SALAM
Presented by:
Muhammad Najeeb Khan
(Shriah Advisor)
Habib Metropolatin Bank Islamic
Banking
At AlHuda CIBE Workshop.
SALAM
Introduction
The basic conditions for a validity of a sale in Shriah are
three:
(1)The purchased commodity must be existing,
(2)The seller should have acquired the ownership of
that commodity,
(3)The commodity must be in the physical or
constructive possession of the seller,
There are only two exceptions to this principle in
Shariah:
(1)Salam
(2)Istisna
• Definition &Concept
• Seller agrees to supply specific goods
to the buyer at a future date in
exchange of an advanced price fully
paid at spot.
• Price is in cash but the supply of
goods is deferred.
Background of Salam
• Before prohibition of interest farmers used
to get interest based loans for growing crops
and harvesting. After prohibition of interest,
they were allowed to do Salam transactions.
This helped them to get money in advance
for their needs.
• During the days of our prophet (S.W.) the
caravans used to get interest based loans for
purchasing the commodities. After
prohibition of interest, they were allowed to
do Salam.
Purpose of Salam
• 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 needs of liquidity
problem.
• To meet the need of traders for import
and export business.
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.
Conditions of Salam
(1) 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.
(2) 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.
(3) All details in respect to quality of goods sold must be
expressly specified leaving no ambiguity which may
lead to a dispute.
(4)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.
(5) 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.
(6)The exact date and place of delivery must be specified in
the contract.
(7) Salam
cannot be effected in respect of
things, which must be delivered at spot. e.g
Salam b/w wheat and barley.
(8)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.
(9) there should be actual delivery of
commodity.
Difference b/w Salam & Murabaha
Salam
• In Salam,
purchased goods
are deffered, price
is paid on spot.
• In Salam price has
to be paid in full in
advance.
Murabaha
•
In Murabaha
purchased goods
are delivered at
spot, price may be
either on spot or
differed.
• In Murabaha price
may be on spot or
differed.
Difference b/w Salam & Murabaha
Salam
• Salam is not executed in
the particular commodity
but commodity is
specified by
specifications.
• Salam cannot be effected
in respect of things,
which must be delivered
at spot. e.g Salam b/w
wheat and barley.
Murabaha
• Murabaha can be
executed in particular
commodity.
• Murabaha can be
executed in those
things.
Delivery of Salam goods
• Before delivery, goods will remain at the
risk of seller.
• After delivery, risk will be transferred to the
purchaser.
• Possession of goods can be physical or
constructive.
• Transferring of risk and authority of use and
utilization/consumption are the basic
ingredients of constructive possession.
Khiyar (option)
• After taking delivery, the purchaser
has the “option of defect” (Khiyare-Aib). Not “option of seeing”
(Khiyar-e-ruyat)
Options available for purchaser after taking delivery
1. Parallel Salam
After the execution of Salam agreement with
one party, buyer
or seller executes another salam agreement with
third party,
Conditions for Parallel Salam:
(a) there must be two different and independent
contracts, these two contracts cannot be tied up
and performance of one should not be contingent
on the other.
(b) Parallel Salam is allowed with third party
only.
Parallel Salam Diagram
1st Salam Seller
2nd Salam Purchaser
Salam
Sale
Parallel
Salam
Delivery of
Commodity
Islamic Bank
Purchaser
Delivery of
Commodity
Islamic Bank
Seller
2.
Agency agreement
•
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.
•
A price must be determined in agency agreement
on which the agent will sell the commodity but
if the price is increased, the benefit can be given
to the agent.
3.
Selling in the market
•
If the bank has expertise in the
relevant commodity, it can sell the
commodity in the market/third party,
Or hold the commodity to fetch a
better market price to maximize its
profit .
4. Promise to purchase
• Before maturity bank can take promise
to purchase from a third party, after
taking delivery, bank will sell the same
commodity to the promissee, and he
will be bound to purchase the same
according to his undertaking.
• This promise should be unilateral.
5. Salam combining with Murabaha
•
Bank can sell the Salam commodity to the seller
of Salam on Murabaha subject to following
terms:
(a) Salam agreement and Murabaha agreement should be
independent, not contingent and with free will of the
parties.
(b) Murabaha will be executed after taking the
possession of Salam goods.
(c) Bank shall assume the risk of loss b/w taking delivery
and execution of Murabaha.
(d) Bank cannot take undertaking from seller of Salam
that he will purchase the Salam commodity from Bank on
Murabaha basis.
Revoking the Salam contract
• After execution of Salam
agreement, it cannot be
revoked unilaterally without
mutual consent of both
parties.
• Penalty for non performance
• Seller can undertake in the Salam
agreement that in case of late delivery of
Salam goods, he shall pay to the charity
account maintained by the bank a sum
calculated on the basis of….% per annum
for each day of default,bank will spend this
amount in charity purpose on behalf of the
client.
• This undertaking is infact a sort of
Yameen/Nazar which is a self-imposed
penalty to keep oneself away from default.
Security
A security in the form of a guarantee, mortgage or
hypothecation may be required for a Salam in
order to ensure that the seller shall deliver the
commodity on the agreed date. In the case of
default in delivery,the guarantor may be asked to
deliver the same commodity and if there is a
mortgage, the buyer can sell the mortgaged
property and the sale proceeds can be used either
to realize the required commodity by purchasing it
from the market or to recover the price advanced
by him.
Scope and potential of Salam
• The Salam sale has the flexibility to cover the
needs of various sectors of people such as farmers,
industrialists, contractors, exporters or traders. It
can be used to meet the capital requirements as
well as to meet the cost of operations.
• Salam sale is suitable to finance the agricultural
operations where the bank can transact with
farmers who are expected to have the commodity
in penalty during harvest either from their own
crops or crops of others, which they can buy and
deliver in case their crops fail. Thus the bank
renders great services to the farmers in their way
to achieve their production targets.
• Salam sale is also used to finance the commercial
and industrial activities, especially in phases prior
to production and export of commodities and that
is purchasing it on Salam and marketing them for
lucrative prices.
• The bank in financing craftsman and small
producers applies the Salam sale by supplying
them with the inputs of production as a Salam
capital in exchange of some for their commodities
to market.