1. SALAM

2. SALAM
In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The payment is at spot but the supply of purchased goods is deferred.

3. Purpose of use
This mode of financing can be used by the modern banks and financial institutions especially to finance the agricultural sector.
To meet the needs and requirements of small farmers who need financing to grow their crops and to feed their families until the time of harvest.
To meet the need of traders for import and export business. Under salam, it is allowed to sell the goods in advance so that after receiving cash price, they can easily undertake the aforesaid business.

5. Conditions for Salam The conditions for Bai Salam are as follows:
It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of affecting the sale
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 differs in quality, size, weight and their exact specification is not possible.

6. Cont.…
Salam cannot be effected on a particular commodity or for 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 may get destroyed before delivery.
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.

7. Cont.…
Salam cannot be affected in respect of items, which must be delivered at spot.
For example,
If gold is purchased in exchange of silver,
it is necessary that the delivery of both commodities be simultaneous,
thus gold or silver cannot become the subject matter of Salam if the price is paid in the form of gold/silver.
The commodity for Salam contract should be available in the market at the time of delivery.
This view is as per the rulings of Shaafi, Maliki and Hanbali schools of thought.
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.
The seller at the time of delivery must deliver commodities and not money to the buyer who would have to establish a special cell for dealing in commodities.

8. Benefits
There are two ways of using Salam for the purpose of financing
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.
The shorter the period of Salam, the higher the price and the greater the profit.
In this way, institutions can manage their short term financing Portfolios.

9. Benefits
There are two ways of using Salam for the purpose of financing
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 institution receives the commodity,
it can sell it at a pre-determined price to a third party according to the terms of the promise.

10. Conditions of Parallel Salam
In an arrangement of parallel Salam, there must be two different and independent contracts;
one, where the bank is a buyer
the other in which it is a seller.

11. Risk Mitigation in Salam
DETAILS
MITIGATION 1
Delivery Risk
Delay in delivery of
goods from the
customer.
i) Wait until the goods are
available.
ii) Bank can cancel the contract
and recover the Salam Price
iii) Bank can agree on replacement
of goods provided that the market
value of the replaced goods does
not exceed the market value of
the original goods that were
subject matter of Salam. 2
Quality Risk
The Customer
delivers defected
/inferior goods.
The Bank has the right to reject
the delivery or bank can accept
the delivery at discounted price.

12. RISK
DETAILS
MITIGATION 3
Price Risk
Market price of the
subject matter
decreases after Bank
enters into Salam
agreement.
Parralel Salam or promise to purchase from a third party will mitigate the risk. 4
Storage Risk
The goods once
delivered by Customer
will be at Bank’s risk before the same are sold to the ultimate
purchaser.
i) Obtain Takaful coverage for Salam goods
ii) Minimize the time duration between acceptance of delivery under Salam and delivery to the ultimate purchaser.