SALAM

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SALAM
Presented by
Muhammad Najeeb Khan(Shriah Advisor)Habib
Metropolatin Bank Islamic Banking At AlHuda CIBE
Workshop.
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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

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• 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.

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• 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.

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• 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.

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BenefitsSalam is beneficial to the
seller,because he receives the pricein
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.
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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, 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.

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• (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.

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• (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.

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Difference b/w Salam Murabaha

• Salam
• In Salam, purchased goods are deffered, price is
  paid on spot.
• In Salam price has to be paid in full in
  advance.

• Murabaha
• In Murabaha purchased goods are delivered at
  spot, price may be either on spot or differed.
• In Murabaha price may be on spot or differed.

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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 spot. e.g Salam b/w
  wheat and barley.

• Murabaha
• Murabaha can be executed in particular commodity.
• Murabaha can be executed in those things.

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• 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.

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• Khiyar (option)
• After taking delivery, the purchaser has the
  option of defect (Khiyar-e-Aib). Not option of
  seeing (Khiyar-e-ruyat)

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• Options available for purchaser after taking
  delivery
• 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.

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Parallel Salam Diagram
1st Salam Seller
2nd Salam Purchaser
Parallel Salam
Salam Sale

• Delivery of Commodity

Delivery of Commodity
Islamic Bank Islamic
Bank Purchaser Seller

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• 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.

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• 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 .

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• 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.

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• 5. Salam combining with Murabaha
• Bank can sell the Salam commodity to the seller
  of Salam on Murabaha subject to following terms
• Salam agreement and Murabaha agreement should be
  independent, not contingent and with free will of
  the parties.
• Murabaha will be executed after taking the
  possession of Salam goods.
• Bank shall assume the risk of loss b/w taking
  delivery and execution of Murabaha.
• Bank cannot take undertaking from seller of Salam
  that he will purchase the Salam commodity from
  Bank on Murabaha basis.

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• Revoking the Salam contract
• After execution of Salam agreement, it cannot be
  revoked unilaterally without mutual consent of
  both parties.

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• 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.

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• 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.

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• 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.

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• 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.