SALAM & ISTISNA’A

Bai Salam

Definition

Purpose

Conditions of Salam

Benefits

Parallel Salam

Presentation Overview

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.

Salam - Definition

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.

Purpose

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.

Conditions of Salam

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.

Conditions of Salam

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.

Conditions of Salam

All details in respect to quality of goods sold

must be expressly specified leaving no

ambiguity which may lead to a dispute.

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.

Conditions of Salam

The exact date and place of delivery must be

specified in the contract.

The commodity for 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.

Conditions of Salam

A security in form of a guarantee, mortgage

may be required for a Salam in order to ensure

that the seller delivers.

Conditions of 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.

Parallel Salam

‘Courtesy of 1st Ethical Charitable Trust in partnership with Centre for Islamic Economics & Meezan Bank Limited’

SALAM AS A MODE OF FINANCE

Using Salam as mode of finance Bank follows the following steps;

Bank pays the full price against a commodity which will be delivered in future.

A distinct party undertakes to purchase the commodity of same quantity and quality without referring to the first contract. Like wise Bank can

make a parallel salam contract matching the terms of first salam contract without referring to

it.

‘Courtesy of 1st Ethical Charitable Trust in partnership with Centre for Islamic Economics & Meezan Bank Limited’

Bank gets the delivery of the commodity and passes on to the other buyer in parallel salam

OR enters in to a sale agreement with the

promiser OR makes the seller of the first salam its agent to sell the commodity

SALAM AS A MODE OF FINANCE continued

ISTISNA’

Istisna’ is sale transaction where commodity is

transacted before it comes into existence.

It is an order to producer to manufacture a

specific commodity for the purchaser.

Istisna - Definition

ISTISNA’The subject on which transaction of Istisna’ is based, is always a thing which needs to be manufactured.Price must be fixed, but need not to be paid in advance

SALAMSubject can be

anything.

Price has to be paid in full in advance

Difference b.w Istisna & Salam Definition

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 unilaterally.

Difference b.w Istisna & Salam Definition

• House Financing• BOT Arrangement• Government Projects

Istisna as a mode

Questions??

Jazak-a-Allah-u-ta’ala