Center of Islamic Finance
COMSATS Institute of Information Technology
Lahore Campus
SALAM
Adopted from open source lecture of
Dr. Muhammad Imran Usmani
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SALAM
Seller undertakes 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.
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Purpose of Use
To meet the need 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 traders for import and export
business.
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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.
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Only those goods can be sold through a Salam contract in
which the quantity and quality can be exactly specified eg.
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.
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.
All details in respect to quality of goods sold must be
expressly specified leaving no ambiguity which may lead to a
dispute.
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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.
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.
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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.
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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.
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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.
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Parallel Salam
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.
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.
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THANK YOU
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