CHAPTER NO#14

SALAM
Presented By:

• Mahnoor Gulshan – 6555

• Maheen Riaz – 6551
• Saima Zahoor – 6553
• Areeba Javed - 6560
 INTRODUCTION

Salam:

In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced
price fully paid at spot. The payment is at spot but the supply of purchased goods is deferred.

. Also known as Bai Salami. It is an islamic contract in which full payment is made in advance for specific goods ( often
agricultural product) to be delivered at a future date.
PURPOSE OF USE:

1. Made of financing can be used by modern banks and financial institution to finance agriculture sector
2. Holy Prophet(PBUH) allow farmers to sell their agricultural products in advance because Riba was
declared haram due to farmers cannot take various loan.
3. Another use is to meet the needs of traders for import and export.

CONDITIONS:
1. Necessary for buyer to pay full payment in advance to seller.
2. Only those goods will be sold in which the quantity and quality is exactly specified for example precious
stones cannot be sold on salam basis.
3. Salam cannot be effect on particular commodity for example before delivery there is a possibility that crops
and fruits can destroyed.
4. Details in respect to quality of goods must be expressly specified.
5.Quantity and weight also be measured according to the absolute terms.
6. Exact date and place should be mentioned in the contarct.
7. Salam cannot be affected in respect of items, which must be delivered at spot.
8. The commodity for Salam contract should be available in the market at the time of delivery.
9. The time of delivery should be at least fifteen (15) days to one month from the date of agreement. Price in
Salam is generally lower than the price in spot sale.
10. 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.

11. A security in the form of a guarantee, mortgage or hypothecation may be required for a Salam in order to
ensure that the seller delivers.

12. The seller at the time of delivery must deliver commodities and not money to the buyer who would have to
establish a special cell for dealing in commodities.

BENEFITS:

1. 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. The shorter the period of Salam, the higher the price and the greater the
profit.

2. 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.
CONDITIONS OF PARALLEL SALAM:

1. Two Independent Contracts:

• Parallel Salam involves two separate contracts.

a). One contract where the bank is the buyer.

b). Another contract where the bank is the seller.

• No interdependency between these contracts.

• Performance in one contract should not rely on the other.

For instance, if 'A' buys wheat from 'B' on Salam, 'A' can also contract Salam with 'C' for wheat delivery without tying 'C's
delivery to 'B's performance.
2. No Buyback Facility:

• A Salam arrangement cannot be used for buyback.

• The seller in the first contract cannot become the purchaser in the second.

• Even if the second purchaser is a separate legal entity but owned by the first seller, it doesn't qualify as a valid parallel
Salam agreement.

Example:
'A' cannot contract parallel Salam with 'C' if 'C' is fully owned by 'B,' who is the seller in the first contract. However, if 'C'
is not wholly owned by 'B,' 'A' can engage in parallel Salam with it, even if some shareholders are common
between 'B' and 'C.'
RISK MITIGATION OF SALAM:

1:DELIVERY RISK

DETAILS:

Delay in delivery of goods from the customer.

MITIGANTS:

i) Wait until the goods are available.

ii) Bank can cancel the contract and recover the salam price.

iii) Bank can agree on replacement of goods provided that the market value of the replaced goods does not
exceed the market value of the original goods that were subject matter of Salam.
3: PRICE RISK

DETAILS:

Market price of the subject matter decreases after Bank enters into Salam
agreement.

MITIGANT:

Parralel Salam or promise to purchase from a third party will mitigate the
risk.

4: Storage Risk
DETAILS:

The goods once delivered by Customer will be at Bank’s risk before the same are sold to
the ultimate purchaser.

MITIGANTS:

i) Obtain Takaful coverage for Salam goods

ii) Minimize the time duration between acceptance of delivery

under Salam and delivery to the ultimate purchaser.
END