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SALAM & ISTISNA

Abdur Rashid Mirza University of Lahore School of Accountancy and Finance Lecture no.06

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.

Benefits
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)The exact date and place of delivery must be specified in the contract. (6) there should be actual delivery of commodity.

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.

Security
A security in the form of a guarantee, mortgage 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.

Istisna
Introduction
Istisna is sale transaction where commodity is transacted before it comes into existence.

Definition
It is an order to producer to manufacture a specific commodity for the purchaser.

Conditions of Istisna
(1) The subject of Istisna is always a thing which needs manufacturing. (2) Manufacturer use his own material. (3) Quality and Quantity should be agreed in absolute term (4) purchase price should be fixed with mutual consent

Price of Istisna
price of istisna may be in the form of money, commodity. Price of Istisna is can be paid in installments. The installments may be tied up with different stages of projects.

Option
When the required goods have been manufactured by the manufacturer purchaser can exercise his option of defect.

Revoking of Istisna
The contract of Istisna can be cancelled onesidedly before the manufacturer starts working. After starting the work, Istisna cannot be cancelled one-sidedly.

Difference between Istisna & Salam


ISTISNA SALAM The subject of istisna is The subject can be any always a thing which thing. needs manufacturing. The price in istisna does The price has to be paid not necessarily need to in full in advance. be paid in full in advance.

Difference between Istisna & Salam


ISTISNA Time of Delivery does not have to be fixed The contract can be cancelled before the manufacturer starts working. SALAM Time of delivery is an essential part of the sale The contract cannot be cancelled individually.

Security
A 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, 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 proceed can be used either to realize the required commodity by purchasing it from the market, or to recover the price advanced by him.

Time of Delivery
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.

Delivery of Manufacturing 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. If manufactured goods are delivered before agreed date, purchaser can refuse to accept the goods.

Author Introduction
Abdur Rasid Mirza, Economic and Financial Analyst Associated Consulting Engineers ACE (Pvt.) Ltd. Faculty Member of University of Lahore, School of Lahore, School of Accountancy and Finance Research Scholar (Islamic Banking and Finance) Mobile no. 0300-4210261 Email Address: yourarm1972@hotmail.com Email address: yourarm@yahoo.com
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