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Salam mode of financing in Islam. contains all basic rulings and conditions


  1. 1. Presented by: Shafqat Junaid Khurram
  2. 2. Salam <ul><li>Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. </li></ul>
  3. 3. <ul><li>Salam </li></ul><ul><li>In Salam, purchased goods are deffered, price is paid on spot. </li></ul><ul><li>In Salam price has to be paid in full in advance. </li></ul><ul><li>Salam is not executed in the particular commodity but commodity is specified by specifications. </li></ul><ul><li>Salam cannot be effected in respect of things, which must be delivered at spot. e.g Salam b/w wheat and barley. </li></ul><ul><li>Murabaha </li></ul><ul><li>In Murabaha purchased goods are delivered at spot, price may be either on spot or differed. </li></ul><ul><li>In Murabaha price may be on spot or differed. </li></ul><ul><li>Murabaha can be executed in particular commodity. </li></ul><ul><li>Murabaha can be executed in those things. </li></ul>Difference b/w Salam & Murabaha
  4. 4. Benefits <ul><li>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. </li></ul>
  5. 5. Rulings <ul><li>Salam was allowed by the Holy Prophet (SW) subject to certain conditions. The basic purpose of this sale was to meet the needs of small farmers who needed money to grow their crops and to feed their families upto the time of harvest. After the prohibition of riba, they could not take usurious loans. Therefore, it was allowed for them to sell the agricultural products in advance. </li></ul>
  6. 6. Conditions <ul><li>(1) First of all, 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. </li></ul><ul><li>(purpose : fulfill the instant needs of the seller.) </li></ul><ul><li>(2) Salam can be affected in those commodities only the quality and quantity of which can be specified exactly. </li></ul><ul><li>(purpose : eliminate disputes on quality of product) </li></ul><ul><li>(3) Salam cannot be affected on a particular commodity or on a product of a particular field or farm. </li></ul><ul><li>(purpose : the delivery becomes uncertain) </li></ul><ul><li>(4) It is necessary that the quality of the commodity is fully specified. </li></ul><ul><li>(purpose : leaving no ambiguity) </li></ul>
  7. 7. <ul><li>(5) It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. </li></ul><ul><li>(purpose : exact measure should be known) </li></ul><ul><li>(6) The exact date and place of delivery must be specified in the contract. </li></ul><ul><li>(7) Salam cannot be affected in respect of things which must be delivered at spot. </li></ul>
  8. 8. <ul><li>All the Muslim jurists are unanimous on the principle that salam will not be valid unless all these conditions are fully observed, because they are based on the express ahadith ofthe Holy Prophet (SW). The most famous hadith in this context is the one which the Holy Prophet (SW) has said: </li></ul><ul><li>“ Whoever wishes to enter into a contract of salam, he must effect the Salam according to </li></ul><ul><li>the specified measure and the specified weight and the specified date of delivery.” </li></ul>
  9. 9. Point of differences <ul><li>The commodity (for which salam is effected) remains available in the market right from the day of contract upto the date of delivery. </li></ul><ul><li>(Hanafi school) </li></ul>
  10. 10. <ul><li>Availability of the commodity at the time of the contract is not a condition for the validity of salam . What is necessary, according to them, is that it should be available at the time of delivery. </li></ul><ul><li>(Shafi’, Maliki, and Hanbali) </li></ul>Point of differences
  11. 11. Time <ul><li>Hanafi and Hanbali schools that the time of delivery is, at least, one month from the date of agreement. </li></ul><ul><li>(beneficial to farmers) </li></ul><ul><li>Imam Malik supports the view that it should not be less than fifteen days, because the rates of the market may change within a fortnight. </li></ul><ul><li>According to the Hadith , is that the time of delivery must be clearly defined. The parties may fix any date for delivery with mutual consent. </li></ul>
  12. 12. Salam as a Mode of Financing <ul><li>This mode of financing can be used by the modern banks and financial institutions, especially to finance the agricultural sector. </li></ul><ul><li>In order to ensure that the seller shall deliver the commodity on the agreed date, they can also ask him to furnish a security </li></ul>
  13. 13. Parallel Salam <ul><li>The bank enters two different contracts. </li></ul><ul><li>In one of them, the bank is the buyer and in the second one the bank is the seller </li></ul><ul><li>They 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. </li></ul><ul><li>Each contract should have its own force and its performance should not be contingent on the other. </li></ul>
  14. 14. <ul><li>Delivery of Commodity </li></ul>Mr. A Mr. B Islamic Bank Islamic Bank Purchaser Seller 1 st Salam Seller 2 nd Salam Purchaser Delivery of Commodity
  15. 15. <ul><li>For Example, if A has purchased from B 1000 bags of wheat by way of Salam to be delivered on 31 December, A can contract a parallel Salam with C to deliver to him 1000 bags of wheat on 31 December. 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 31 December, A is duty bound to deliver 1000 bags of wheat to C. </li></ul>
  16. 16. <ul><li>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. </li></ul>