Overview

Definition
Background

and Concept
Purpose of Salam
Rules of Salam
Difference between Salam and Murabaha
Delivery of goods
Parallel Salam
Penalty for nonperformance
Security
Potential of Salam

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.

Rules 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

Rules of Salam
(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.

Rules of Salam
Salam cannot be effected in respect of things,
which must be delivered at spot. e.g Salam b/w
wheat and barley.

(7)

(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

In

Salam,
purchased
goods are
deferred, price
is paid on spot.
Murabaha

In

Salam price
has to be paid
in full in
advance.

In Murabaha purchased goods are

delivered at spot, price may be either on
spot or deferred.
In Murabaha price may be on spot or
differed.

Difference b/w Salam &

Murabaha
Salam
Salam

is not
executed in the
particular
commodity but
commodity is
specified by
specifications.

Salam

cannot be
effected in respect
of things, which
must be delivered at

Murabaha
Murabaha

can be
executed in
particular
commodity.

Murabaha

can be
executed in those
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)

Parallel Salam
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

Salam
Sale

Parallel
Salam

Delivery of
Commodity

Islamic Bank
Purchaser

Delivery of
Commodity

Islamic Bank
Seller

Parallel Salam
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.

Parallel Salam
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 .

Parallel Salam
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.

Parallel Salam
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 of 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.

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

Scope and Potential of

Salam
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.