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Before prohibition of interest farmers used to get interest based loans for growing crops and harvesting. After prohibition of interest, they were allowed to do Salam transactions. This helped them to get money in advance for their needs.
During the days of our prophet (S.W.) the caravans used to get interest based loans for purchasing the commodities. After prohibition of interest, they were allowed to do Salam.
Purpose of Salam
To meet the needs of small farmers who need money to grow their crops and to feed their family up to the time of harvest.
To meet the need of working capital
To meet the needs of liquidity problem.
To meet the need of traders for import and export business.
Benefits Salam is beneficial to the seller,because he receives the price in advance,and it is beneficial to the buyer also,because normally,the price in salam used to be lower then the price in spot sales.
Conditions of Salam
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, because the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not be achieved.
(2) Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified e.g.precious stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible.
(3) All details in respect to quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute.
(4)It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure.
(5) Salam cannot be effected on a particular commodity or on a product of a particular field or farm e.g.. supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain.
(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. e.g Salam b/w wheat and barley.
(8)The commodity of Salam contract should remain in the market right from day of contract up to the date of delivery or at least at the date of delivery.
(9) there should be actual delivery of commodity.
In Salam, purchased goods are deffered, price is paid on spot.
In Salam price has to be paid in full in advance.
In Murabaha purchased goods are delivered at spot, price may be either on spot or differed.
In Murabaha price may be on spot or differed.
Difference b/w Salam & Murabaha
Salam is not executed in the particular commodity but commodity is specified by specifications.
Salam cannot be effected in respect of things, which must be delivered at spot. e.g Salam b/w wheat and barley.
Murabaha can be executed in particular commodity.
Murabaha can be executed in those things.
Difference b/w Salam & Murabaha
Delivery of Salam goods
Before delivery, goods will remain at the risk of seller.
After delivery, risk will be transferred to the purchaser.
Possession of goods can be physical or constructive.
Transferring of risk and authority of use and utilization/consumption are the basic ingredients of constructive possession.
After taking delivery, the purchaser has the “option of defect” (Khiyar-e-Aib). Not “option of seeing” (Khiyar-e-ruyat)
Options available for purchaser after taking delivery
After the execution of Salam agreement with one party, buyer
or seller executes another salam agreement with third party,
Conditions for Parallel Salam:
(a) 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.
(b) Parallel Salam is allowed with third party only.
Parallel Salam Diagram
Delivery of Commodity
Salam Sale Parallel Salam Islamic Bank Islamic Bank Purchaser Seller 1 st Salam Seller 2 nd Salam Purchaser Delivery of Commodity
2. 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 .
3. Selling in the market
If the bank has expertise in the relevant commodity, it can sell the commodity in the market/third party, Or hold the commodity to fetch a better market price to maximize its profit .
4. Promise to purchase
Before maturity bank can take promise to purchase from a third party, after taking delivery, bank will sell the same commodity to the promissee, and he will be bound to purchase the same according to his undertaking.
This promise should be unilateral .
5. Salam combining with Murabaha
Bank can sell the Salam commodity to the seller of Salam on Murabaha subject to following terms:
Salam agreement and Murabaha agreement should be independent, not contingent and with free will of the parties.
Murabaha will be executed after taking the possession of Salam goods.
Bank shall assume the risk of loss b/w taking delivery and execution of Murabaha.
Bank cannot take undertaking from seller of Salam that he will purchase the Salam commodity from Bank on Murabaha basis.
Revoking the Salam contract
After execution of Salam agreement, it cannot be revoked unilaterally without mutual consent of both parties.
Penalty for non performance
Seller can undertake in the Salam agreement that in case of late delivery of Salam goods, he shall pay to the charity account maintained by the bank a sum calculated on the basis of….% per annum for each day of default,bank will spend this amount in charity purpose on behalf of the client.
This undertaking is infact a sort of Yameen/Nazar which is a self-imposed penalty to keep oneself away from default.
A security in the form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller shall deliver the commodity on the agreed date. In the case of default in delivery,the guarantor may be asked to deliver the same commodity and if there is a mortgage, the buyer can sell the mortgaged property and the sale proceeds can be used either to realize the required commodity by purchasing it from the market or to recover the price advanced by him.
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.
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.