement on which the agent will sell the commodity but if the price is increased, the benefit can be given to the agent.
  • 29. Benefits of Salam Salam is beneficial to the: 1: seller because the price is received in advance 2: buyer because the price in Salam is lower than the price in spot sales.
  • 30. Risk in Salam 1: Seller through Salam contract transfers the price risk towards the buyer, while the 2: Buyer transfers the business risks to the seller through guaranteed quantity and quality supply of output at a predefined date and place.
  • 31. Scope and potential of Salam 1: The Salam sale has the flexibility to cover the needs of various sectors of people such as farmers, industrialists, contractors, exporters or traders. It can be used to meet the capital requirements as well as to meet the cost of operations. 2: Salam sale is suitable to finance the agricultural operations where the bank can transact with farmers who are expected to have the commodity in penalty during harvest either from their own crops or crops of others, which they can buy and deliver in case their crops fail. Thus the bank renders great services to the farmers in their way to achieve their production targets.
  • 32. 3: Salam sale is also used to finance the commercial and industrial activities, especially in phases prior to production and export of commodities and that is purchasing it on Salam and marketing them for lucrative prices. 4: The bank in financing craftsman and small producers applies the Salam sale by supplying them with the inputs of production as a Salam capital in exchange of some for their commodities to market.