Deferred Delivery Sale Contract

Contract of Salam/Salaf
 Meaning of Salam

↖ Literally: means giving (‗ita‘), advance

(taslif)pre-payment
↖ Technically: “is a sale transaction in which the price is
specified amount of a commodity deliverable at an agreed
upon future time is paid immediately upon signing the
contract .
▶ 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

Ex: RM 1000 now - 500kg of rice type A upon harvesting time.

 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.
▶ Salam/Salaf was practiced even in pre-Islamic period but
without specifying measure, weight and time of delivery.
 Permissibility of this
contract

↖ Hadith says: “who ever engages in a salam, let him specify a

known volume or weight, and a known term of deferment” .
(by six major narrators).
Ibn Abbas: the following verse refers to Salam:
“O ye who believe! When ye deal with each other, in transactions
involving future obligations in a fixed period of time, reduce
them to writing Let a scribe write down faithfully as between
the parties…” (2:282).
▶ By using salam contract, the buyer may benefit from its
permissibility as well, by acquiring the commodity at a
price below the market price .
▶ Salam transaction occurs if the buyer has paid the
purchase price to the seller in full at the time of sale.
This is necessary so that the buyer can show that they
are not entering into debt with a second party in order to
eliminate the debt (Sale debt by debt ) Al kali bil kali .
▶ Salam - a mechanism that ensures the seller has the
liquidity they expected from entering into the
transaction in the first place. If the price were not paid
in full, the basic purpose of the transaction would have
been defeated.
 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.
▶ It 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.
Maliki School: can be postponed up to three days.
The purchaser is not allowed to make his debt on the seller as the price of
Salam goods. Otherwise it amounts to exchange of obligation for
obligation, which is forbidden.
▶ (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.
 Cont..

3- All details in respect to quality of goods sold must be

expressly specified , 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.
 Cont..
6-The exact date and place of delivery must be
specified in the contract.
7- The sold commodity should be as an obligation on the
seller . Salam involves commodity that are not specific .
8- Hanafis: commodity should be present in the market from
the time the contract is concluded until the delivery is made.
To make sure that the seller is capable of delivery if his own
crops are destroyed by causes beyond his control.
- Majority of schools: it is enough if commodity is available
in the market during the time of the delivery.
9- There should be actual delivery of commodity.
 An Important Issue Related
To Salam

No reselling to a third party before it is handed over to

him from the original seller. Hadith says: “Whoever
buys foodstuff (or anything), he should not sell it (to
others) before he receives it, or possess it”.
● The idea behind such a ‘prepayment’ requirement has
to do with the fact that the objective in a Ba’y Salam
contract is to help needy farmers and small businesses
with working capital financing.
 Difference b/w Salam &
Murabaha
Murabaha
Salam
▶ In Salam, purchased ▶ In Murabaha purchased
goods are deferred , goods are delivered at
price is paid on spot. spot, price may be either
on spot or differed.
▶ In Murabaha price may be
▶ In Salam price has to be on spot or defrered.
paid in full in advance.
▶ Salam is not executed in
the particular commodity ▶ Murabaha can be
but commodity is executed in particular
specified by commodity.
specifications.
 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.
 Options available for the
purchaser after taking
delivery

▶ After taking delivery, the purchaser has the “option of

defect” (Khiyar-e-Aib). Not “option of seeing”
(Khiyar-e-ruyat)
▶  After execution of Salam agreement, it cannot be
revoked unilaterally without mutual consent of both
parties.
 Parallel Salam

▶ After the execution of Salam agreement with one

party , 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.
 Salam in currencies

▶ The majority of jurists do not allow Salam in gold,

silver, currencies or monetary units, although a
few jurists have allowed it and, as such, a few
Islamic banks have been using Salam in currencies
as an alternative to bill discounting. Gold, silver
and other metallic money like Fulus of copper or
other metals can be used for some purposes other
than for making payments; hence, they can be
traded keeping in mind the Sharıah principles.
However, paper money can be used only in
payment of a price, it cannot serve as a
commodity to be sold
Manufacture contract
Contract of Istisna’
- Literally :The word istisna’ derived from the Arabic
verb “istasna’a” which is mean to request someone
to manufacture an asset.
Technically: Bay’ al-istisna’ is defined as a
contractual agreement with manufacturer to
produce items with specified description at a
determined price, and manufactured from his own
materials with his own effort.
Istisna' is “a contract with a manufacturer who provides
both raw materials and labour to manufacture a
specifically defined product for a determined price and
deliver it at a specific time.”
 EVIDENCE
▶  According to jurist, the legality on an istisna’
contract is established from different legal
sources such as the Sunnah, ijma’, qiyas and
istihsan.
▶ There is no differences of opinion on its
permissibility. It clearly can be seen from
hadith: Indeed that the Prophet s.a.w booked
the making of a golden ring
▶ The istisna’ contract is legitimate on the basis
of the people’s customary practice of this
contract in all periods of time without any
objection, which in turn constitutes a legal
consensus.
 Some differences between
Istisna’ and other contracts

↖ In a sale contract- in contrast to Istisna’- there is no labour.

↖ In a sale contract non-existing thing cannot be sold
↖ In Istisna' – in contrast to Ijarah - the manufacturer makes the
required goods with his own material.
↖ In murabahah the bank buys and resells the property while in
istisna' the bank may finance the manufacturing of a
commodity and sell that commodity to the buyer.
 Legality Of Istisna’

Hanafis: It is based on Istihsan

It includes both labor (manufacture) and commodity
so it is (‘ain)specific thing
while Salam includes commodity only, therefore
it is (dayn) obligation

Majority of shcools : Istisna’ similar to Salam (with

same conditions)
The Conditions of
Istisna’
1) Nature, type, quantity... of the item to be
manufactured should be known.
2) Istisna’ is valid with respect to those goods which are
customarily sold based on prior order
3) Date of delivery of manufactured asset should be known
4) The process of manufacturing should be stated in
contract
5) No bargaining no unilateral cancellation of contract after
it was signed unless if asset contradicts with order
6) Penalties can be stipulated in contract in
case if either party does not fulfill its
obligation, however, it must be according to
the damages caused (Unavoidable events are
excluded).
Hadith says: “Muslims are bound by their
conditions”.
7) Payment can be either deferred or paid by
instalments
 CONDITION OF The Object (product )
In ISTISNA’

▶ The object to be manufactured must be precisely determined in

its type, kind, quantity and quality, considering that istisna’
contract is a form of sale of the non-existence.
▶ The object of an istisna’ contract must be something that the
people are familiar with to contract it on the basis of manufacture
and construction process.
▶ •If the subject matter does not conform to the contractual
specifications at the time of delivery, the purchaser has the right
to either refuse or accept it.
Conditions of time of delivery

▶ The best view to fix the delivery time to avoid dispute

even though it is not a requirement.
▶ The time of delivery of the manufactured object must
be clearly specified to avoid uncertainty and ambiguity
which may lead to a later dispute among the transacting
parties.
▶ The customer permitted to penalize the manufacturer if
the latter fails to deliver the work on specified date.
 Conditions of price

▶ Price of istisna may be in the form of money,

commodity and usufruct.
▶ Price of istisna may be spot and differed therefore
istisna is applicable where Salam is not applicable. Price
of istisna is can be paid in installments. The
installments may be tied up with different stages of
projects.
 DIFFERENCES BETWEEN
BAY AL-ISTISNA’ BAY’ AL-SALAM

▶ The subject of istisna’ is always a thing which needs

manufacturing.
▶ In Salam the subject can be anything, whether need manufacturing
or not Time of delivery of istisna’ product does not have to Time of
delivery is an essential part of the sale be fixed .
▶ The contract can be cancelled before the manufacturer starts
working.
▶ In Salam the contract cannot be cancelled unilaterally.
In Istisna’the seller (client) may involve a third party to manufacture.
▶ This gives a green light to Islamic Banks to enter a contract of istisna’ with a
buyer and a manufacturer simultaneously through two separate contracts
(parallel istisna’)
 Two major options

1) option of defect ‫( ﺧﯿﺎر اﻟﻌﯿﺐ‬real

defect)
2) option of desired description
‫( ﺧﯿﺎر اﻟﻮﺻﻒ‬different color...)
MODERN APPLICATIONS

▶ In contemporary Islamic finance, an istisna’ contract is

applicable to various industrial productions which can
be constructed or manufactured and supervised by
specification.
▶ Customers are able to apply for the istisna’ financing
facility and other product offered by Islamic bank using
istisna’ contract such as: Parallel istisna’ (Istisna’
Mawazi) , Sukuk istisna’
 (‫)اﻟﺼﺮف‬
x ch a n ge
S a r f = E
A l -
Gold and Silver were Money

▶ From time immemorial gold and

silver were used as moneys.
▶ While they are a store of wealth
as they have their own genuine
value, they can also become a
medium of exchange, and units of
account.
 Contract of
Currency (Exchange)

▶ Al-Sarf : is a sale of price for

price
▶ exchange transaction is
essentially an agreement to
exchange one currency for
another at an agreed exchange
rate on an agreed date.
Permissibility of CX
transactions

In Islamic finance, there is a general

consensus among Islamic scholars on the
view that currencies of different countries
can be exchanged on a spot basis at a rate
different from unity.
 The divergence of views

▶ The divergence of views on the permissibility of

currencies exchange contracts can be traced primarily
to the issue of existence of the following elements; Riba
(usury).
▶ Gharar (excessive uncertainty).
▶ Qimar (speculation/gambling).
 Regarding the comparison with Riba,
Some jurists compare paper currencies with gold and silver. based on hadith "Sell
gold for gold, silver for silver... in same quantities on the spot; and when the
commodities are different, sell as it suits you, but on the spot."
However, the case of exchange involving paper currencies belonging to different
countries, the worth of paper currencies cannot be identified or assessed unlike gold
and silver which can be weighed. Hence, the Shari’ah injunctions for Riba prohibition
are not applicable to paper currencies.
Such exchange would be permissible as long as it is free from any injunction regarding
the rate of exchange and the manner of settlement.
 Regarding Gharar and
speculation

▶ The prohibition of futures and forwards involving exchange of currencies is justified

by the fact that such a contract involves sale of a non-existent object or of an
object not in the possession of the seller.
▶ Some recent scholars have opined that futures, in general, should be
permissible, because the efficient cause, that is, the probability of failure to
deliver was quite relevant in a simple, primitive and unorganized market.
▶ However, this should be no longer cause for concern in today’s organized
futures markets where the standardized nature of futures contracts and
transparent operating procedures on the organized futures markets are
believed to minimize this probability of failure.
▶ Fom the Shari’ah viewpoint, the problem with the
above structures arises when the parties involved want
to exchange currency sometime in future but already
fixing a rate which is fixed today while the contract is
sealed today.
▶ This contravenes to the basic Shari'ah rules governing
the exchange of currency (Bai` Sarf).
 The transaction must be on
the spot.

▶ In Bai` Sarf, it is a requirement for an exchange which

involves two different currencies to be transacted on
spot basis. Hence it is prohibited to enter into forward
currency contracts whereby the execution of a
deferred contract in which the concurrent possession of
both the counter values by both parties does not take
place.
In order to minimize the risk of uncertainty of prices in
the future, forwards, futures, options and
swaps(exechanges) markets for currency-trading have
also emerged for Islamic banks although the general
ruling of Shari'ah scholars is that hedging (precaution) is
not permissible. Yet, these objections may be arguable,
since hedging (precaution) helps to eliminate Gharar by
enabling the importer to buy the needed foreign
exchange at the current exchange rate
▶ Most of the Islamic financial contracts provided by
Islamic banks will be exposed to foreign exchange
fluctuations arising from general FX spot-rate changes in
foreign operations and the resultant foreign currency
receivables and payables.
▶ Islamic banks can charge fees based on various Islamic
contracts and to curb (control ) speculation and misuse,
hedging could be confined to foreign exchange
receivables and payables related to real goods and
services only.
 Conditions Of Exchange
1) Immediate possession of exchanged prices (before parting)
The parties should take mutual possession of the prices during
the session of the contract .
3) No postponement is allowed for ribawi items because it will
lead to Riba al-Fadhl as stated in Hadith,there should not
be any deferment in the exechange of one of the currencies.
The principle concerning money is that it cannot be sold or
bought on credit but on a cash basis .
4 ) When both of the moneys exchanged are of the same kind
then the equality is necessary . unequal exchange of gold for
silverand vice versa is allowed provided it is on the spot .
5-The currency exchange contract is binding . Only the option
of defect is allowed , but NOT option of condition.
THE END