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Presentation Outline-Salam
1. Concept of Salam
2. Contract of Salam
3. Subject Matter of Salam
4. Changes to the Subject Matter
5. Delivery to Al-Muslam Fihi
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Introduction of Salam
A Salam transaction is the purchase of commodity for deferred delivery in exchange
for immediate payment.
Price is fully paid at spot while the delivery of goods is deferred.
Salam is also known as ‘Salaf’
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To meet the needs of small farmers who need money to grow their crops and to feed
their family up to the time of harvest.
To meet the need of Working Capital.
To meet the need of Liquidity Problem.
To meet the need of traders for import & Export business.
Purpose of Salam
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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, because the basic wisdom for allowing Salam is
to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not
be achieved.
Only those goods can be sold through a Salam contract in which the quantity and
quality can be exactly specified e.g. precious stones cannot be sold on the basis of
Salam because each stone differ in quality, size, weight and their exact specification
is not possible.
All details in respect to quality of goods sold must be expressly specified leaving no
ambiguity which may lead to a dispute.
Conditions of Salam
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It is necessary that the quantity of the commodity is agreed upon in absolute terms. It
should be measured or weighed in its usual measure.
Salam cannot be effected on a particular commodity or on a product of a particular
field or farm e.g.. supply of wheat of a particular field or the fruit of a particular tree
since there is a possibility that the crop is destroyed before delivery and given such
possibility, the delivery remains uncertain.
The exact date and place of delivery must be specified in the contract.
Conditions of Salam (Continue..)
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The exact date and place of delivery must be specified in the contract.
Salam cannot be effected in respect of things, which must be delivered at spot. e.g.
Salam b/w wheat and barley.
The commodity of Salam contract should remain in the market right from day of
contract up to the date of delivery or at least at the date of delivery.
There should be actual delivery of commodity.
Conditions of Salam (Continue..)
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2. Contract of Salam
Salam and Parallel Salam (AAOIFI Shari’a Standard # 10)
2-1 Master Agreement
2-2 Form of Salam Contract
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2-1 Master Agreement
It is permissible to draw up a general framework or a master agreement that consists
of an understanding to conclude successive salam contracts, each of which will take
place at an appropriate time (Memorandum of Understanding).
The execution of each salam contract may then take place separately at the
appropriate time, the contents of memorandum become part and parcel of the
contract.
Necessary details like the specifications of the commodity and the due date, etc will
be expressed in each Salam transaction.
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2-2 Form of Salam Contract
The contract may be concluded using the word salam, or salaf, or sale, or any term
that indicates sale of a prescribed commodity for deferred delivery in exchange for
immediate payment of the price.
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3. Subject Matter of Salaam
3-1 Capital of Salaam
3-2 Subject Matter of Salaam
3-3 Security
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3-1 Capital of Salaam
It is permissible for the capital of salam to be in the form of fungible goods (such as
wheat and other cereals), in which case the parties must make sure that they do not
fall into Riba.
The capital may also be items of material value (such as livestock) or general usufruct
of a particular asset. In case when the usufruct is the price the delivery of the asset
would be considered as the payment of the price.
The capital should be made known to the two parties in a manner that removes all
uncertainty and eliminates the possibility of dispute.
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In principle, the capital of salam should be in the form of cash. In this case, the
currency of payment, the amount and the manner of payment shall be clearly defined.
If the capital of Salam is in the form of fungibles, then the kind, type, specifications
and quantity of these shall be clearly defined.
The capital of salam must be paid immediately at the place where the contract is
concluded.
It is not permitted that a debt be recognized as the capital of Salam.
3-1 Capital of Salaam (Continue..)
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3-2 Subject Matter of Salaam
Salam contracts are permitted for fungible goods, like those that may be weighed,
measured or counted, the articles of which do not differ in any significant manner.
This include products of companies that manufacture goods in approximate units that
are identified by trademarks, standardized specifications, and are regularly and
commonly available at any time.
Salam is not permitted for anything specific like ‘this car’. Nor it is permitted for
anything for which the seller may not be held responsible, like land, building or trees;
or for articles whose specifications can not be easily defined, like jewellery and
antiques.
Also, it is not permissible to stipulate that al-Muslam fihi must be from a specific
piece of land or factory.
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3-2 Subject Matter of Salaam (Continue..)
Subject matter must be the kind of article for which a specification may be drawn up.
Subject matter should be clearly known to the contracting parties in a manner that
eliminates any possibility of uncertainty or ambiguity.
The parties must know the quantity of goods to be determined according to its
condition and nature with regard to weight, measurement, volume and number.
Subject matter must be commonly available under normal circumstances on the
delivery date.
The date of delivery for subject matter should be known in a manner that eliminates
any uncertainty or ambiguity which may lead to a dispute.
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3-2 Subject Matter of Salaam (Continue..)
There is no Shari’a objection for setting various dates on which the delivery may take
place in installments provided that the full price was paid in advance in the beginning
of the contract.
If the parties to the contract do not determine that place of delivery, then the place at
which contract was concluded will be regarded as the place of delivery.
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3-3 Security
Al-Muslam fihi (Subject Matter) my be secured by:
a Pledge or
a Guarantee or
any other permissible means of securing payment.
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4. Changes to the Subject Matter
4-1 Changes to the Subject Matter
4-2 Replacement
4-3 Iqala of Contract
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4-2 Replacement
It is permissible for the buyer to exchange subject matter for other goods, after the
delivery date falls due as long as it was not stipulated in the contract.
Replacement is possible provided the substitute is suitable for being exchanged as
subject matter for the capital of salam contract.
The market value of substitute should not be greater than the market value of al-
Muslam fihi at the time of delivery.
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4-3 Iqala of Contract
It is permissible, when both parties agree, to cancel the entire salam contract in return
for repayment in full of the amount of capital of salam.
Partial cancellation is also permissible.
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Delivery of Goods
The seller is under obligation to deliver the goods to the buyer on the due date in
accordance with the terms of the contract.
The buyer must accept the goods if they meet the required specifications. If the buyer
refuses to accept the goods, he shall be compelled to do so.
Superior Quality
If the seller delivers goods of a superior quality, the buyer must accept the goods,
unless the seller seeks a higher price for better quality.
However, this will apply only if the (inferior) description specified in the contract is
not itself deemed vital.
Inferior Quality
If the quality of delivered goods is inferior to that required by the contractual
specifications, the buyer is entitled to either reject or to accept the goods in that
condition.
It is also permissible for the two parties to agree to a settlement on terms for
acceptance of the goods even at a discounted price.
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Delivery of Goods (Continue..)
Delivery of goods may take place before the due date, on condition that the goods
conform to the agreed specifications and quantities.
If the buyer has a valid reason for rejecting the goods, then he will not be compelled
to accept them. Otherwise, he will be forced to accept the goods.
If the seller fails to perform his obligation, owing to insolvency, he should be granted
an extension of time for delivery.
It is not permitted to stipulate a penalty clause in respect of delay in the delivery of
subject matter.
In case all or part of the subject matter is not available to the seller on due date, the
buyer can either:
Wait until the commodity is available
Cancel the contract and recover the paid capital
Replace the subject matter with some other goods (in accordance with the 4/2)
