This document provides an overview of Salam and Istisna contracts in Islamic finance. It defines Salam as a sale where the price is paid in full at the time of contract for goods to be delivered in the future. Istisna is defined as a sale of goods to be manufactured, where the price is not necessarily paid in full up front. The document outlines the conditions for each contract and differences between them, such as payment terms and ability to cancel. It also discusses how Istisna can be used to structure financing agreements, such as for construction projects.

1. Salam and Istisnaa
An Introduction To Islamic Finance :
Group Members
Salman Khan
Laila Khalil
Uruba Shah
Imstudies, University of Peshawar !

2.  Basic principle for validity of a sale in Shari'ah is that:
• The commodity must be existing;
Non-existing goods are not eligible for sale;
• The seller must have ownership of the commodity;
Short sale (selling of what is not owned by seller) is
not allowed;
• The commodity must be in the physical or constructive
possession of the seller;
Selling of what is not possessed by seller is not
allowed;
 All sale transactions should conform to these rules;
 There are only two exceptions to these principles in
Shari'ah and they are:
• Salam and
• Istisna';
• Both these are sales of special nature and are exceptions
to the general rules of sale.

4.  Salam is a type of Sale in which:
The seller undertakes to supply some
specific goods to the buyer at a future date,
against an agreed price which is fully paid in
advance and the delivery of the sold commodity
is deferred.

6.  “rabb-us-salam”
The buyer
 “Muslam ilaih”
The seller
 “ra’s-ul-mal”
 The cash price
 “muslam fih”
 The purchased commodity

7. Explanation of Salam
 Before prohibition of interest, farmers in Madinah
Munawwarah used to obtain interest-based loans for their
agricultural and routine life needs;
 After prohibition of interest, the farmers faced hardship;
 Similarly trade caravans of Arabs used to get interest based
loans for purchasing the commodities for trade;
 After prohibition of interest, the traders have also faced
difficulties;
 To solve this problem of Ummat, Holy Prophet ( ‫ﷺ‬ ) allowed
Bai' Salam;
 The purpose of this permission was to ease the financial needs
of small farmers and traders;
 Salam transactions has been allowed by the Holy Prophet ( ‫ﷺ‬ )
with some conditions;

8. Conditions of Salam
 Conditions for validity of Salam are:
► The Salam price must be paid in full at the time of effecting
sale;
– Also this is against the basic wisdom behind
permissibility of Salam which is fulfilling the instant
needs of the farmers and traders;
– If the price is not paid in advance this purpose can not be
achieved;
► Salam can be effected only in those commodities that can be
exactly specified in quantity and quality;
– It means only those goods can be sold under Salam
transaction which fall under the category of ‘Dhawatul-
Amthal’;
– The term ‘Dhawatul-Amthal’ refers to such commodities,
the units of which are homogeneous in characteristics.

9. ► Subject matter of Salam should be of common
nature;
–Therefore Salam cannot be effected on a
particular commodity of a particular field or
farm;
–The reason is that it is not necessary that the
farm or the tree would be able to produce the
required commodity or fruit.

10. ► Both the quality and quantity of the goods should
be very clearly agreed upon;
– All the possible details in this respect must be
expressly mentioned;
– For example if the commodity is quantified in
weight in the market, its weight must be
determined and if it is quantified through
measures, its exact measure should be known.
► 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 on spot;
– Gold with silver or wheat with barley are
example of it. According to Shari'ah delivery of
these goods should be simultaneous;

11. • All the Muslims jurists are unanimous on the
principle that Salam will not be valid unless all
these conditions are fully observed.
The most famous hadith in this context is the one
in which the Holy Prophet (PBUH) said;
“Whoever wishes to enter into a contract of Salam,
he must effect the Salam according to the specified
measure and specified weight and the specified date
of delivery”.

12. Point Of Differences
•The Commodity (for which salam is
effected) remains available in the
market right from the day of contract
up to the date of delivery.
(Hanafi school)

13. • Availability of the commodity at the time of
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.
(Shafi’, Maliki and Hanbali)

14. Time
• Its is necessary that the time of delivery is,
at least, one month from the date of
agreement.
(Hanafi and Hanbali schools)
• Imam Malik supports the view that there
should be a minimum period for the
contract of salam, he is of the opinion that
it should not be less than fifteen days.

15. •According to the Hadith, is that the
time of delivery must be clearly
defined. Therefore, no minimum
period can be prescribed. The parties
may fix any date for delivery with
mutual consent.

16. ISTISNA’
• DEFINITION:
• Istisna’ is the second kind of sale where a
commodity is transacted before it comes into
existence.
• The material required for manufacturing the
commodity is provided by the manufacturer.
• Price is fixed with the consent of the parties.
• It is not necessary in Istisna’ that the price is paid
in advance.

17. ISTISNA’
• Necessary specifications of the commodity is fully settled.
• The contract can be cancelled before the manufacturer has
started the work and not unilaterally after he has started the
work.
• It is invalid for natural things or products like animals, crops,
fruit, etc

18. DIFFERENCE BETWEEN ISTISNAAND SALAM
SALAM ISTISNA
a) SUBJECT Manufactured
commodity
Need to be manufactured
b) PRICE Paid in full advance Not necessarily to be
paid in full advance
c) TIME OF DELIVERY Fixed Not necessary
d) CANCELLATION OF
CONTRACT
Once effected cannot be
cancelled unilaterally
Can be cancelled before
the manufacturer starts
the work

19. Difference between Istisna and Ijarah
• In Istisna’ the manufacturer undertakes to
manufacture the goods with his own material. If
the customer provides the material, it will be a
transaction of ijarah whereby the services of a
person are hired for a specified fee paid to him.

20. REJECTION OFGOODS MANUFACTURED
• Once the manufacturer presents the goods
manufactured by him to the client, whether
the client can reject the goods at this stage?
There is a difference of opinion among the
Muslim jurists on this issue.
• Imam Abu Hanifa is of the view that he
can exercise his ‘option of seeing’ (khiyar-
ur-ru’yah)

21. REJECTION OFGOODS MANUFACTURED
• However, Iman Abu Hanifa is of the view that if
commodity confirms to the specifications he
cannot exercise the option of seeing.
• This view has been preferred by the jurists of the
Ottoman Empire and Hanafi law. Also, keeping
in view the present day set up of trade and
industry, it will be damaging to allow the client to
reject the goods without assigning any reason
even though the goods are in full conformity with
the required specifications.

22. TIME OF DELIVERY
• It is not necessary in istisna that the time of
delivery is fixed. However, the purchaser may fix
a maximum time for delivery which means that if
the manufacturer delays the delivery after the
appointed time, he will not be bound to accept
the goods and to pay the price.

23. TIME OF DELIVERY
• The price in istisna may be tied up with the time
of delivery, and it will be permissible if it is
agreed between the parties that in the case of
delay in delivery, the price shall be reduced by a
specified amount per day.

24. MODE OF FINANCING
Istisna can be used for providing the facility of financing in
certain transactions, especially in the house finance sector.
If the client has his own land and he seeks financing for the
construction of a house, the financier may undertake to
construct the house at that open land, on the basis of istisna,
and if the client has no land and he wants to purchase the
land also, the financier may undertake to provide him a
constructed house on a specified piece of land.
Since it is not necessary in istisna that the price is paid in
advance, nor is it necessary that it is paid at the time of
delivery, (it may be deferred to any time according to the
agreement of the parties), therefore, the time of payment
may be fixed in whatever manner they wish. The payment
may also be in installments.

25. MODE OF FINANCING
• On the other hand, it is not necessary that the financier
himself constructs the house. He can enter into a parallel
contract of istisna with a third party, or may hire the
services of a contractor (other than the client). In both
cases, he can calculate his cost and fix the price of istisna
with his client in a manner which may give him a
reasonable profit over his cost.
• The payment of installments by the client may start, in
this case, right from the day when the contract of istisna
is signed by the parties, and may continue during the
construction of the house and after it is handed over to the
client. In order to secure the payment of the installments,
the title deeds of the house or land, or any other property
of the client may be kept by the financier as a security,
until the last installment is paid by the client.

26. MODE OF FINANCING
• The financier, in this case, will be responsible for the
construction of the house in full conformity with the
specifications detailed in the agreement. In the case of
any discrepancy, the financier will undertake such
alteration at his own cost as may be necessary for
bringing it in harmony with the terms of the contract.
• The instrument of istisna may also be used for project
financing on similar lines. If a client wants to install an
air-conditioning plant in his factory, and the plant needs
to be manufactured, the financier may undertake to
prepare the plant through the contract of istisna according
to the aforesaid procedure. Similarly, the contract of
istisna can be used for building a bridge or a highway.

27. MODE OF FINANCING
• The modern BOT (buy,operate and transfer)
agreements may also be formalized on the basis
of istisna. If a government wants to construct a
highway, it may enter into a contract of istisna
with a builder. The price of istisna, in this case,
may be the right of the builder to operate the
highway and collect tolls for a specified period.

28. THANKS