Report on Salam Islamic Banking

Institute of Southern Punjab

ISLAMIC BANKING And
FINANCE
Reported on:
February 10, 2014

Presented By:

Ghulam Murtaza

Presented To:

Ms. Sonia Hassan

Acknowledgment

First of all I would like to express my great gratitude to ALLAH PAK that without his
will I never complete my report related to the subject “Islamic Banking and Finance”.

I would also like to make great thanks and express my deep gratitude to our
supervisor, Ms. Sonia Hassan, lecturer, Institute of Southern Punjab, ISP, for her help and
guideline to me about this report.

Finally, I would like to put my great thanks to my friends, family and all other persons
who guided me and teach me anything for completing this report. Without the contribution of
all of the above it would definitely be difficult for me to complete this report.

Regards
Aneeza Salah ud Din
Ghulam Murtaza
Ali Hayan
Imran Khan
Abdul Rehman

ISLAMIC BANKING And FINANCE

Table of Contents
Chapter 1 ................................................................................... 1
1. An overview ........................................................................................................ 1
1.1 Introduction .......................................................................................................... 1
1.2 Islamic banking…………………………………………………………………1
1.3 Contracts of Islamic banking…………………………………………………...2

Chapter 2 ................................................................................... 3
2. Salam .................................................................................................................... 3
2.1Meaning of Salam ................................................................................................. 3
2.2 Terms used in Salam……………………………………………………………4
2.3 Purpose of allowing Salam……………………………………………………..4
2.4 Benefits in Salam………………………………………………………….........4
2.5 Conditions in Salam…………………………………………………………….5
2.6 Risks in Salam………………………………………………………………….6
2.6.1 Market risk…………………………………………………………….7
2.6.2 Delivery risk…………………………………………………………...7
2.6.3 Credit risk……………………………………………………………...7
2.6.4 Risk of damage………………………………………………………...7
2.7 Different school of Islamic thoughts…………………………………………...7
2.8 Salam as a mode of financing…………………………………………………..8
2.8.1 Security in Salam……………………………………………………...9
2.8.2 Problem in Salam……………………………………………………...9
Salam

2.8.3 Dealing in modern banks………………………………………………9
2.9 Cancellation of Salam contract………………………………………………..10
2.9.1 In case of death……………………………………………………….10
2.10 Salam in Pakistan…………………………………………………………….10
2.11 Applications of Salam ………………………………………………………10
2.11.1 Crop sector………………………………………………………….10
2.11.2 Non-crop sector……………………………………………………..11
2.12 Procedure and mechanism…………………………………………………...11
2.12.1 Eligibility of customer………………………………………………11
2.12.2 Pricing strategy……………………………………………………..12
2.12.3 Written offer………………………………………………………...12
2.12.4 Delivery notice……………………………………………………...12
2.12.5 Goods receiving notice……………………………………………...12
2.13 Scope of Salam………………………………………………………………13

Chapter 3……………………………………………………..13
3. Parallel Salam…………………………………………………………………13
3.1 Some rules of parallel Salam………………………………………………….13
3.2 Agency agreement…………………………………………………………….14
3.4 Conclusion…………………………………………………………………….15

Salam


Chapter 1

1. An overview
This whole report covers the understanding of Salam contract which are used by different
Islamic institutions. I try my level best to sum up the whole concept of Salam in these limited
pages of report.
Islamic banking used different contracts or instruments of financing like murabah,
musharakah, mudarabah etc, these instruments and the contracts regulating them are well
understood. Another contract which is introduced by the Islamic institutions is a Salam contract
and its rules and regulations are also well understood. This contract is characterized by the
advance payment of a price paid by the buyer and the delivery of the goods in future pre- agreed
date.
This type of contract arises many questions in the mind of seller as well as the buyer.
This report gives the answer of those questions. This report presents the considerable details,
terms and the conditions of Salam contract as discussed by the different Muslim Jurists in detail.
The whole report is based on those opinions of the Muslim jurists which they passes for
the Salam contract that in what conditions this contract would be considered as valid and in what
conditions this contract is not considered as valid contract. Some rules of Salam contract are also
defined in this report. The whole procedure and mechanism of Salam contract is also discussed
in detail. All the possible matters related to this contract are discussed in this report and finally a
conclusion that I understand while studying about this contract is also mentioned in the last.

1.1 Introduction
Salam and Istisna are forward contract used in Islamic banking for the purpose of
producing and manufacturing something. Customer who produces and manufactures something
needs a special kind of financing which help them to support the finance issues. For this purpose
Islamic financial institutions (IFIs) enter into Salam and Istisna contracts because the general
practicing contracts which are already used in Islamic banking like (Murabaha, Ijarah,
Musharakah etc) cannot be used for this purpose. So, according to Shari‟ah the Salam and Istisna
contracts are introduced by Islamic institutions for this purpose. These contracts are being
executed in a very small scale with very reliable customers only because of the high intensity of
risk involved in this.

1.2 Islamic banking
Islamic banking is totally based on Shari‟ah practices, perspectives, rules and principles.
It is also based on Fiqh and Muamlaat.

Salam

Page 1

Shari’ah is the fixed elements of Islam whose obedience is necessary on every Muslim
and there is no liberty on that.
Fiqh is the result of human reasoning and understanding to Shari‟ah. It‟s a human
reasoning, understanding after reading the Quran and Sunnah.
Muamlaat is a complete commercial Islamic laws including:
 Set rules of Fiqh
 They relaters to the worldly matters
Some prohibitions of Islamic banking are given below:
 Paying and charging of interest is totally prohibited in Islamic banking
 Gambling which is called Maysir is also prohibited in Islamic banking
 Uncertainty in object, price and delivery of object should not be existed in Islamic
banking
 Buying, selling, leasing of non- Halal items is also prohibited
 Depart from money for money transactions are also prohibited in Islamic banking
 Derivative securities and hedging are also limited in Islamic banking
These are the features which makes the Islamic banking different from conventional
banking. These terms are practices in conventional banking but completely forbidden in Islamic
banking.

1.3 Contracts of Islamic banking
Some contracts of Islamic banking are given below:
1. Mudarabah
2. Musharakah
3. Murabaha
4. Qard
5. Sarf
6. Salam
7. Parallel salm
8. Istisna
9. Parallel istisna
10. Tawarruq
11. Takkaful
12. Re-takkaful
13. Ijarah
14. AQD
15. Islamic stock screening
16. Islamic mutual funds
Salam

Page 2


17. Islamic sukuk
18. Islamic hedge funds
These contracts are used in Islamic banking according to shari‟ah defined by Islamic
institutions and Islamic scholars. The whole Islamic banking is based on these contracts.

Salam

Page 3


Chapter 2
2. Salam
It is one of the basic conditions for the validity of a sale in shariah that the commodity
(intended to be sold) must be in the physical or constructive possession of the seller. This basic
condition has three ingredients and those are:
1. The commodity which is going to be purchased must be existed
2. The person who is going to sell that commodity must have an ownership over it
3. The purchased commodity should be in to the possession of seller. Just ownership is not
enough. The possession should be in physical or constructive state
So while following the above conditions there are only two exceptions to this general
principle in Shari‟ah. One is Salam and the other is Istisna.
Salam is contract used to finance the agricultural goods and Istisna is a contract which is
used to finance the manufactured goods. Salam is also known as the (Trust sale) and Istisna is
also known as the (Order sale).

2.1 Meaning of Salam
Salam is a special type of contract between the seller and the buyer. In this the buyer pays
the full payment of goods in advance and the seller undertakes to supply the specific goods on
agreed future date. The Salam contract is a moral obligation on the seller that he must have to
deliver the goods to buyer on agreed date.
Salam is a type of financing transaction hold by the financial institutions. The fully
advance payment for the specified goods are paid by those institutions and agree to receive the
goods on future date. In exchange of that payment, the return should not be in the nature of
money. Fully advanced payment is paid by institutions and specified goods are received on preagreed date. For the payment in advance, the contracting parties stipulate a future date for the
supply of goods of specified quantity and quality. It‟s an exchange of price to commodity as:
Price paid in cash at the time of contract (Salam)
Supply of purchase goods or commodity is deferred (Future supply)
Salam can also be considered as a debt because it‟s a liability on the seller that he must
have to supply the object or commodity on future pre-agreed date, for which the seller received
the full payment in advance from buyer.

Salam

Page 4


2.2 Terms used in Salam
Some of the basic terms which are used in the contract of Salam are given below:


Buyer:

“Rabb-us-salam”



Seller:

“Muslam ilaih”



Cash Price:

“Ra‟s-ul-mal”



Purchased Commodity:

“Muslam fih”

2.3 Purpose of allowing Salam
The Holy Prophet (P.B.U.H) was allowed the Salam contract under certain conditions:
 Salam is a contract which is allowed at that time because after the prohibition of “RIBA”
the farmers can‟t take the Riba base loans. So, to meet the financial needs of those
farmers it was allowed by Holy Prophet (P.B.U.H) that the farmers can sell out their
agricultural products in advance.
 The other purpose of allowing the Salam contract was the import and export goods. Arab
traders used to export the goods to other places and also import some goods to their
homeland. For this purpose a lot of finance is needed and they can‟t borrow the loans
based on “RIBA”. So the Salam contract is allowed for those traders that they can sell
their goods in advance and fulfill the need of finance.

2.4 Benefits in Salam
Both the buyer and seller take the benefit from the contract of Salam. This contract
fulfills the needs of both the parties with mutual consents.
Salam contract is beneficial for the seller as he received the full payment in advance and
can meet his financial requirements.
On the other hand it is also beneficial for the buyer because in Salam contract the
payment paid by buyer is normally less than the price paid in spot sales.

2.5 Conditions of Salam
As we discussed above that in Salam contract the seller and buyer make the dealing of
that product which does not exist, shari‟ah define the strict rules related to this so that the right of
Salam

Page 5

both the parties are to be protected equally. For this purpose some conditions defined by shari‟ah
are summarized below:


The first and the most important condition of Salam contract is the full payment which is
given by the seller or financial institutions. The purpose of this condition is to the
fulfillment of instant need of the seller. If the full payment is not paid at the time of
signing the contract then the contract is not considered as the Salam contract. Therefore,
all the Muslim jurists are agreed on the same point that full payment at the time of
contract is the key element of the Salam contract. Otherwise it will consider as the sale of
debt against debt which is completely prohibited by Holy Prophet (P.B.U.H).
For this condition Imam Malik gave a view that the seller can give a concession to the
buyer for 2 to 3 days but this is not considered as the part of an agreement.



The second condition of the Salam contract is that we can only make the dealing of those
commodities whose quality and quantity can be specified exactly. As the specifications
related to weight, size, volume, color, grade etc are clearly defined in the contract of
Salam. It eliminates all the disputes between the seller and buyer.
For example, the dealing of precious stones cannot be making in Salam contract because
usually the prices of these stones are different from one another and also the
specifications related to quantity and quality also differs from one another.



The third condition of Salam contract is that, the contract is not based on particular
commodity or product of some particular farm or field. The reason behind that is, in this
case the delivery of commodity remains uncertain.
For example, at the time of contract, the seller specifies a tree that he supplies the fruit of
that particular tree on the time of delivery. This contract shows the uncertainty because
the possibility of damage and destroy of commodity also exist. In this condition the
contract would not be considered valid.
This condition is applicable to all those commodities, the supply of which is not certain.



The fourth condition specifies that the quality of the commodity is fully expressed or
mentioned in the contract. This will eliminate the ambiguities related to the product.
Written documentation of all possible details must be made.



The fifth condition specifies that both the parties are clearly agreed upon the quantity of
the commodity. The purpose of this condition is that the exact measure of the commodity
should be known by both the parties.
Suppose if the commodity is quantified in weights, the exact weight must be determined
and if the quantity is quantified through measures then the exact measure should be
known.

Salam

Page 6



The sixth condition specifies that on what time, place, date the commodity would be
delivered is clearly defined in the contract. By the mutual consent of both the parties the
delivery in installments can also be made by seller.



The seventh condition specifies that Salam contract cannot be affected in respect of
things which must be delivered at spot.
For example, if someone wants to purchase the gold in exchange of silver then there is no
need of Salam contract. According to shari‟ah in this type of purchasing, the delivery of
both is simultaneous.



The eighth condition specifies that at the time of delivery the seller only delivers the
commodity not the price to the buyer.
The above conditions are strictly followed by both the parties while entering in the Salam
contract. If one of the above conditions is ignored by the seller or buyer, the Salam
contract cannot be considered as valid. All the Muslim jurists are agreed on this they are
based on the express Hadith of the Holy Prophet (P.B.U.H). He said:
“Whoever wishes to enter in to a contract of Salam, he must affect the Salam according
to the specified measures and the specified weight and the specified date of delivery”.

2.6 Risks in Salam
Risk factor is also included in the Salam contract. Financial institutions pays the price in
advance and seller agree to deliver the commodity in future pre-agreed date. For this purpose
both the parties are in risk.
Seller through the Salam contract transfers the price risk towards the buyer.
Buyer transfers the business risks to the seller through guaranteed quantity and quality
supply of output at a predefined date and place.
Some other risks which are including in the Salam contract are given below:





Market risk
Delivery risk
Credit risk
Risk of damage

2.6.1 Market risk
As in Salam contract the delivery of goods or commodity is in future date so at that time
the price of the commodity can be less than the purchasing price.

Salam

Page 7


2.6.2 Delivery risk
Delivery risk mean the goods or commodity are not delivered by the seller on pre-agreed
date. And also if goods are delivered, which are not according to the specified contract.
2.6.3 Credit risk
At the time of delivery if the seller is unable to supply the goods to the buyer, he can
reduce the credit risk by keeping the property of the seller.
2.6.4 Risk of damage
After taking the complete possession of the commodity, the buyer is considered as the
owner of that commodity. Now if any damage occurs due to negligence, the buyer will bear that
loss.

2.7 Different schools of Islamic thoughts
There are some other condition also existed in the contract of Salam which have been the
point of difference between the different schools of Islamic Jurists.
These conditions are:
 According to Hanafi school of thought, in Salam contract the commodity which is
defined to deliver by the seller remains available in the market right from the day of
contract upto the date of delivery. Salam contract cannot be affected in this case if the
commodity is not available in the market at the time of contract and it is also expected
that the commodity will be available in the market at the date of delivery.
On the other hand, the other three Muslim Jurists (i.e. Imam Sha‟fi, Imam Maliki, and
Imam Hanbli) said that it is not compulsory in the Salam contract that the commodity is
available in the market at the time of signing the contract. The main and important point
that is to be focused, the commodity should be available in the market at the date of
delivery.
 The other discussion between the different schools of thought is about the time duration
given to the seller for the delivery of goods.

In this discussion the two Jurists (Imam Hanafi and Imam Hanbli) said that the time of
delivery should be at least one month from the date of agreement. If the time duration
will be less than one month so it invalidates the Salam contract. The reason behind this
concept is that the Salam contract is allowed for the needs of small farmers and traders,
therefore the enough time should also be given to them for the supply of commodity.
Salam

Page 8


They may not be able to supply the commodity before one month. Moreover, the price of
Salam contract is normally less than the price of spot selling. This concession is only
justified when the enough time is given to the supplier to deliver the commodity. The
period of less than one month does not normally affect the prices. Therefore, the
minimum time of delivery should not be less than one month.
On the other hand, Imam Malik says that in Salam contract there should be a minimum
time period given to the seller for the delivery of goods. According to his view, the time
limit should not be less than 15 days, because the rates of the market may change within a
fortnight.
The third view which is given by Imam Sha‟fi and Imam Hanafi is totally opposite to
both of the above. They said that there is no minimum time limit which is defined by the
Holy Prophet (P.B.U.H). According to the Hadith the only condition which is to be
clearly defined is the time of delivery of goods. Both the parties can fix the date and time
by mutual consent.
This third opinion is considered preferable according to the present circumstances,
because the Muslim Jurists define these limits which range between one day to one
month. These limits are defined while seeing the interest of poor sellers. The time limit
may differ from time to time and place to place. Moreover, in Salam contract it is not
compulsory that the price paid by the buyer is always less than the price of spot selling. It
depends on the seller the in what price he would have a benefit so he is the best judge of
his interest.

2.8 Salam as a mode of financing
As we discussed above in detail that the Salam contract is allowed by the shari‟ah to
fulfill the needs of farmers and traders. So Salam is basically a mode of finance for these two
types of sellers. Modern banks and financial institutions mostly adopt this type of financing to
finance the agricultural sector. As we also discussed above that the price in Salam contract is
normally less than the price paid in spot selling. So the difference between purchasing the
commodity and selling the commodity again is considered as the profit for the financial
institutions.
Some other points which are to be discussed in Salam contract are given below:
Security in Salam
Problem in Salam
Dealing in modern banks
2.8.1 Security in Salam

Salam

Page 9


While seeing the security factor in Salam contract, the fear of non-delivering the
commodity always existed there. For this purpose the buyer can also ask him to furnish a
security, which may in the form of:
o Mortgage
o Hypothecation (pledge)

In case of any default in delivery, the buyer will 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 in advanced by him.
2.8.2 Problem in Salam
The only problem in Salam contract which may agitate the modern banks and financial
institutions is that they will receive certain commodities from their clients, and will not receive
money. The financial institutions cannot sell those commodities before they are actually
delivered to them, because it is prohibited in Shari‟ah.
2.8.3 Dealing in modern banks
Financial institutions and banks dealing in money but if they want to earn Halal profit
then they must adopt some of the points given below:
 The financial institutions must deal in commodities because no profit is allowed in
shari‟ah on advancing loans only
 Banks must received commodities from their clients
 They have to establish a special cell for dealing the commodities like Salam etc
 They must purchase the commodities through Salam
 They sell the commodities in spot market

2.9 Cancellation of Salam contract
The Salam contract cannot be cancelled once signed. This means to terminate the contract
by returning the price to the buyer and the commodity to the seller when the buyer receives the
price. It is permissible if the return is full otherwise it would not be allowed.
Some Jurists says that the partial payment is allowed but according to some Jurists, it should not
less or more than the thing meant otherwise it would be invalid.
2.9.1 In case of death
The majority of fuqaha think that deferred debts, honored by trust, can be incumbent
when the debtor dies. One of these is the Salam. If the seller dies before the specified date of
Salam

Page 10


delivery the debt must be incumbent upon this inheritance and these fore the inheritors have to
fulfill.

2.10 Salam in Pakistan
Traditional Islamic banks are not providing any Salam base product however almost all
Islamic banking branches (IBBs) are providing Salam base products in agriculture such as
Islamic divisions of:
o
o
o
o

Askari bank limited
Bank Alfalah limited
Soneri bank limited
UBL Ameen limited

2.11 Applications of Salam
Applications related to Salam contract should also be discussed in this report. As we
know that in agricultural sector there are two types of sectors as:
o Crop sector
o Non-crop sector
We simply discussed the applications of Slam in these two sectors in detail because the
financing requirements and cash flows of these two sectors are quite different from one another.
2.11.1 Crop sector
As we know that in crop sector there are two types of cropping seasons passed in a year.
Kharif: the season of Kharif crops starts from March to August. The important Kharif crops are
cotton, rice, sugarcane, maize, Jawar and Bajra.
Rabi: the season of Rabi crops starts from September to February. The important Rabi crops are
wheat, barley, gram and mustard seeds.
So the financial institutions provide the finance facility to farmers for production. For
example, providing the finance which is Salam based for the purchasing of raw materials,
equipments, long term investments and for the development purposes.
2.11.2 Non-crop sector

Salam

Page 11


Non-crop farming means livestock, fisheries, poultry etc. financial institutions also
provide the Salam base financing to this sector so that they can also fulfill their needs and meet
the requirements.

2.12 Procedure and mechanism
The procedure and mechanism of Salam contract defines the way through which a farmer
and trader can apply for this type of financing. As we discussed above that the Salam based
financing is purely for the farmers and traders so whenever a farmer or a trader requires money
for their businesses they move towards the financial institutions for finance. Instead of taking
loan from conventional banking they move towards the Islamic institutions for financing. Islamic
banks will make a future sale agreement which is known as Salam agreement. Some basic
features of this contract are:
 The complete specifications of this contract are defined in detailed. The written
agreement is signed by both the parties (buyer and seller)
 Any type of security is also mentioned in the contract
 All the conditions, termination, rules and regulations are also defined in the contract as
well as the Salam contract is signed in the presence of witnesses‟ of both the parties.
Some points which are to be focused in the Salam procedure and mechanism are:
Eligibility of customer
Pricing strategy
Written offer
Delivery notice
Goods receiving notice
2.12.1 Eligibility of customer
Eligibility criteria define as:
 The farmer or a trader should have his NIC as well as all the needed documents
which are important
 He should not be a defaulter of any other financial institutions
 Islamic banks feel comfortable while giving the finance to that person on the basis
of his identical character, reputation and creditworthiness.
2.12.2 Pricing strategy
There is no specific pricing criterion which is followed in the Salam contract. The price
would be set by the mutual consent of the buyer and seller. Price can be decided from these
ways:

Salam

Page 12

 Taken by daily Index price (Newspaper)
 Always less than the Index price
2.12.3 Written offer
After deciding all the matters related to Salam contract including quantity, quality, date,
size etc the farmer then gave a written offer for the sale of goods which include some specific
points as:






Description of the goods
Validity of the offer
Delivery date
Terms of delivery
Place of delivery

2.12.4 Delivery notice
When the commodity which is to be delivered is prepared or produced by the farmer, the
farmer then sends a delivery notice to the buyer. After receiving the notice the buyer send some
of his field managers for the inspection of that commodity. The delivery notice includes:





Delivery date
Place of delivery
Description of the goods
Additional remarks

2.12.5 Goods receiving notice
This is the last stage of Salam contract. After receiving the goods the financial
institutions sends a receiving notice to the seller and ensure him that the goods are received by
the bank.

2.13 Scope of Salam
Scope of Salam contract includes:
 Salam contract is the most beneficial contract for the traders and farmers. They can meet
their financial needs through this contract. This contract can be used to purchase the raw
material, machinery, and other inputs.
 Salam sale is suitable to finance the agricultural operations where the bank can transect
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 banks render great services to the farmers in their way to achieve
their production targets.

Salam

Page 13

 Salam contract is also beneficial for the commercial and industrial sectors, especially in
their phases of trading and production.
 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 of their
commodities to market.

Salam

Page 14


Chapter 3

3. Parallel Salam
Selling the goods purchased in a Salam contract prior to taking delivery is not generally
allowed in Shari´ah. Instead, it is allowed for the Islamic bank to make parallel Salam contracts
for the same goods to be delivered even at the date and time of delivery of the original Salam.
After purchasing the commodity by way of Salam, the financial institutions may sell it through a
parallel contract of Salam for the same date of delivery. The period of Salam in the second
transaction being shorter, the price may be a little higher than the price of a first transaction, and
the difference between the two prices shall be the profit earned by the institution. The shorter the
period of Salam, the higher the price, and the greater the profit. In this way the institutions may
manage their short term financing portfolios.

3.1 Some rules of parallel Salam
For the arrangement of parallel Salam some rules are to be focused or observed by the
financial institutions as:
 In this an arrangement, there must be two different and independent contacts; one where
the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied
up in a manner that the rights and obligations of one contact are dependent on the rights
and obligations of the parallel contract. And each contract should have its own force and
its performance should not be contingent on the other.
For Example, if A has purchased from B 100 tons of wheat by way of Salam to be
delivered on 31st December, A can contract a parallel Salam with C to deliver to him 100
tons of wheat on the same date. But while contracting Parallel Salam with C, the delivery
of wheat to C cannot be conditioned with taking delivery from B. Therefore, even if B
did not deliver wheat on 31st December, A has the duty to deliver the agreed quantity of
wheat to C. He can seek whatever recourse he has against B, but he cannot rid himself
from his liability to deliver wheat to C. Similarly, if B has delivered defective goods
which do not conform to the agreed specifications, A is still obliged to deliver the goods
to C according to the specifications agreed with him.

 Parallel Salam is allowed with a third party only. The seller in the first contract cannot be
made purchaser in the parallel contract of Salam, because it will be a buy-back contract,
Salam

Page 15


which is not permissible in Shari´ah. Each one of the two contracts entered into by a bank
should be independent of the other, but the bank, as seller, can sell the goods on parallel
Salam on similar conditions and specifications as previously purchased on the first Salam
contract without making one contract dependent on the other. If the purchaser in the
second contract is a separate legal entity, but it is fully owned by the seller in the first
contract the arrangement will not be allowed, because in practical terms it will amount to
„buy-back‟ arrangement.
For example, A has purchased 1000 bags of wheat by way of Salam from B, a joint stock
company. B has 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.

3.2 Agency agreement
Agency agreement means after receiving the goods from seller and after taking the
complete possession of the commodity, the bank then hire a person as its agent to sell that
commodity in the market or third party. Agency agreements are totally separate from Salam
agreements.
Price must also 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.

Salam

Page 16


Conclusion
The simple definition of Salam contract is that the two parties (buyer and seller) signed a
contract of purchasing the commodity in which the buyer gave the full payment of that
commodity in advance and the seller gave the commodity in future on pre agreed date.
According to Shari‟ah the commodity which does not exist physically or not in the
possession of seller, could not be sold out. But Salam is a special type of selling contract defined
by the Holy Prophet (P.B.U.H) for those farmers and traders who needs the finance for growing
of their crops and for the fulfillment of the needs of their family.
Strict rules, terms and conditions are also defined by Muslim Jurists so that the rights of
both the parties are to be protected.
Finally, it‟s a type of financing considering best for those peoples who don‟t want to take
the loans from conventional banking because of “RIBA”. They borrow money from Islamic
institutions without any fear of interest and can precede the production while purchasing the raw
material, machinery etc.

Salam

Page 17

Report on Salam Islamic Banking

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (12)

Similar to Report on Salam Islamic Banking

Similar to Report on Salam Islamic Banking (20)

Recently uploaded

Recently uploaded (20)

Report on Salam Islamic Banking