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University utara malaysia
BWFS 3093 SEMINAR IN ISLAMIC FINANCE AND BANKING

Forward sales:
Salam and Istisna`a
GROUP MEMBER

MUHD NURFIRWAN BIN ISMAIL

(205439)

MOHD SYAHMIE SYAWAL BAKRI

(205657)

AHMAD MUSTAQIM MAHASAN

(207192)
Bai’ Salam/Salaf
INTRODUCTION

 This contract is crucial during the time of prophet hood and at the
time where agricultural sector become ...
DEFINITION
 Literally Salam means giving (ita ), advance (taslif) and leaving
 Technically:
Sale contract over prescribe...
DEFINITION

Bay’ as-Salam or Salam means a contract in which advance cash
payment is made for goods to be delivered later...
PILLARS OF AL-SALAM
 Rabb as-salam/ Musallim
The Buyer
 Muslam Ilaihi
The Seller
 Ra’s al-Mal
The Price
 Al-Musallim F...
FLOWS OF BAY’ AL-SALAM
1) Ijab (Offer)

3)

Ra’s al-Mal
(Price)

Rabb as-salam/
Musallim
(Buyer)

Muslam Ilaihi
(Seller)

...
THE OBJECTIVES OF BAY’ AL-SALAM
 Provide the financing for small and medium enterprises
 The economic reality underlying...
CONT..
 Benefits the purchaser
 Provides goods and products at a discounted price in return for the willingness
of the p...
Feature of a Valid Salam Contract
 Conditions related to the price (ra’s al-mal)
 The price must be clearly determined a...
Cont..
 Conditions related to the purchased commodity (mussalam fih)
 Salam can be effected on commodity whose quality a...
Cont..
 Khiyar (option) in salam
 After taking delivery, the purchaser has the “option of defect” (Khiyar-e-Aib). Not
“o...
Cont..
 Salam in currencies
 The majority of jurists do not allow Salam in gold, silver, currencies or
monetary units, a...
Security, Pledge and Liability of the Sureties
 Security
 A security in the form of a guarantee, mortgage or hypothecati...
DISPOSING OF THE GOODS PURCHASED ON SALAM
First, the Salam buyer cannot sell the commodity onward before
taking its deliv...
Alternatives for Marketing Salam Goods
The options available to Islamic banks are:

i.

Enter into a Parallel Salam contr...
Salam Financing Working Capital
Parallel salam
SALAM – POST EXECUTION SCENARIOS
Supply of Goods as Per Contract.

Failure in Supply of Goods.
1.

To wait until the com...
SALAM-BASED SECURITIZATION – SALAM CERTIFICATES/SUKUK
Salam certificates representing a sort of forward contract can be
i...
SUMMARY OF SALAM RULES
SALAM AS A FINANCING TECHNIQUE BY BANKS
The Difference between Salam and Murabaha
Salam

Murabaha

In Salam, delivery of t...
Risks in Salam and their Management
Cont..
Istisna`a
CONTENT


DEFINITION



EVIDENCE



PILLARS OF AL-ISTISNA’



TYPES OF AL-ISTISNA’



CONDITION OF AL-ISTISNA’



DI...
DEFINITION
 Literally:



The word istisna’ derived from the Arabic verb “istasna’a”
which is mean to request someone to...
EVIDENCE
According to jurist, the legality on an istisna’ contract is established
from different legal sources such as th...
PILLARS OF ISTISNA’
Mustasni’
Customer

 Sani’
Manufacturer

 Ra’s al-Mal
The Price

 Masnu’
The Product

 Sighah
Ija...
TYPES OF ISTISNA’ CONTRACT
 Classical Istisna’

 The normal istisna’contract that involves two transacting parties; the
...
CONDITION OF ISTISNA’
 Conditions of subject matters (product @ masnu’)
 The object to be manufactured must be precisely...
Cont..
 Conditions of time of delivery
 The best view to fix the delivery time to avoid dispute even though it is not a
...
Cont..
 Conditions of price for istisna’
 Price of istisna may be in the form of money, commodity and usufruct.
 Price ...
DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM
BAY AL-ISTISNA’

BAY’ AL-SALAM

The subject of istisna’ is always a thing which ...
DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM
 Total payment is paid in advanced. (It is necessary for Salam that the
price i...
Difference between Istisna’ & Ijarah
 ISTISNA

 The manufacturer either uses his own material.
 IJARAH

 The material ...
MODERN APPLICATIONS
 In contemporary Islamic finance, an istisna’ contract is
applicable to various industrial production...
PARALLEL ISTISNA’ (ISTISNA’ MAWAZI)
2
3

Customer
Also as developer

Bank

4
Original Seller/ Developer
(Builder)

1
Cont..
 Parallel salam takes effect through two separate contract.

 In the first contract the IFI act in the capacity a...
Cont..
 Parallel Istisna and its applications
 After the execution of Istisna agreement with one party, buyer
 or selle...
ISTISNA` MAWAZI BY AL – ‘INAH

1

Ccustomer/
contractor

2

3

bank
Cont..
Example of data transaction:
Asset

: Manufacturing of Supermarket

Total financing

: RM 300 000

Dateline

: 1 Ja...
Thank u….
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bai al salam and istisna

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bai al salam and istisna

  1. 1. University utara malaysia BWFS 3093 SEMINAR IN ISLAMIC FINANCE AND BANKING Forward sales: Salam and Istisna`a
  2. 2. GROUP MEMBER MUHD NURFIRWAN BIN ISMAIL (205439) MOHD SYAHMIE SYAWAL BAKRI (205657) AHMAD MUSTAQIM MAHASAN (207192)
  3. 3. Bai’ Salam/Salaf
  4. 4. INTRODUCTION  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.
  5. 5. DEFINITION  Literally Salam means giving (ita ), advance (taslif) and leaving  Technically: 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.
  6. 6. DEFINITION 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 contract.
  7. 7. PILLARS OF AL-SALAM  Rabb as-salam/ Musallim The Buyer  Muslam Ilaihi The Seller  Ra’s al-Mal The Price  Al-Musallim Fih The Product  Sighah Ijab (Offer) Qabul (Acceptance)
  8. 8. FLOWS OF BAY’ AL-SALAM 1) Ijab (Offer) 3) Ra’s al-Mal (Price) Rabb as-salam/ Musallim (Buyer) Muslam Ilaihi (Seller) Musalllim Fih (Product) 4) 2) Qabul (Acceptance)
  9. 9. 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
  10. 10. CONT..  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.
  11. 11. 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 conditions.  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 account.
  12. 12. Cont..  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 equivocal terms.  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.
  13. 13. Cont..  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 default.
  14. 14. Cont..  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 discounting.  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
  15. 15. Security, Pledge and Liability of the Sureties  Security  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.  Pledge  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 seller.
  16. 16. 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.
  17. 17. Alternatives for Marketing Salam Goods The options available to Islamic banks are: i. Enter into a Parallel Salam contract. ii. an agency contract with any third party (seller); and/or 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 delivery.
  18. 18. Salam Financing Working Capital
  19. 19. Parallel salam
  20. 20. SALAM – POST EXECUTION SCENARIOS Supply of Goods as Per Contract. Failure in Supply of Goods. 1. To wait until the commodity is available; 2. To cancel the contract and recover the paid price; 3. To agree to a replacement with mutual consent and subject to the relevant rules.  Supply of Inferior Goods.
  21. 21. 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/ service. For example, a country that produces oil may want to expand its refining facilities. 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.
  22. 22. SUMMARY OF SALAM RULES
  23. 23. SALAM AS A FINANCING TECHNIQUE BY BANKS The Difference between Salam and Murabaha Salam Murabaha In Salam, delivery of the purchased goods is deferred; the price is paid on the spot. 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 commodities. Salam cannot be executed in respect of things which must be delivered on the spot, e.g. Salam between wheat and barley. Murabaha can be executed in those things
  24. 24. Risks in Salam and their Management
  25. 25. Cont..
  26. 26. Istisna`a
  27. 27. CONTENT  DEFINITION  EVIDENCE  PILLARS OF AL-ISTISNA’  TYPES OF AL-ISTISNA’  CONDITION OF AL-ISTISNA’  DIFFERENCES BETWEEN AL-ISTISNA’ AND BAY’ AL SALAM  MODERN APPLICATION
  28. 28. DEFINITION  Literally:  The word istisna’ derived from the Arabic verb “istasna’a” which is mean to request someone to manufacture an asset.  Technically:  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.
  29. 29. EVIDENCE According to jurist, the legality on an istisna’ contract is established from different legal sources such as the Sunnah, ijma’, qiyas and istihsan. 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.
  30. 30. PILLARS OF ISTISNA’ Mustasni’ Customer  Sani’ Manufacturer  Ra’s al-Mal The Price  Masnu’ The Product  Sighah Ijab (Offer) Qabul (Acceptance)
  31. 31. TYPES OF ISTISNA’ CONTRACT  Classical Istisna’  The normal istisna’contract that involves two transacting parties; the customer (mustasni’) and the manufacturer (sani’)  Parallel Istisna’  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.
  32. 32. 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 non-existence.  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 process.  •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.
  33. 33. Cont..  Conditions of time of delivery  The best view to fix the delivery time to avoid dispute even though it is not a requirement.  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 transacting parties.  The customer permitted to penalize the manufacturer if the latter fails to deliver the work on specified date.
  34. 34. Cont..  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.
  35. 35. DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM BAY AL-ISTISNA’ BAY’ AL-SALAM The subject of istisna’ is always a thing which needs manufacturing. 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 be fixed 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).
  36. 36. 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) (salam)  Total payment can be done upfront or at the end or by installment. (istisna)  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.
  37. 37. Difference between Istisna’ & Ijarah  ISTISNA  The manufacturer either uses his own material.  IJARAH  The material is provided by the customer and the manufacturer uses only his labor and skill.
  38. 38. MODERN APPLICATIONS  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 as:  Parallel istisna’ (Istisna’ Mawazi)  Hybrid Istisna’  Sukuk istisna’
  39. 39. PARALLEL ISTISNA’ (ISTISNA’ MAWAZI) 2 3 Customer Also as developer Bank 4 Original Seller/ Developer (Builder) 1
  40. 40. Cont..  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.
  41. 41. Cont..  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.
  42. 42. ISTISNA` MAWAZI BY AL – ‘INAH 1 Ccustomer/ contractor 2 3 bank
  43. 43. Cont.. Example of data transaction: Asset : Manufacturing of Supermarket Total financing : RM 300 000 Dateline : 1 Jan. 2013 Booker 1 : Customer and Bank as contractor Booker 2 : Bank and Customer as contractor Total Bank profit : RM 200 000 Payment Period : 8 years
  44. 44. Thank u….

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