SALAM

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 Murabaha

• In Salam, • In Murabaha
purchased goods purchased goods
are deffered, price are delivered at
is paid on spot. spot, price may be
either on spot or
• In Salam price has deferred.
to be paid in full in • In Murabaha price
advance. may be on spot or
deferred.
 Difference b/w Salam & Murabaha
Salam Murabaha

• Salam is not executed in • Murabaha can be

the particular commodity executed in particular
but commodity is commodity.
specified by
specifications.

• Salam cannot be effected

in respect of things, • Murabaha can be
which must be delivered
at spot. e.g Salam b/w executed in those
wheat and barley. 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” (Khiyar-
e-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

Parallel
Salam
Salam
Sale

Delivery of Delivery of
Commodity Commodity

Islamic Bank Islamic Bank

Purchaser 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.