salam based business

1. ASSIGNMENT NO.2
Islamic banking
Salam based business
Shumaila bibi
MBA(B&F)
AW-534689

2. PREFACE
Every student of Master in Business Administration at Allama Iqbal Open University has an
essential request to make report in any of the well reputed organization. The purpose of this
program is to acquaint the students with practical applications of theoretical concepts taught to
them during conduct of their MBA program.
The internship in BankIslami Pakistan is personally arranged by my own resources and the
department gave me a letter for getting this internship.
Really, it was a nice opportunity to have a close comparison of theoretical concept in practical
field, involving the use of primary and secondary data. All the efforts on the way are summarized
in shape of this internship report. This report may depict deficiencies on my part but still it is on
output of student efforts, for which I beg pardon. The output of my internship analysis is
summarized in a shape of internship the contents of the report shows the detail of sequence of
these. The report is concluded with problem and suggestions. I have no words to express my
gratitude to sir Awais for his intellectual guidance without which it could have been rather
difficult for me to complete this report.

3. ACKNOWLWDGEMENT
“To him belongs the dimension of the heavens and the earth, it is he who gives
life and death and hehas power overall things.”
No one can say that I am perfect everyone should admitthat without the help of
Allah and his people a man can’t get anything so, I bow my head before almighty
Allah with gratitude. I am also very much thankfuland presents salute too many
individualswhohave helped me in shaping this report. I am also very much
thankfulto lot of former fellows who took the time and trouble during the last few
days to speak to me aboutthe waythis text could be further improved. We would
like to admitthat we completed this project dueto parentswho pray for our
success. We also wish to express our appreciation to our teachers who help us a
lot and introduce us to new dimensionsof knowledge. And we would like to
acknowledgeall our work to our parents and friends who guided to accomplish
this never forgetting task I am also thankfulto the staff of BankIslami Pakistan. In
the end, we would like to express our sincere and humblegratitudeto Allah
almightythat’s blessings, help and guidancehasbeen a real source of all our
achievements in our life.
SHUMAILA BIBI
ROLL NO. AW534689.

4. EXECUTIVE SUMMARY
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.
Islamic banking system is based on risk sharing, owning and handling of physical goods,
involvement in the process of trading, leasing and construction contracts using various Islamic
modes of finance.

5. Table of content
S #. DESCRIPTION Page #.

6. Salam basedbusiness
Islamic Banking
Islamic banking has been defined as banking in consonance with the ethos and value system
of Islam and governed, in addition to the conventional good governance and risk management
rules, by the principles laid down by Islamic Shariah.
1) Salam based business 1 to 6
2) Islamic banking and finance
3) Major modes of Islamic banking and finance
4) Salam as a mode of financing
5) Cancelation of contract
Practicalstudy 7 to 13
6) History and introduction of BankIslami Pakistan
7) Organization structure of BankIslami Pakistan
8) Vision and mission statement of BankIslami Pakistan
9) Salam financing
10) Data collection method 14
11) SWOT analysis 15 to 16
12) Conclusion 17
13) Recommendations 18
14) Bibliography 19

7. The objective of Islamic banking system is to make a positive contribution to the fulfillment
of socioeconomic objectives of the society in all spheres, including trade, industry & agriculture
etc. In general, is to promote, foster and develop the application of Islamic principles, law and
tradition to the transaction of financial, banking and related business affairs and to promote
investment companies. Islamic banks accept deposits which they can either commit to
investment or general deposits. They also have investment accounts with or without
authorization. Banks engage in investment activities based on Musharakah (equity
participation) Mudarabah or Qirad (agencies), Murabaha, Bai' Salam (post delivery sale) and/or
leasing arrangements especially for equipment. On the lending side, Islamic banks issued a
number of new lending instruments such as Al Muqarada profit bonds to finance large projects
and Al-Mudarabah certificates which were not issued for specified projects. Islamic banks
practice conventional short term financing on a profit/loss basis.
PHILOSOPHY OF ISLAMIC BANKING AND FINANCE
The prohibition of interest by Islam is the base of the development of Islamic Banking
Philosophy. The Islamic system order based on a set of principles constituting the concept and
philosophy as enunciated explicitly in the Quran. This philosophy provides what can be
understood as the Islamic system of social justice. In Islamic law some gain has been prohibited
which are generally fixed or if there is no concept of risk shearing. Conventional Finance
believes in return without risk, whilst Islamic Finance prohibits the latter and enforces the
opposite.
MAJOR MODES OF ISLAMIC BANKING AND FINANCE
Following are the main modes of Islamic banking and finance:
1) Murabaha
2) Ijara 1.
3) Ijarah-Wal-Iqtina
4) Istisna
5) Bai Muajjal
6) Mudarabah
7) Musharakah

8. 8) Bai Salam
9) Qard Hassan (Good Loan)
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).
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
2.
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

9. be in the nature of money. Fully advanced payment is paid by institutions and
specified goods are received on pre agreed date.
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”
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 farmer’s 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.
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 3.
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.

10. 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, shariah define the strict rules related to this so that the right of both
the parties are to be protected equally. For this purpose some conditions defined by shari‟ah are
summarized below:
1) The first and the most important condition of Salam contract is the full payment which is
given by the seller or financial institutions.
2) 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.
3) The third condition of Salam contract is that, the contract is not based on particular
commodity or product of some particular farm or field.
4) The fourth condition specifies that the quality of the commodity is fully expressed or
mentioned in the contract.
5) The fifth condition specifies that both the parties are clearly agreed upon the quantity of
the commodity.
6) The sixth condition specifies that on what time, place, date the commodity would be
delivered is clearly defined in the contract.
7) The seventh condition specifies that Salam contract cannot be affected in respect of
things which must be delivered at spot.
8) 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.
4.
Risks in Salam

11. 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
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
5.
Cancellation of Salam contract:

12. 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.
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
6.

14. Bank Islami-The Idea:-
The idea of Bank Islami was conceptualized by Jahangir Siddiqui & Company
Limited and DCD Group in late 2003. The idea was formulized by Mr. Hassan A.
Bilgrami, appointed as Adviser to the sponsors on March 16, 2004. A detailed
business plan was then prepared and a formal application was submitted to the State
Bank of Pakistan on May 26, 2004. On September 26, 2005, Dubai Bank joined the
Sponsors and became one of the founding shareholders of Bank Islami by investing
18.75% in the total Capital.
Accreditation by State Bank of Pakistan:
The State Bank of Pakistan issued a No Objection Certificate
on August 19, 2004 and Bank Islami Pakistan Limited, the
second full-fledge Islamic Commercial Bank in Pakistan, was
established on October 18, 2004 in Pakistan. Bank Islami
Pakistan Limited was the first Bank to receive the Islamic Banking license under
the Islamic Banking policy of 2003 on March 31, 2005. The Bank focus on Wealth
Management as the core area of business in addition to Shariah compliant Retail
Banking products, Proprietary and Third party products, and integrated financial
planning services.
Initial Public Offering of Bank Islami:
Bank Islami Pakistan Limited made a public offering of Rs.
400 Million, at par, from 6th to8th March. The Initial public
offering (IPO) of Bank Islami received great response from
the general public as the applications received were 9 times
higher than offered, fetching nearly Rs. 3.5 Billion, against
7.

15. The demand of Rs. 400 Million.
Inauguration and Network Expansion:
Bank Islami started its operations on 7th April 2006 with its first branch in SITE,
Karachi. The Bank had 10 branches, nine in Karachi and one in Quetta by the end of
2006. By the end of year 2007, its branch network grew to 36 branches in 23 cities.
In 2008, the Bank opened66 new branches nationwide which expanded its network
to 102 branches in 49 cite. This gives Bank Islami the distinction of having the
fastest expanding network in Pakistan.
Values Statement:
Bank Islami is strongly committed towards its core values of:
 Product authenticity
 Customer focus
 Meritocracy
 Integrity
 Team work
Vision Statement:
“The Vision of Bank Islami is to be recognized as the leading Authentic Islamic
Bank”
Mission Statement:
The Mission of Bank Islami is to create value for our stakeholders by offering
Authentic, Sharia Compliant and Technologically advanced product and services.
We differentiate ourselves through:
 Authenticity
 Innovation
8.

16.  Understanding our Clients need
 Commitment to excellence, and
Fast, efficient and seamless delivery of solution. As a growing institution, the foundation for our
performance lies on our human capital and Bank Islami remains committed to becoming an
employer of choice, attracting, nurturing and developing talent in a transparent and performance
driven culture.
The Board of Directors of BankIslami:
The board of directors of bank Islami comprises of eminent representatives from the Bank
and its Sponsors. These include Chief Justice(R) Mahboob Ahmed (Chairman),
Mr. Ahmed EIshall, Mr. Ahmed Randeree, Mr. Ali Raza Siddiqui, Mr. Hasan A. Bilgrami, Mr.
Shabir Ahmed Randeree and Mr. Mohamed Al Amiri.
Product, services and departments:
Corporate banking:
 Account services
 trade services
 Working capital finance
 project finance
 Musharakah financing
 Mudarabah financing
Departments:
BankIslami divided into different departments:
1. Credit department
2. Operation department
3. Consumer banking
Credit department:
Credit Department is also called Corporate Banking Group. Bank is offering different type of
financing in her branches. This type of financing are based upon Islamic mode of financing. Just
like MUSKUN home financing, Islami Auto Ijara-new vehicle and same with imported vehicles.
9.

17. 10.
Organizational structure of BankIslami limited Pakistan

18. There are main two types of Financing modes in bankislami Mudarabah and Musharakah. Other
modes of financing are divided in two categories Short term financing and long term financing.
Working Capital Finance (shot term financing):
At BankIsami, we understand that your business needs constant access to low cost and flexible
financing, in order to meet day-to-day funding needs. Our teams of experienced Relationship
Managers with wide sector experience offer you effective cash flow management by way of
financing arrangements suitably structured to your needs and your risk profile. Cash is the
lifeline of your business. Let your business have a blooming & prosperous life with our Working
capital finance facility. To fulfill your working-capital financing requirements, BankIslami offers
a wide range of products as follows.
Salam Financing:
Salam is a sale, whereby, the seller undertakes to supply some specific commodity to the buyer
at a future date in exchange for an advanced price fully paid on the spot. As a matter of principle,
the sale of a commodity which is not in the possession of the seller is unlawful. Thus, the
practice of Salam is legalized as an exception and is allowed under certain term and condition.
Salam is allowed for commodities only which are homogeneous and fungible in nature i.e. every
unit of the commodity should be identical and substitutable in nature e.g. sugar, rice, wheat etc.
Therefore, Salam is an ideal mode for financing for agricultural concerns. Salam financing can
also fulfill all working capital requirements of manufacturers/traders dealing in homogeneous
commodities.
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: 11.

19.  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
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) 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:
 taken by daily index price (newspaper)
 always less than the index price
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
12.

20.  place of delivery
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 the notice the buyer
send some o f his field managers for the inspection of that commodity. The delivery
notice includes:
 delivery date
 place of delivery
 description of the goods
 additional remarks
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 the goods are received
by the bank.
13.

21. RESEARCH
METHODOLOGY/DATA
COLLECTION METHOD
The methodology reported for collection of data is primarily as
well as secondary data. The biggest source of information is my personal observation while
having discussion with staff. Formally arranged interviews and discussions also helped me in this
regards.
PRIMARY DATA COLLECTION:
Formal interviews.
Informal interviews.
The formal interviews include people from the top management and the informal interviews
included people from middle and lower management.
SECONDARY DATA COLLECTION:
Internet search:
www.google.com
Newspapers.
References books and other literature.
Annual reports of the organization.
LIMITATIONS
One of the major limitations while carrying out this research was the lack of co-operation on
the part of the management of the BankIslami Pakistan limited in providing the data regarding
the organization and its policies.
14.

22. SWOT ANALYSIS
The acronym SWOT stands for a firm’s internal strengths and
weaknesses and its external opportunities and threats. The
purpose of such analysis is to build on company’s strengths in
order to exploit opportunities and counter threats and to
correct company’s weaknesses. On the basis of environmental
analysis of BankIslami, the structural analysis of fast food
industry, and the assessment of internal resources of the company, following strengths,
weaknesses, opportunities and threats are there for BankIslami Pakistan limited:
Strengths:
 Bank Islami Pakistan Limited is conducting its business in an Islamic
Shariah Compliant manner following puritan Islamic rules.
 As bank made on name of Islam in Pakistan so, it have advantage of
religious position in a country.
 Saving can be mobilized and increasing deposits of banks using as charities and zakat
fund schemes etc
 It has a competitive advantage of doing less marketing as compassed to conventional
banking and as a result better cost control.
 For speculative motive less money is used due to which there is reduction in volatility in
investment and chances of investment failure.
Weakness:
 Bank Islami Pakistan Limited offers its credit services in only a
limited number of cities. Many branches of BIPL are not offering
credit facilities and most of the financing is done in urban areas,
while little attention is paid towards the rural areas, which have
potential of a lot of customers.
 Bank is not offering financing schemes for farmers, especially in agrarian cities.
 People have incomplete knowledge about Islamic banking and thus they cannot easily
15.

23.  Differentiate it from conventional banking. The bank should create awareness in people
about how Islamic banking is different from conventional banking and what are the
benefits of Islamic banking instead of conventional banking.
Opportunities:
 Bank can offer special financing schemes for farmers especially in
agrarian cities.
 Previously and even now many people were not in the favor of
conventional banking system due to Riba BIPL provides a chance to people to do Riba
free banking. People are now switching from conventional to Islamic banking. This
increasing trend towards Islamic banking is a grand opportunity for BIPL.
 BIPL offers value added services and products to customers.
 BIPL is currently a local bank, it needs to go multinational. BIPL should start opening
branches all around the world in the world‘s biggest financial markets like USA, UK and
UAE.
Threats:
 Usually people have a mindset that there is no
difference between Islamic banking and conventional
banking and Islamic banks are deceiving under the
name of Islam. These wrong perceptions need to be removed otherwise they can also
cause problems for BIPL.
 Due to terrorist activities in Pakistan the economy is moving very slow. It means lessinv
estment and as a result low financing demand.
16.

24. 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.
Islamic banking system is based on risk sharing, owning and handling of physical
goods, involvement in the process of trading, leasing and construction contracts
using various Islamic modes of finance. Profit has been recognized as reward for
the use of capital and Islam permits gainful deployment of surplus resources for
enhancement of their value. However, along with the entitlement of profit, the
liability of risk of loss on capital rests with the capital itself; no other factor can be
made to bear the burden of the risk of loss. As such, Islamic banks deal with asset
management for the purpose of income generation. They will have to prudently
handle the unique risks involved in management of assets by adherence to best
practices of corporate governance. Once the banks have stable of Halal income,
depositors will also receive stable and Halal income. This is what bank Islami is
doing; rather it is quite successfully doing so.
17.

25. Recommendations
Here I am putting some suggestions and recomendations, which will in my point of viewenable
the bank to compete with other banks more effectively & efficiently.
 The BIPL should expand its Branch network throughout Pakistan especially in rural areas
and foreign countries as well.
 Bank can offer special financing schemes for farmers especially in agrarian cities.
 There is a need of a separate information desk of BIPL in each branch that is essential
to provide complete information about Islamic banking and all the products, services and
facilities provided by the Bank to potential or walk-in customers.
18.

26. REFERENCES/BIBLIOGRAPHY
For successfulcompletion of this project we have utilize different available resources from which we
have obtain required data. This resources lie in both digital and analog form. Most of the information is
obtain from internet, while a visit to organization is also made to get further information. We are thankful
to company management who had welcome and cooperate with us. Resources which are consulted
discussed below.
References:
 Mohammed, Naveed (2015-02-08). "A History of Islamic Finance". Islamic Finance.
 Subhi Y. Labib (1969), "Capitalism in Medieval Islam", the Journal of Economic
History29 (1), p. 79–96 [81, 83, 85, 90, 93, 96].
 Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", Historical
Materialism 15 (1), pp. 47–74, Brill Publishers.
 Mughal, Muhammad Zubair. "Funding Sources for Islamic Microfinance
Institutions".alhudacibe.com. AlHuda Centre of Islamic Banking & Economics.
Retrieved 6 August 2015.
 Dar, Humayon A. Rizwan Rahman, Rizwan Malik and Asim Anwar Kamal, ed. 2012.
Global Islamic finance report 2012. London: Edbiz Consulting.
 Hayat, Usman (18 February 2015). "Is the Islamic Finance Industry a Success or
Failure?". Enterprising Investor. CFA Institute. Retrieved 7 August 2015.
 Mazid, Muhammad Abdul (2012). "Islami Bank Bangladesh Limited". In Islam,
Sirajul; Jamal, Ahmed A. Banglapedia: National Encyclopedia of Bangladesh (Second
ed.). Asiatic Society of Bangladesh.
19.

27. 19.