BAI SALAM

SALAM DEFINED

Salam is the first exception to the rules of sale whereby the seller
undertakes to supply some specific goods to the buyer at a future
date in exchange of an advanced price fully paid at spot.

Goods existence can’t be ascertained at the time of contract.

Here the price is fully paid at spot, but the supply of the purchased
goods is deferred. The buyer is called “rabb-us-salam”, the seller is
“muslam ilaih”, the cash price is “ra’s-ul-mal” and the purchased
commodity is termed as “muslam fih.”
 CONDITIONS OF SALAM

 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.

 In the absence of full payment, it will be tantamount to sale of a

debt against a debt which is expressly prohibited by the Holy
Prophet.

 Moreover 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.
 CONDITIONS OF SALAM

 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.

 A security in form of a guarantee, mortgage or hypothecation

may be required for a Salam in order to ensure that the seller
delivers.

 Price in Salam is generally lower than the price in spot sale. The
period should be long enough to affect prices.
 PARALLEL SALAM

 After purchasing a commodity by way of Salam, the financial

institution can sell it through a parallel contract of Salam for the
same date of delivery. The period of Salam in the second
parallel contract is shorter and the price is higher than the first
contract. The difference between the two prices shall be the
profit earned by the institution.

 In an arrangement of parallel Salam there must be two different

and independent contacts; one where the bank is a buyer and
the other in which it is a seller. The two contracts cannot be tied
up and performance of one should not be contingent on the
other.
 PARALLEL SALAM

 A Salam arrangement can not be used as a buy back facility

where the seller in the first contract is also the purchaser in the
second. Even if the purchaser in the second contract a separate
legal entity but owned by the seller in the first contract; it would
not tantamount to a valid parallel Salam agreement.
 SIGHT BILL NEGOTIATION

 Exporter does not wish to wait for the payment to be received

from the LC issuing bank and needs an instant Liquidity.

 The Islamic Bank can enter into a Salam transaction with the
customer whereby the Bank will buy FCY from the customer
against PKR at the prevailing market price.

 The FCY will be delivered on a specified future date and the PKR
will be paid by the bank full in advance (Spot). The Delivery of
FCY should not be contingent upon arrival of the LC proceeds.
SIGHT BILL NEGOTIATION

 No consideration with respect to the delivery date of FCY will

affect the conversion rate of FCY into Pak Rupee.

 Bank may ask the exporter to assign its receivable (under this LC)
to the Bank.
TRADE FINANCE PRODUCTS

 Import Financing through “Import Murabaha & Musharakah”

 Sight & Usance LCs - Shari'ah Compliant alternative

 Shari'ah Compliant alternative of Bill Discounting – Dollar Salam

(for Sight Bills) & Murabaha (for Usance Bills)

 Islamic Export Refinance scheme – Part I & Part II

AGRICULTURAL FINANCING

Agricultural finance is a highly specialized field.

 An Islamic Bank may sell di-ammonium phosphate (DAP), urea,

pesticides and seeds to its clients on a Murabaha basis, which
means that the bank will purchase agricultural inputs and sell them
to farmers.

 In other words, the bank buys and resells agricultural input with
profit instead of a conventional banking transaction, where the bank
lends money to the client to buy products.
AGRICULTURAL FINANCING

 The borrower can make a lump sum repayment or opt for

installments.

Other than Murabaha, Bank may offer Ijarah for agricultural

financing in the case of movable property, like tractor and other
farm equipment. Moreover, the bank may offer Diminishing
Musharakah and Salam products.
THANK YOU