Salam and Istisna’ Differences between Salam and Istisna' The risk involved in Salam Risk Management in Salam

1. Salam and Istisna’

2. Presented By:
• Aymen Siddiqui

3. Bai-Salam

4. INTRODUCTIO
N
 Salam is a future sale in which the seller contracts the
buyer to supply the goods at some future date receiving the
money in advance at the spot.
 It’s a contract and cannot be cancelled once signed.
 Cash payment and deferred supply of goods.
 Buyer is called “rabb-us-salam” and the seller is called
“muslam-illaih”.
 The cash price is called “ra’s-ul-mal” and the commodity
purchased is called “muslam-fih”.
 It is an exception to the rule of Islam which prohibits
forward sales and has strict conditions for that reason.

5. BACKGROUN
D
It was allowed by the Holy Prophet (S.A.W)
under some conditions to assist small
farmers in growing crops and raising their
families up to the time of harvest.
Also Arabic traders were involved in import
and export business for which they needed
money. So, they were allowed to engage in
“BAI – SALAM”.

6. CAPITAL OF
SALAM
The capital of Salam should be in the form of some fungible
good like wheat or cereals
The parties should make sure that they do not fall into Riba.
Capital may also be an item of value such as livestock.
Capital of Salam should be made known to both the parties
and both parties should be transparently dealt in a way to
remove all the uncertainties and possibility of dispute.
Capital must be paid immediately at the place where the
contract is concluded.
A debt cannot be recognized as the capital of Salam.

7. CONDITIONS
FOR
MUSLAM-FIHI
 The commodity can be in the form of fungible
goods or things that can be measured or
weighed.
 It should not be in the form of currency or
gold or anything for which a specification
cannot be drawn.
 The specification of Muslam-Fihi should be
clearly defined in the contract to eliminate the
chances of dispute between the parties.

8. PARALLEL
SALAM
 In parallel Salam there are parallel transactions. The
seller enters a separate independent contract with the
third party in order to acquire the good of similar
specification for which he agreed in the first Salam
contract. In this way the seller in the first Salam
contract becomes the buyer in the second Salam
contract.
 It is also permissible for the buyer to conclude
separate parallel Salam with the third party for the
purpose of selling.
 It is important to mention that the two contracts should
not be linked to each other. They should be separate in
both the above cases.

9. DELIVERY OF
SALAM
GOODS
 Before delivery, the goods will remain at the
risk of seller which shifts to purchaser after
delivery.
 Possession of goods can be physical or
constructive.
 Transfering of risk and authority of use and
utilization or consumption are the basic
ingredients of constructive possession.

10. Istisna’

11.  Meaning:
The word Istisna' is derived from the word Sana's which literally means
making, manufacturing or constructing something
 Definition:
Istisna' is an agreement in a sale at an agreed price whereby the purchaser
places an order to manufacture, assemble or construct anything to be
delivered at a future date.
 Example:
Infrastructure projects like hospitals, school, roads etc.

12. Parties
Sani (Manufacturer)
Mustasni (customer)
Bank (financier)

13. Types of Istisna'’
 Classical Istisna'
 Parallel Istisna'

14. Classical Istisna'
 Its a normal contract between two parties.
The customer The manufacturer
(buyer) (seller)

15. Parallel Istisna'
 It consist of two contracts.
 First one is between
The bank The manufacturer
 Second one is between
The customer The bank

16. Conditions
 State in a clear terms and condition.
 Price involved must be specified.
 The contract must include the quantity of good,
the quality of material used, the type,
dimensions, period taken and place of delivery
of object.
 Manufactured by any specific manufacturer

17. Subject matter of Istisna'
 The contract is valid only for those objects that have to be manufactured or constructed must
be known and specified to the extent of removing any ignorance or lack of knowledge of its kind,
type, quality and quantity.
 In Istisna' the manufacturers arranges both the raw material and labor.
 In Istisna' a contract may be drawn for real estate development.

18. Invalid Subject
Matter of Istisna’
 It is invalid for natural things or product
like animal, corn, fruit etc.
 It is not permissible that subject matter of
an Istisna' contract be an existing asset.

19. Price of Istisna'
 The price can be in form of cash.
 The price should be known in advance
 The price of Istisna' transaction varies.
 Can be paid in installments within the agreed time period
 It is not necessary in Istisna' a price must be paid in advance
 The price once settled cannot be unilaterally increased or decreased.

20. Delay In Fulfilling Obligation
 Istisna' contract also contains the penalty clauses:
 An agreed amount of money for compensating the purchaser adequately if the
manufacturer is late in delivering the asset.
 It is not permitted to stipulate a penalty clause against the purchaser for default in any
payment because this would be Riba.

21. Differences between Salam and Istisna'
Subject of
sale
Advance
payment
Cancellation
of contract
Time of
delivery

22. Risk involved in Salam
Counter-party Risk; The client
may default after taking the
payment in advance.
Commodity Price Risk; The
time the goods are received the
price may be lower than the
price that was originally
expected.
Quality Risk (low investment
Return or Loss); Which occurs
when goods received are not of
desired quality or unacceptable
for the potential buyer.
Asset-Holding Risk; The bank
might not be able to market the
goods in time, resulting in possible
asset loss for the unsold goods and
locking funds in the goods until they
are sold, this is Asset-Holding Risk
that implies possible extra expenses
on storage.
Asset-Replacement Risk; The third
party fails to supply the specified
goods under the parallel contract, so
the Islamic bank has to purchase
goods from the market in parallel
Salam.
Fiduciary Risk; In parallel
Salam, if original Salam seller
has not delivered the goods as
expected.

23. Risk
Management in
Salam
In order to manage and mitigate the discussed risks, Islamic banks need to
take proper measures. Some of which are given below:
 Islamic banks purchase only goods that have good marketing potential.
 They take proper security and a performance bond.
 They require adequate earnest money in deposit from the prospective
buyers and a binding promise to purchase these goods.
 They also insert a penalty clause in the Salam contract to protect
themselves from late delivery from the supplier.
 They accomplish the responsibility of parallel Salam by purchasing similar
goods from the market on spot to supply these to the buyer and recover
the loss, if any, from the seller in the original Salam.

24. Thank you!