4. 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.
5. 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.
6. 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.
7. 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).
8. According Qur'an 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.’”
9. Islamic Fiqh 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 accurately fixed
Clearly Enumerated
Not uniquely identified underlying asset
Full payment at the conclusion of the contract
11. 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.
12. 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.
13.
14. DIFFERENCE BETWEEN SALAM
SALE AND ORDINARY SALE
SALAM 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.
ORDINARY SALE
1. In ordinary sale it is not
necessary.
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.
15. SALAM SALE
ORDINARY SALE
4. A Salam sale cannot take
place between identical
goods, for example wheat for
wheat.
4. In ordinary sale it is
permissible.
5. In Salam sale advance
payment should be made at
the time of making the
contract.
5. In ordinary sale payment may
be deferred or may be made
at the time of the delivery of
goods.
16. 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
17. 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.
18. 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.
19. 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
20. 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
21. Essential conditions in a Salam
contract
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.
1.
22. 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.
23. 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.
24. Types of Salam
Single Salam
2. Multiple Salam
3. Parallel Salam
1.
1. Single Salam:
The total funds needed by the farmer will be
disbursed/credited to the farmer’s account in lump
sum.
25. 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.
26. 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’.
27. • Salam contract signed
and payment released by
IFI
• parallel Salam contract
signed and payment
released by IFI
step
1
•Goods delivered by IFI to
the buyer of parallel
Salam contract
step
2
step
4
step
3
• Goods received by
IFI from seller of first
Salam Contract
28. 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.
29. 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.
30. Agency Agreement
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.
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.
31. Benefits of Salam
Salam is beneficial to the:
seller because the price is received in advance
buyer because the price in Salam is lower than the
price in spot sales.
32. Risk in Salam
Seller through Salam contract transfers the price risk
towards the buyer, while the
Buyer transfers the business risks to the seller through
guaranteed quantity and quality supply of output at a
predefined date and place.
33. Scope and potential of Salam
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.
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.
34. 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.
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.
