1. By Muhammad Asif MBK-11-03 MBA(B & F) 6TH Semester

2. SALAM AS A MODE OF FINANCING 3. Introduction Islamic banking is a booming industry in the world today. Less well understood is the term Salam and conditions of the Salam contract. it raises many questions within both the economic and the Shariah framework. 4. Definition of Salam Salam is a contract where two parties enter into a contract of sale of goods which would be delivered in future for which the price for the goods would be paid in cash on spot at the time of the signing of the contract. Means that it is a kind of sale in which payment is spot while the delivery of the good is deferred. It is also known as bay salaf or bay mafalis. 5. When salam is mentioned, the foremost thing which the majority of the people assume would be about the risk involved in it. The application of salam as a form of financingwould indeed equilibrium the banks aim of maximizing profit as well as achieving its role as a communal institution helping the deprived. 6. Contract of Salam under Islamic law Under Islamic commercial law, the general rule. Salam is an exception to this general rule. Like many other modes of sale this mode, too, was prevalent even before the advent of the Prophet(peace be upon him). 7. According Qur'an verse:O ye who believe, when ye contract a debt for a fixed term record it in writing. . . . (2:282) According to Hadith:Narrated from Ibn Abbas is the Prophetic hadith: When Gods Messenger came to Madinah, the people were paying one and two years in advance for fruits, so he said: Those who pay in advance for anything must do so for a specified weight and for a definite time. 8. Islamic Fiqh Point of view Abu Hanifah Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contract Imam Malik Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Could be deferred to three days or even more Imam Shafiee Must be precisely fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contract Imam Ahmad Must be accurately fixed Clearly Enumerated Not uniquely identified underlying asset Full payment at the conclusion of the contract 9. Salam Glossary Rabb-us-salam Muslam ilaih Ras-ul-maal Muslam fihBuyer Seller Cash Price Purchased Commodity 10. Purpose of Salam Meet up the necessitate of farmers who need money to grow their crops and to feed their familyup to the time of harvest. Aid the traders for import and export business. 11. Mechanism of Salam Step 1 : Client sells commodity to Bank on forward basis and receives financing normally for purchasing agricultural inputs like seed, fertilizer, pesticides, diesel for tractor, payment of water charges, labor etc. Step2: On due date, Client delivers commodities to Bank. Step3: Bank sells commodities in the market and get profit. 12. DIFFERENCE BETWEEN SALAM SALE AND ORDINARY SALE SALAM SALE 1. In Salam sale, it is necessary to precisely fix a period for the delivery of goods. 2. In Salam sale, the commodity which is not in possession of the seller can be sold. 3. In Salam sale, only those commodities which can be precisely determined in terms of quality and quantity can be sold.ORDINARY SALE 1. In ordinary sale it is not necessary. 2. In ordinary sale, it cannot be. 3. In ordinary sale everything that can be owned is salable, unless the Qur'an or the Hadith prohibit it. 13. SALAM SALEORDINARY SALE4. A Salam sale cannot take place between identical goods, for example wheat for wheat.4. In ordinary sale it is permissible.5. In Salam sale advance payment should be made at the time of making the contract.5. In ordinary sale payment may be deferred or may be made at the time of the delivery of goods. 14. DESCRIPTION OF FACTORS IN SALAM CAPITAL Capital in Salam should be known to both of theparties involved in Salam sale agreement. Ideally it should be in cash however it is allowed to supply the capital in kind subject to: Quality & Quantity. A debt receivable from customer cannot be converted into Salam capital 15. COMMODITYOnly those commodities can be sold under bay' Salam which can be precisely defined in terms of quality and quantity. SECURITY/SURETYSecurity in Salam contract can be obtained through guarantee, pledge or any other permissible mode of security. 16. DISPOSAL OF COMMODITIESDisposal of commodities involved in Salam contract is not allowed prior to maturity of contract, however replacement with other commodities, except with cash, is allowed. TIME OF PAYMENT The buyer must pay the amount at the time of signing the contract in that very meeting. Imam Malik allows delay by two to three days in the case of handicrafts or of manufactured goods. 17. THE PERFORMANCE OF SALAM CONTRACTS ISNOT CONDITIONAL The performance of any one of the Salam contracts is not conditional to the performance of any other Salam contract. PRICE It is not necessary that price be fixed in terms of money; it may be in terms of goods as well, on the condition that this should not violate the prohibition of riba' in barter transaction as laid down in the Hadiths 18. THE PERIOD OF DELIVERYSome jurists believe in precise fixation of the date on which delivery is to be made while some others approve of a rough date but a definite period or occasion of delivery; for example, on harvest, or the beginning of Hajj season REVOCATION OF THE CONTRACT Once agreed upon, a Salam contract cannot be revoked unilaterally by any party. It can be cancelled or partially cancelled with mutual consent by returning the actual or proportionate amount of price paid. In case of Default No penalty can be stipulated in the contract Seller can undertake in the Salam agreement that in case of late delivery of Salam goods, he shall pay to the charity account 19. Essential conditions in a Salam contractIt 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. 2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified. 3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. 4. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute. 1. 20. Essential conditions in a Salam contract 5. It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed. 6. The exact date and place of delivery must be specified in the contract. 7. Salam cannot be effected in respect of things, which must be delivered at spot. 8. The commodity for Salam contract should remain in the market right from the day of contract up to the date of delivery or at least till the date of delivery. 21. Essential conditions in a Salam contract 9. The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. 10. 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. 11. A security in the form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller delivers. 12. The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealing in commodities. 22. Types of Salam Single Salam 2. Multiple Salam 3. Parallel Salam 1.1. Single Salam: The total funds needed by the farmer will be disbursed/credited to the farmers account in lump sum. 23. 2. Multiple salam: The funds would be disbursed in tranches as and when needed by the farmer by executing various/multiple salam. Salam depending upon his/her convenience and preference. 3. Parallel salam: In parallel, salam the bank would enter into a salam contract with the farmer first and subsequently before The goods are delivered to the bank, the bank would enter into a waad or a promise with a third party to buy the goods immediately upon the delivery of it to the bank. This would ensure the immediate selling of the goods upon the delivery without bank in curring loss. 24. Examples: If A has purchase from B 1000 bags of wheat by way of salam to bedelivered on 31 december, A can contract a parallel salam with C to deliver to him 1000 bags of wheat on 31 december. But while contracting parallel salam with C cannot be conditioned with taking delivery from B. Therefore, even B did not deliver wheat on 31 December, A is duty bound to deliver 1000 bags of wheat to c. He can seek whatever recourse he has against B but he cannot rid himself from his liability to deliver goods, which do not conform to the agreed specification, A is still obligated to deliver the goods to C according to the specifications agreed with him. A has purchased 1000 bags of wheat by way of salam from B a joint stock company. B has a subsidiary C which is a separate legal entity but is fully owned by B. A cannot contract the parallel salam with C. However, if C is not wholly owned by B, A can contract parallel salam with it, even if some shareholders are common between B and C. 25. Salam contract signed and payment released by IFI parallel Salam contract signed and payment released by IFIstep 1Goods delivered by IFI to the buyer of parallel Salam contractstep 2step 4step 3 Goods received by IFI from seller of first Salam Contract 26. Step.1. Customer requests to an IFI for finance and sell the commodity with deferred delivery hence Salam sales contract is executed while payment is made by bank at spot. Step.2. IFI enters into contract of parallel Salam with another party, receives the payment and signs contract of Salam with promise to deliver the goods at a point in time in future. Step.3. Seller in first Salam contract delivers the goods to IFI on due date to discharge his liability. Step.4. IFI delivers the goods to buyer in Parallel Salam contract hence transaction closed on profit. 27. Conditions for Parallel Salam 1) 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. 2) Parallel Salam is allowed with third party only. 28. Agency Agreement If the bank has no expertise to sell the commoditiesreceived 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. 29. Benefits of Salam Salam is beneficial to the: seller because the price is received in advance buyer because the price in Salam is lower than theprice in spot sales. 30. Risk in Salam Seller through Salam contract transfers the price risktowards the buyer, while the Buyer transfers the business risks to the seller throughguaranteed quantity and quality supply of output at a predefined date and place. 31. Scope and potential of Salam The Salam sale has the flexibility to cover the needs of varioussectors 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. 32. Salam sale is also used to finance the commercial andindustrial 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.