TYPE TOPIC TITLE

Istisna & Salam

Concepts & Process
‫)عقد ا لسلم( ‪Salam‬‬
 Presen
SALAM
Introduction

• A Salam transaction is the purchase of a

commodity for deferred delivery in exchange
for immediate payment.

• Price is fully paid at spot while the delivery of

goods is deferred.

• Salam is also known as ‘Salaf’

 
 Presen
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 need of Liquidity Problem.

• To meet the need of traders for import &

Export business.

 
 Presen
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, 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.

• Only those goods can be sold through a Salam contract

in which the quantity and quality can be exactly
specified ‫ت‬( ‫)مثليا‬, 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.
 Presen
Conditions of SALAM
• All details in respect to quality of goods sold must be
expressly specified leaving no ambiguity which may
lead to a dispute.

• 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.

• 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.

• The exact date and place of delivery must be specified

in the contract.  
 Presen
Conditions of SALAM
• 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 at spot. e.g Salam b/w wheat and
barley.

• 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.

• There should be actual delivery of commodity.

• It is not permissible that the subject matter of Salam

(‫ )مسلم ف يه‬is increased due to delay in its delivery.
Application of Salam
 Presen
Application
• Working capital needs of the industry (such
as textile, sugar mills etc.)

• Financing Agricultural operations e.g. sugar ,

wheat

• Export Bill negotiation

 Presen
Process of Bai Salam
Islamic Alternate for Conventional Sight Bill Discounting
• Exporter comes to the bank and a formal approval will be
sought as per bank policy.
• MAFPC – Master Agreement for Purchase of Foreign Currency,
is signed b/w Bank and Exporter.
• Whenever the Exporter has need for PKR, he will bring his
Export bill to the bank.
• The banks Treasury, based on Market price will set a spot rate
range in its rate sheet.
• The branches CANNOT quote any rate other than the SPOT
rate range provided by the treasury.
• After Finalization of the deal, the bank purchases the Foreign
Currency to be delivered at a future date (due date) and pay
the price in PKR as per the agreed rate.
• The Customer will deliver the foreign Currency to The Bank,
but will not be contingent to the arrival of the LC proceeds.
‫)عقد ا""الستصناع( ’‪Istisna‬‬
 Presen
ISTISNA’ (‫)استصناع‬

• Definition

“ It is an order to a producer for manufacturing a

specific commodity for the purchaser”.
 
 Presen
Conditions of ISTISNA’

• The subject of Istisna’ is always a thing which

needs manufacturing.

• Manufacturer uses his own material.

• Quality & Quantity should be agreed in

absolute terms.

• Purchase price should be fixed with mutual

consent.

 
 Price Presen
of ISTISNA’

• Price of Istisna’ may be in the form of money,

commodity and usufruct.

• Price of Istisna’ may be SPOT and DEFFERED,

therefore Istisna’ is applicable where Salam is
not applicable.

• Price of Istisna’ can be paid in installments.

• The installments may be tied up with different

stages of projects.
 Presen
Revoking of ISTISNA’

• The Contract of Istisna’ can be cancelled

unilaterally before the manufacturer starts
working.

• Once the works starts, Istisna can not be

cancelled unilaterally.
 Presen
Difference
Difference between SALAM & ISTISNA’
ISTISNA’ SALAM
•The subject of •Manufacturing is
istisna’ is always a not a condition for
thing which needs the subject of
manufacturing. salam.
•The price in istisna •The price has to be
does not necessarily paid in full in
need to be paid in advance.
full in advance.
 Presen
Difference
Difference between SALAM & ISTISNA’
ISTISNA’ SALAM
•Time of delivery •Time of delivery is
does not have to be an essential part of
fixed the sale

•The contract can •The contract

be cancelled before cannot be cancelled
the manufacturer unilaterally.
starts working.
 Presen
Difference
Difference between SALAM & ISTISNA’
ISTISNA’ SALAM
•The manufacturer •The material is
either uses his own provided by the
material customer and the
manufacturer uses
only his labor and
skill.
 Presen
Difference
Difference between SALAM & ISTISNA’
ISTISNA’ SALAM
•It is permissible to •It is not
include a penalty permissible to
clause in istisna’. include a penalty
clause in Salam.
 Presen
Security of Istisna‫استصناع‬

• Security in form of a guarantee, mortgage or

hypothecation may be required for Istisna in
order to ensure that the manufacturer shall
deliver the commodity on the agreed date.
 TimePresen
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. In case of
delay in delivery, the purchaser will not be
bound to accept the goods and pay the price.

• In order to ensure that the goods will be

delivered within the specified period, some
modern agreement of this nature contain a
penalty clause to the effect that in case the
manufacturer delays the delivery after the
appointed time,the price shall be reduced by
a specified amount per day.
 Presen
Delivery of Goods
• Before delivery, goods will remain in the
ownership 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.
 Presen
Potential of ISTISNA’

• The client can get finance for raw material,

working capital and other overhead expenses
by the execution of Istisna agreement.

House financing, import and export products

can be easily designed on Istisna basis.
ISTISNA’ :Presen
Mode of Finance

• House Financing

• Project Financing

• Export
 Presen
Example: ISTISNA’
•A glass company wants financing.

•The Bank does Istisna agreement with the company in

which the company is the manufacturer and The Bank
is the purchaser.

•The Bank gives cash to the company as a sale price.

•After completion of the manufacturing, The Bank

takes delivery of the product.

•The Bank appoints the company as its agent to sell

the product on cash or credit basis.

•The Bank receives the sale proceeds from the

company.
 Presen
ISTISNA’

ً ‫جزاكم هللا خيرا‬

 Salam & Istisna-
Background

In Islamic Shariah there are three conditions for Valid sale:

1. Purchased commodity should have come into existence. (eg. If a person

says that I have bought the cloth that will be manufactured in your
factory, then this sale will be invalid)
2. Even if the commodity has come into existence but has not come under
the ownership of seller then the seller can’t sell it forward and if he does it
will be an invalid sale.
3. Only ownership will also be not enough rather the commodity should
also be under physical possession or constructive possession of the seller.

This is a general rule . But in Islamic Shariah there are just two
exceptions to this rule- Salam & Itisna
 SALAM
• Purchase of a commodity for deferred delivery in exchange for
immediate payment according to specified conditions.
• The following two conditions are a must:

• Price is immediately delivered in cash.

• Supply of goods is deferred.
 Purpose of Salam
• To finance someone who is in need to grow something or
acquire something for further sale.
– To meet the need of small farmers who need money to
grow their crops and to look after their family up to the time
of harvest.
– To meet the need of traders for import and export business.
• The buyer also enjoys a lower purchase price, since he pays in
advance.
• Rasu’malissalam
• Mu’salam Fai.
• Mu’salam Ilaih.
 Conditions of Salam
Capital
• Buyer must pay the price in full to the seller at the time of
effecting a sale. Cash
(Currency, Amount, Payment Mode)
• Cash
(Currency, Amount, Payment Mode) Fungible assets
(Kind, Type, Specification, Quantity)
• The basic wisdom for allowing Salam is to fulfill the instant
need of the seller.
 Conditions for Salam
(Al-Muslam Feeh)
• Only those goods can be sold through a Salam contract in
which the quantity and quality can be exactly specified I.e.
precious stones cannot be sold on the basis 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.
• All details in respect to quality of goods sold must be
expressly specified leaving no ambiguity which may lead to a
dispute.
 Conditions for Salam
(Al-Muslam Feeh)
• 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 only meaning what is normally weighed
cannot be quantified and vice versa.
• 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 at spot e.g. Currency, Gold
• The commodity for Salam contract should remain in the
market right from day of contract up to the date of delivery or
at least till the date of delivery.
• The time of delivery should be at least fifteen days or one
month from the date of agreement. Price in Salam is
generally lower than the price in spot sale. The period
should be long enough to affect prices. But Holy Prophet
SAW did not specify any minimum period for the validity
of Salam. It is all right to have a earlier date of delivery if
the seller consents to it.
• Since price in Salam is generally lower than the price in
spot sale; the difference in the two prices may be a valid
profit for the Bank.
• A security in form of a guarantee, mortgage or
hypothecation may be required for a Salam in order to
ensure that the seller delivers.
• The seller at the time of delivery delivers commodities and
not money to the buyer who would have to establish a
special cell for dealing in commodities.
 Benefits
• 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.
• The institution can obtain a promise to purchase from a
third party. This promise should be unilateral from the
expected buyer. The buyer does not have to pay the price
in advance. When the commodity is received by the
institution, it can be sold at a pre-determined price to a
third party according to the terms of the promise.
 Parallel Salam
• In an arrangement of parallel Salam by the bank, the bank
may conclude a Separate parallel Salam contract with a third
party of a commodity whose description meets the
description the description of the goods to be acquired
through the first Salam Contract.

• 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.
 SALAM as Mode of Financing
• Agricultural Finance
• Export Finance
• Working Capital Finance
• Inventory Finance
• Operational Cost Management
• Liquidity Management-Short term financing
ISTISNA’
 ?’What is Istisna

• Istisna’ is a sale transaction where commodity is

transacted before it comes into existence.
• It is an order to producer to manufacture a specific
commodity for the purchaser.
 Difference between Istisna’ & Salam

ISTISNA’ SALAM
• The subject on • Subject can be
which transaction either
of Istisna’ is based,
manufactured or
is always a thing
which needs to be natural.
manufactured. • Price has to be
• Price must be paid in full in
fixed, but need not advance
to be paid in
advance
 Difference between Istisna’ &
ISTISNA’
Salam SALAM
• Time of Delivery • Time of delivery is
does not have to an essential part
be fixed of the sale
• The contract can • The contract
be cancelled cannot be
before the cancelled
manufacturer unilaterally.
starts working.
 Istisna’ as Mode of Financing

• House Financing
• BOT Arrangement
• Government Projects