Financing ProductsUncategorized

Salam Sale

Salam is a highly efficient financing tool in the Islamic economy and Islamic banking. This is due to its flexibility and responsiveness to various financing needs, both short- and medium-term financing, in addition to meeting the requirements of various segments of customers in different sectors and economic activities. .

Although the use of Salam has been a beginning in the agricultural field, the possibility of using it in other economic fields is very much available. Salam can be applied in Islamic banking to finance commercial and industrial activities. It supports agricultural producers, industrialists, contractors or traders by providing them with the necessary funds to purchase raw materials, and when the commodity is ready to be received by the Islamic Bank, the later buys it and sells it with a benefit margin.

Salam Sale Definition

Also known as Bai-salaf (بيع السلف) or Bai-mafalisa (بيع المفالسة) is the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the Salam Capital, is paid at the time of contract while the delivery of the item to be sold, known as Al-Muslam Fihi / المسلم فيه (the subject matter of a Salam Contract), is deferred. The seller and the buyer are known as AlMuslam Ilaihi and Al-Muslim or Rab al-salam, respectively.

Salam Sale Legitimacy

A contract of Salam derives its legitimacy from the Quranic verse.

In the Quran Allah says: “O you who believe! When you contract a debt for a fixed period, write it down…” (02:282).

In Sunnah, Ibn Abbas (May Allah be pleased with him) narrated :

Allah’s Apostle (Peace be upon Him) came to Medina and the people used to pay in advance the price of fruits to be delivered within one or two years.

The Prophet Muhammad (Peace be upon Him) said:

whoever pays money in advance for dates (to be delivered later) should pay it for known specified weight and measure (of the dates).” (Al Bukhari, Book #35, Hadith #441).

Principles of Salam

1. Contracting Parties:

The parties who are involved in a Salam contract are

  1. The seller (Musallam Ilaihe المسلم إليه)
  2. The purchaser (the Musallim المسلم).

2. The subject matter of Salam:

1.1) Object:

The object of a Salam contract can be goods that may be weighed, measured or counted and not permitted to be an identified and specific thing like “this rice” or cannot be stipulated as a produce of specific piece of land. The Salam object is also not permitted to be any article which cannot be delineated in terms of their description like jewellery and antiques. It must be the kind of article for which a specification may be drawn up properly so that the seller may be held responsible for its conformity to the specifications and be commonly available under normal circumstances at the place where it should be on the delivery date. The purchaser cannot sell the subject matter before taking possession of it except through a parallel Salam contract.

1.2) Price:

The price for Salam goods can be in the form of goods such as wheat and other cereals, or items of material value such as livestock. It can also be in the form of a usufruct from certain assets, but it must be known to the contracting parties and must be paid in full to the seller at the time of concluding the contract.

3. Conclusion of Salam:

Like other sale contracts, a Salam contract can be concluded by offer and acceptance. However, it may be concluded using the word Salam or Salaf or sale or any term that indicates sale of a prescribed commodity for deferred delivery in exchange for immediate payment of the price. It can be initiated through several agreements or can be initiated by drawing a general framework and master agreement.

4. Delivery of the subject matter:

The date of delivery for Salam goods must be specific and must be known. The seller must deliver the Salam goods to the purchaser on the due date and the purchaser must accept the goods if they meet the specifications.

If the quantity and quality of the Salam goods is superior to that required by the contractual specifications, the purchaser must accept the goods unless the seller seeks a higher price. If it is inferior, then the purchaser has the option to either reject or accept the goods. The delivery of Salam goods may take place before the due date. If the seller fails to perform his obligation, owing to insolvency, for instance, it can be granted an extension of time for delivery but no penalty clause shall be included in respect of delay in the delivery. In case all or part of Salam goods is not being available to the seller on the due date, the buyer may wait until availability or may cancel the contract and may also replace Salam goods by other goods.

Operational Procedure Of Salam:

  1. The customer applies for financing in a manner of peace, determining the item to be sold to the bank, the price of the sale and the time of delivery.
  2. The Islamic bank will examine the customer’s application according to the applicable standards.
  3. the Islamic Bank informs the customer of the details of the approval of his request.
  4. The contract is signed after the parties agree to the details of the transaction. The customer (as seller) enters into a Salam sale contract with the Islamic Bank (as purchaser).
  5. The Islamic bank pays the full purchase price in advance to the customer for the specified commodity to be delivered in future.
  6. On the delivery date which is predefined, the customer delivers the commodity to the Islamic Bank.

Advantages of Salam Sale

  • The seller is assured that the the goods are guaranteed to be sold as a result of the second party’s commitment to purchase it.
  • Producer gets financing for working capital without the need to loans.
  • It enables the creation of financial instruments based on the method of Salam Sale, including short-term or long-term ones for trading in financial markets, such as Salam bonds.
  • Exploit excess liquidity in Islamic banks in order to make an appropriate profit rather than remain stagnant.
  • Attract potential customers and maintain existing ones by meeting their various financing needs.
  • Ensure that the item is obtained at a reasonable price
  • Islamic banks use this formula in financing priority sectors such as agriculture, industry … by providing cash to them.

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