This contract is crucial during the time of prophet hood and at the
time where agricultural sector become outstanding and supreme.
The wisdom of making salam permissible lies in the fact that salam
facilitates a types of financing for people in need of it.
Literally Salam means giving (ita ), advance (taslif) and leaving
Sale contract over prescribed commodity sold as a deferred
liability on one party, in exchange for a price that is
received during the contract session
Maliki defined it as a sale in which capital sum (price) is paid in
advance and the object of sale is deferred to a specified term.
AAOIFI defined salam as the purchase of commodity for
deferred delivery in exchange for immediate payment.
Bay’ as-Salam or Salam means a contract in which advance cash
payment is made for goods to be delivered later on.
The seller undertakes to supply some specific goods to the buyer at a
future date in exchange of an advance price fully paid at the time of
PILLARS OF AL-SALAM
Rabb as-salam/ Musallim
FLOWS OF BAY’ AL-SALAM
1) Ijab (Offer)
2) Qabul (Acceptance)
THE OBJECTIVES OF BAY’ AL-SALAM
Provide the financing for small and medium enterprises
The economic reality underlying the contract of Salam, the ordering of goods to be
delivered later for a price paid in advance, was the financing of the business of a small
trader or artisan by his customers.
Benefits the trader or producer
Provides Islamically accepted financing alternative and avoids any involvement in riba
The seller gets in advance the money he needs in exchange of obligation to deliver the
commodity later. Thus, he benefits from the Salam sale by covering his cash/liquidity
needs in respect of personal expenses or for productive or trading activity
Benefits the purchaser
Provides goods and products at a discounted price in return for the willingness
of the purchaser to help the financing of the business venture.
The purchaser gets the commodity he has planned to trade at the time he
decides. He will also benefit from cheap prices, because usually the Salam price
is cheaper than the cash market price. This way he will also be secured against
fluctuations of price.
Feature of a Valid Salam Contract
Conditions related to the price (ra’s al-mal)
The price must be clearly determined and paid in full by the buyer at the time of
undertaking the sale to avoid later dispute
The seller must take possession of the price in full before departing one another;
otherwise it will be similar to the sale of debt for a debt which is prohibited.
Maliki jurist allowed it to be paid within few days as long as it is not stipulated as
If the price is ribawi item, it is not allowed to be exchanged for another ribawi item to
avoid riba. Eg: wheat with barley.
Cash payment is not necessary in Salam; the price can be credited to the seller’s
Conditions related to the purchased commodity (mussalam fih)
Salam can be effected on commodity whose quality and quantity can be clearly
specified; commodities which quality and quantity cannot be specified cannot be
sold through salam.
The commodity must be vastly available in the market at the time of contract until
the time of delivery, to ensure the capability of the trader to deliver the product.
The quantity, weight and measure of the commodity must be agreed upon in
Conditions related to the date and place of delivery
The exact date and place of delivery must be specified in the contract
Scholars differ on the shortest duration of time of delivery either 3 days, more than
half a day thirty days or up to the contracting parties to decide.
Khiyar (option) in salam
After taking delivery, the purchaser has the “option of defect” (Khiyar-e-Aib). Not
“option of seeing” (Khiyar-e-ruyat)
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 self-imposed penalty to keep oneself away from
Salam in currencies
The majority of jurists do not allow Salam in gold, silver, currencies or
monetary units, although a few jurists have allowed it and, as such, a few
Islamic banks have been using Salam in currencies as an alternative to bill
Gold, silver and other metallic money like Fulus of copper or other metals can
be used for some purposes other than for making payments; hence, they can be
traded keeping in mind the Sharıah principles. However, paper money can be
used only in payment of a price, it cannot serve as a commodity to be sold
Security, Pledge and Liability of the Sureties
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.
the bank, in the event of the seller’s default, has the right to sell out the pledge
and purchase the stipulated goods from the market in collaboration with the
customer or take away his advance payment out of the sale proceeds and return
the balance to the owner. If the bank gets its money back, it cannot be more than
the price paid in advance, as the advance price is like a debt outstanding on the
DISPOSING OF THE GOODS PURCHASED ON SALAM
First, the Salam buyer cannot sell the commodity onward before
taking its delivery.
The seller cannot resell an item, even at cost, cannot contract its
transference and cannot make it partnership capital.
It seems logical to take into consideration the opinion of those who
uphold the legality of reselling Salam before taking possession,
since there is no genuine text to prohibit that and as a result the
ideas of parallel Salam and Sukuk, or certificates based on Salam.
To be on the safer side, we may not allow actual or constructive
delivery of the Salam goods before taking possession.
Alternatives for Marketing Salam Goods
The options available to Islamic banks are:
Enter into a Parallel Salam contract.
ii. an agency contract with any third party
or with the customer
iii. sale in the open market by the bank itself by entering into a
promise with any third party or direct selling upon taking
SALAM – POST EXECUTION SCENARIOS
Supply of Goods as Per Contract.
Failure in Supply of Goods.
To wait until the commodity is available;
To cancel the contract and recover the paid price;
To agree to a replacement with mutual consent and subject to the relevant
Supply of Inferior Goods.
SALAM-BASED SECURITIZATION – SALAM CERTIFICATES/SUKUK
Salam certificates representing a sort of forward contract can be
issued against the future delivery of a commodity, product/
For example, a country that produces oil may want to expand its
The Salam purchaser can choose to hold onto the Salam contract
and receive the shipment on the designated date,
Or he may elect to sell the goods involved in the contract through
parallel Salam before the date of delivery, at whatever possible
market price, to another investor.
SALAM AS A FINANCING TECHNIQUE BY BANKS
The Difference between Salam and Murabaha
In Salam, delivery of the purchased
goods is deferred; the price is paid on
In Murabaha, the purchased goods are
delivered on the spot; the price may
be either on the spot or deferred.
In Salam, the price has to be paid in
full in advance.
In Murabaha, the price may be on the
spot or deferred.
Salam is not executed in the particular
commodity but the commodity is
specified by specifications.
Murabaha is executed in particular
Salam cannot be executed in respect
of things which must be delivered on
the spot, e.g. Salam between wheat
Murabaha can be executed in those
PILLARS OF AL-ISTISNA’
TYPES OF AL-ISTISNA’
CONDITION OF AL-ISTISNA’
DIFFERENCES BETWEEN AL-ISTISNA’ AND BAY’
The word istisna’ derived from the Arabic verb “istasna’a”
which is mean to request someone to manufacture an asset.
Bay’ al-istisna’ is defined as a contractual agreement with
manufacturer to produce items with specified description at a
determined price, and manufactured from his own materials with
his own effort.
According to jurist, the legality on an istisna’ contract is established
from different legal sources such as the Sunnah, ijma’, qiyas and
There is no differences of opinion on its permissibility. It clearly can
be seen from hadith:
Indeed that the Prophet s.a.w booked the making of a golden ring
The istisna’ contract is legitimate on the basis of the people’s
customary practice of this contract in all periods of time without any
objection, which in turn constitutes a legal consensus.
PILLARS OF ISTISNA’
TYPES OF ISTISNA’ CONTRACT
The normal istisna’contract that involves two transacting parties; the
customer (mustasni’) and the manufacturer (sani’)
Contractual agreement consists of two series of separate istisna’ contracts
whereby the first istisna’ contract is between the ultimate purchaser
(customer) and the seller (bank), who is responsible for delivering the
specified asset to the purchaser.
CONDITION OF ISTISNA’
Conditions of subject matters (product @ masnu’)
The object to be manufactured must be precisely determined in its type, kind,
quantity and quality, considering that istisna’ contract is a form of sale of the
The object of an istisna’ contract must be something that the people are
familiar with to contract it on the basis of manufacture and construction
•If the subject matter does not conform to the contractual specifications at the
time of delivery, the purchaser has the right to either refuse or accept it.
Conditions of time of delivery
The best view to fix the delivery time to avoid dispute even though it is not a
The time of delivery of the manufactured object must be clearly specified to
avoid uncertainty and ambiguity which may lead to a later dispute among the
The customer permitted to penalize the manufacturer if the latter fails to
deliver the work on specified date.
Conditions of price for istisna’
Price of istisna may be in the form of money, commodity and usufruct.
Price of istisna may be spot and differed therefore istisna is applicable where
Salam is not applicable.
Price of istisna is can be paid in installments.
The installments may be tied up with different stages of projects.
DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM
The subject of istisna’ is always a thing which needs
The subject can be anything, whether need
manufacturing or not
Time of delivery of istisna’ product does not have to Time of delivery is an essential part of the sale
The contract can be cancelled before the
manufacturer starts working.
The contract cannot be cancelled unilaterally.
Any penalty for charged late delivery can reduce the The penalty amount is paid to charity
price of an Istisna contract
(not taken as benefit for the buyer).
DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM
Total payment is paid in advanced. (It is necessary for Salam that the
price is paid in full in advance, while it is not necessary in Istisna)
Total payment can be done upfront or at the end or by installment.
Commodity-agricultural products, fungible or generic goods. E.g.
Paddy rice, wheat, corn
Commodity-construction or manufacturing products i.e. it is unique
goods. E.g. Buildings, set of table, car, gate etc.
Difference between Istisna’ & Ijarah
The manufacturer either uses his own material.
The material is provided by the customer and the manufacturer
uses only his labor and skill.
In contemporary Islamic finance, an istisna’ contract is
applicable to various industrial productions which can be
constructed or manufactured and supervised by specification.
Customers are able to apply for the istisna’ financing facility and
other product offered by Islamic bank using istisna’ contract such
Parallel istisna’ (Istisna’ Mawazi)
PARALLEL ISTISNA’ (ISTISNA’ MAWAZI)
Also as developer
Original Seller/ Developer
Parallel salam takes effect through two separate contract.
In the first contract the IFI act in the capacity as manufacturer,
builder or supplier and concludes a contract with the customer.
In the second contract the IFI act in the capacity of a purchaser and
concludes another contract with a manufacturer, builder or supplier
in order to fulfill its contractual obligations towards the customer in
the first contract.
By this process a profit is realized through the difference in price
between the two contracts and in most cases, one of the contract is
concluded immediately and the second contract concluded later.
Parallel Istisna and its applications
After the execution of Istisna agreement with one party, buyer
or seller executes another Istisna agreement with third party,
Conditions for Parallel Istisna :
(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 Istisna is allowed with third party only.
ISTISNA` MAWAZI BY AL – ‘INAH
Example of data transaction:
: Manufacturing of Supermarket
: RM 300 000
: 1 Jan. 2013
: Customer and Bank as contractor
: Bank and Customer as contractor
Total Bank profit : RM 200 000
: 8 years