Introduction Islamic banking is a booming industry in theworld today. Less well understood is the term Salam andconditions of the Salam contract. it raises manyquestions within both the economic and theShari‘ah framework.
Definition of SalamSalam is a contract where two parties enter into acontract of sale of goods which would be delivered infuture for which the price for the goods would be paidin cash on spot at the time of the signing of thecontract.Means that it is a kind of sale in which payment is spotwhile the delivery of the good is deferred.It is also known as bay’ salaf or bay’ mafalis.
When salam is mentioned, the foremost thingwhich the majority of the people assume would beabout the risk involved in it. The application of salam as a form of financingwould indeed equilibrium the bank’s aim ofmaximizing profit as well as achieving its’ role as acommunal institution helping the deprived.
Contract of Salam underIslamic 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, wasprevalent even before the advent of the Prophet(peace be upon him).
According Quranic verse:O ye who believe, when ye contract a debt for a fixedterm 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 peoplewere paying one and two years in advance for fruits, sohe said: ‘Those who pay in advance for anything must doso for a specified weight and for a definite time.’”
Islamic Fiqah Point of viewAbu Hanifah Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contractImam Malik Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Could be deferred to three days or even moreImam Shafi’ee Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contractImam Ahmad Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contract
Purpose of SalamMeet up the necessitate of farmers who needmoney to grow their crops and to feed their familyup to the time of harvest.Aid the traders for import and export business.
Mechanism of SalamStep 1 : Client sells commodity to Bank on forwardbasis and receives financing normally forpurchasing agricultural inputs likeseed, fertilizer, pesticides, diesel fortractor, payment of water charges, labor etc.Step2: On due date, Client delivers commoditiesto Bank.Step3: Bank sells commodities in the market andget profit.
DIFFERENCE BETWEEN SALAM SALEAND ORDINARY SALESALAM SALE ORDINARY SALE1. In Salam sale, it is necessaryto precisely fix a period forthe delivery of goods.2. In Salam sale, thecommodity which is not inpossession of the seller canbe sold.3. In Salam sale, only thosecommodities which can beprecisely determined interms of quality andquantity can be sold.1. In ordinary sale deliverydate is fix.2. In ordinary sale, it cannotbe.3. In ordinary saleeverything that can beowned is salable, unless theQuran or the Hadithprohibit it.
SALAM SALE ORDINARY SALE4. A Salam sale cannot takeplace between identicalgoods, for example wheat forwheat.5. In Salam sale advancepayment should be made atthe time of making thecontract.4. In ordinary sale it ispermissible.5. In ordinary sale payment maybe deferred or may be madeat the time of the delivery ofgoods.
DESCRIPTION OF FACTORS INSALAM CAPITALCapital in Salam should be known to both of theparties involved in Salam sale agreement. Ideally itshould be in cash however it is allowed to supply thecapital in kind subject to: Quality & Quantity.A debt receivable from customer cannot be convertedinto Salam capital
COMMODITYOnly those commodities can be sold under bay Salamwhich can be precisely defined in terms of quality andquantity.SECURITY/SURETYSecurity in Salam contract can be obtained throughguarantee, pledge or any other permissible mode ofsecurity.
DISPOSAL OF COMMODITIESDisposal of commodities involved in Salam contract isnot allowed prior to maturity of contract, howeverreplacement with other commodities, except withcash, is allowed.TIME OF PAYMENTThe buyer must pay the amount at the time of signingthe contract in that very meeting. Imam Malik allowsdelay by two to three days in the case of handicrafts or ofmanufactured goods.
THE PERFORMANCE OF SALAM CONTRACTS IS NOTCONDITIONALThe performance of any one of the Salam contracts is notconditional to the performance of any other Salamcontract.PRICEIt is not necessary that price be fixed in terms of money;it may be in terms of goods as well, on the condition thatthis should not violate the prohibition of riba in bartertransaction as laid down in the Hadiths
THE PERIOD OF DELIVERYSome jurists believe in precise fixation of the date on whichdelivery is to be made while some others approve of a rough datebut a definite period or occasion of delivery; for example, onharvest, or the beginning of Hajj seasonREVOCATION OF THE CONTRACTOnce agreed upon, a Salam contract cannot be revokedunilaterally by any party. It can be cancelled or partially cancelledwith mutual consent by returning the actual or proportionateamount of price paid.In case of DefaultNo penalty can be stipulated in the contractSeller can undertake in the Salam agreement that in case of latedelivery of Salam goods, he shall pay to the charity account
Essential conditions in a Salamcontract1. It is necessary for the validity of Salam that thebuyer pays the price in full to the seller at the time ofeffecting the sale.2. Only those goods can be sold through a Salamcontract in which the quantity and quality can beexactly specified.3. Salam cannot be effected on a particular commodityor on a product of a particular field or farm.4. All details in respect to quality of goods sold must beexpressly specified leaving no ambiguity, which maylead to a dispute.
Essential conditions in a Salamcontract5. It is necessary that the quantity of the commodity isagreed upon in absolute terms. It should bemeasured or weighed.6. The exact date and place of delivery must be specifiedin the contract.7. Salam cannot be effected in respect of things, whichmust be delivered at spot.8. The commodity for Salam contract should remain inthe market right from the day of contract up to thedate of delivery or at least till the date of delivery.
Essential conditions in a Salamcontract9. The time of delivery should be at least fifteen days or onemonth from the date of agreement. Price in Salam isgenerally lower than the price in spot sale.10. Price in Salam is generally lower than the price in spotsale, the difference in the two prices may be a valid profitfor the Bank.11. A security in the form of a guarantee, mortgage orhypothecation may be required for a Salam in order toensure that the seller delivers.12. The seller at the time of delivery delivers commodities andnot money to the buyer who would have to establish aspecial cell for dealing in commodities.
Types of Salam1. Single Salam2. Multiple Salam3. Parallel Salam1. Single Salam:The total funds needed by the farmer will bedisbursed/credited to the farmer’s account in lumpsum.
2. Multiple salam:The funds would be disbursed in tranches as and whenneeded 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 salamcontract with the farmer first and subsequently beforeThe goods are delivered to the bank, the bank would enterinto a wa’ad or a promise with a third party to buy thegoods immediately upon the delivery of it to the bank. Thiswould ensure the immediate selling of the goods upon thedelivery without bank in curring loss.
Examples: If ‘A’ has purchase from ‘B’ 1000 bags of wheat by way of salam to bedelivered on 31 december, ‘A’ can contract a parallel salam with ‘C’ todeliver to him 1000 bags of wheat on 31 december. But whilecontracting parallel salam with ‘C’ cannot be conditioned with takingdelivery from ‘B’. Therefore, even ‘B’ did not deliver wheat on 31December, ‘A’ is duty bound to deliver 1000 bags of wheat to ‘c’. He canseek whatever recourse he has against ‘B’ but he cannot rid himselffrom his liability to deliver goods, which do not conform to the agreedspecification, ‘A’ is still obligated to deliver the goods to ‘C’ according tothe specifications agreed with him. ‘A’ has purchased 1000 bags of wheat by way of salam from ‘B’ a jointstock company. ‘B’ has a subsidiary ‘C’ which is a separate legal entitybut 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 salamwith it, even if some shareholders are common between ‘B’ and ‘C’.
• Goods received byIFI from seller of firstSalam Contract•Goods delivered by IFI tothe buyer of parallelSalam contract• parallel Salam contractsigned and paymentreleased by IFI•Salam contract signedand payment released byIFIstep1step2step3step4
Step.1.Customer requests to an IFI for finance and sell the commoditywith deferred delivery hence Salam sales contract is executedwhile payment is made by bank at spot.Step.2.IFI enters into contract of parallel Salam with anotherparty, receives the payment and signs contract of Salam withpromise to deliver the goods at a point in time in future.Step.3.Seller in first Salam contract delivers the goods to IFI on duedate to discharge his liability.Step.4.IFI delivers the goods to buyer in Parallel Salam contract hencetransaction closed on profit.
Conditions for Parallel Salam1: There must be two different and independentcontracts, these two contracts cannot be tied up andperformance of one should not be contingent on theother.2: Parallel Salam is allowed with third party only.
Agency Agreement1: If the bank has no expertise to sell the commoditiesreceived under Salam contract, then the bank canappoint the customer as its agent to sell the commodityin the market/third party, subject to Salam agreementand Agency agreement are separate from each other.2: A price must be determined in agency agreement onwhich the agent will sell the commodity but if the priceis increased, the benefit can be given to the agent.
Benefits of SalamSalam is beneficial to the:1: seller because the price is received in advance2: buyer because the price in Salam is lower than theprice in spot sales.
Risk in Salam1: Seller through Salam contract transfers the price risktowards the buyer, while the2: Buyer transfers the business risks to the sellerthrough guaranteed quantity and quality supply ofoutput at a predefined date and place.
Scope and potential of Salam1: The Salam sale has the flexibility to cover the needs of varioussectors of people such asfarmers, industrialists, contractors, exporters or traders. It can beused to meet the capital requirements as well as to meet the cost ofoperations.2: Salam sale is suitable to finance the agricultural operationswhere the bank can transact with farmers who are expected to havethe commodity in penalty during harvest either from their owncrops or crops of others, which they can buy and deliver in casetheir crops fail. Thus the bank renders great services to the farmersin their way to achieve their production targets.
3: Salam sale is also used to finance the commercial andindustrial activities, especially in phases prior toproduction and export of commodities and that ispurchasing it on Salam and marketing them for lucrativeprices.4: The bank in financing craftsman and small producersapplies the Salam sale by supplying them with the inputsof production as a Salam capital in exchange of some fortheir commodities to market.