Salam or salaf is defined as the sale or purchase of a deferred item in exchange for an immediate price. Thus, in the salam contract, the price is

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1 Bay al-salam Contents Conclusion of Salam Contract Conditions of Salam Commodities Delivery of Salam Commodities Legal Consequences of Salam Differences between Salam and Other Types of Sales Revocation of Salam Contract Modus Operandi of Salam as a Mode of Finance

2 Bay al-salam:intro Bay Salam, also known as bay salaf or bay mafalisa is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advanced price fully paid on the spot. As a matter of principle, the sale of a commodity which is not in the possession of the seller is unlawful. This is what the Prophet (pbuh) is reported to have laid down as a general rule in the Hadith: Do not sell what do you not have. Thus the practice of salam is legalised as an exception, and therefore its legality cannot be used as a precedent in analogy to other types of contracts (except in the case of istisna, where both salam and istisna share the same features of the non-existing subject matter).

3 Salam or salaf is defined as the sale or purchase of a deferred item in exchange for an immediate price. Thus, in the salam contract, the price is paid in advance while the commodity is deferred to an agreed date in the future, such as, buying two tons of dates which will be delivered one year later, while the price is paid on the spot.

4 Salam is very beneficial and advantageous to both parties. It is beneficial to the seller, because he receives the price in advance, and it is beneficial to the buyer also, because normally, the price in salam tends to be lower than the market price compared to a spot sale.

5 Cont It is not necessarily used for agricultural products only but it has become a form of financing instrument for working and trade capital which is applicable for all trade and businesses, thus enhaning the Islamic commercial and economic system.

6 Cont The wisdom of the permissibility of a salam contract lies in the fact that salam facilitates a type of financing for people in need. It complies with the needs of farmers and merchants who need working capital for their businesses and for their living expenses; and it also responds to the needs of a large number of business enterprises at different levels - small, medium sized enterprises and conglomerates that are involved in agricultural and industrial production or trade and the like. Salam provides the working capital in the form of either cash or assets, in order for these businesses to be productive. It also covers the demands of those in need of liquidity. This is because it gives the seller flexibility in using the sale proceeds (before the commodity is delivered), and the opportunity to arrange for the counter value and its delivery to the buyer.

7 Rules In the salam contract, the price is paid in cash, but the supply of the purchased goods is deferred. The forward buyer is called rabb al-salam; the forward seller is al-muslam ilayhi; the cash price is ra's al-mal, and the purchased commodity is termed as al-muslam fihi. In bay salam, the vendor has no title over the sale object but undertakes to make it available to the purchaser. The subject matter of salam is a promise given against payment and not an object in rem.

8 Muslam fih Salam cannot be affected in respect of things which must be delivered on the spot. For example, salam sale of currency for currency, or wheat for wheat. In these sales, the exchange must be simultaneous or on the spot, otherwise it tantamounts to riba. Salam cannot be applied for non fungible goods. Salam cannot be applied for the specified existing goods.

9 Bay al-salam Class notes prepared by Assoc. Prof Dr. Azman Mohd Noor, International Islamic University Malaysia

10 Cont; commodities must be commonly available under normal circumstances at the place where it should be on the delivery date, so that the commodity will be accessible to the seller in order to discharge his obligation by delivering it to the buyer. As such the Hanafis require that the commodities should remain available in the market right from the day of contract up to the date of delivery. On the other hand, the other three schools of Fiqh (that is,.

11 Cont Shafi i, Maliki, and Hanbali) are of the view that the availability of the commodity at the time of the contract is not a condition for the validity of salam. What is necessary, according to them, is that it should be available at the time of delivery. The second group of scholars maintains that, the Prophet (pbuh) did not make it a condition that the object of sale must exist at the time of the salam contract.

12 SALAM AS A MODE OF FINANCING Initially salam was allowed by Shari ah, as an exception, to fulfill the needs of farmers and traders. It provides financing facilities to the small farmers and traders. However, it is evidenced from the foregoing discussion, that this mode of financing can be used by modern banks and financial institutions, especially to finance the agricultural sector. It is simply noted that the price of salam can be fixed at a lower rate as compared to the price of those commodities when purchased and delivered on the spot. As such, the difference between the two prices is considered a valid profit for the banks or financial institutions.

13 DIFFERENCES BETWEEN SALAM AND OTHER TYPES OF SALE Being an exception to the ordinary sale, there are a few distinctive features of salam that are different from an ordinary sale. First, in a salam sale it is necessary for the parties to precisely fix a period for delivery of the goods, but in an ordinary sal, it is not necessarily so. Second, in a salam sale, a commodity not in the possession of the seller can be sold; however, in an ordinary sale, the seller cannot sell what he does not have.

14 Cont the salam commodities are confined only to the goods which can be precisely determined in terms of quality and quantity ; however, everything that can be owned is saleable in an ordinary sale, except the commodities which are prohibited by the Shariah. The salam sale cannot take place between identical goods; for example wheat for wheat or rice for rice; and on the other hand,the sale of identical goods is allowed in an ordinary sale. Finally, in a salam sale, payment must be made in advance (of the delivery of goods) or at the time where the contract is concluded; whereas in an ordinary sale, the payment may be deferred or made at the time of delivery of the goods.

15 Fixing the Date of Delivery? According to Muslim jurists, the time for delivery of salam commodities may not be specifically fixed. The approximate time for delivery is permissible, for example the parties agree that the delivery of salam commodities should be in the next harvest time. However, the approximate time for delivery of the goods may not be convenient to the bank. It may be advisable, however, for the bank to stipulate the specific time and date for the delivery of the goods, provided that the goods required are available in the market.

16 Revocation of Salam Contract Another interesting observation is the effect of the revocation of the salam contract. As a general rule, the parties have the right to rescind the contract of salam before the delivery of the goods, in which the seller is required to return the advance paid. However, a critical observation on this requirement tells that the parties may be taking advantages over the fluctuation of the price of the commodities. The seller may be inclined to withdraw from the contract if the market price of the contracted goods is higher at the time of delivery than what the bank has paid to him. Likewise, the bank may tend to rescind the contract if the price of the contracted goods goes down at the time of delivery. Looking into the possible manipulation of the flexible revocation right, it seems that it is preferable that the salam be made irrevocable by the agreement of the parties concerned. The only exception which may be considered is unavailability of the commodities in the market and inaccessibility of the commodities to the seller, in the case where the bank refuses to extend the period of delivery. In the case of revocation of the contract, the bank will charge the same amount that it had paid to the seller.

17 Security for Salam Since the delivery of the goods in salam is in the future, banks and financial institutions are allowed to request the seller to furnish a security, which may be in the form of a guarantee or in the form of a mortgage, to cover the risk of non delivery. In the case of default, the guarantor may be asked to deliver the same commodity; and if there is a mortgage, the buyer or the financier may sell the mortgaged property and the sale proceeds can be used either to realise the required commodity by purchasing it from the market, or to recover the price advanced by him.

18 Cont. Securities in Salam The issue of security in a salam sale is also prevalent in a situation where the seller supplies inferior goods to what was agreed upon and forcing the bank to accept them, or to rescind the contract. This will put the bank in a difficult situation whereby acceptance of the inferior goods may be harmful to it; and in the case where the bank rescinds the contract, the price has to be returned back to the bank; in which this too will be unprofitable to the bank.

19 Solutions The fiqh provides a few solutions to this problem such as (i) the bank may refuse to accept the goods and claim for the supply of the agreed goods or its price; (ii) in the case where the seller is not able to supply the stipulated goods, he may revise the agreement to supply other goods; and (iii) in the case where the seller can only supply part of the agreed goods, the bank may accept the same and revise the purchase order to the extent of the remaining quantity, or it may claim the refund of the balance. Another solution is parallel salam

20 Parallel Salam Another possible solution to minimise the risk of non delivery or incomplete delivery of the salam commodities is by exercising the parallel contract of salam (salam muwazi). After purchasing a commodity by way of salam, the bank may sell it trough a parallel contract of salam for the same date of delivery. The difference between the two prices shall be the profit earned by the financial institution. Second, the bank can obtain a promise to purchase from a third party. This promise should be unilateral from the expected buyer. Being merely a promise, and not the actual sale, the buyers will not have to pay the price in advance. Therefore, a higher price may be fixed and as soon as the commodity is received by the institution, it will be sold to the third party at a pre-agreed price according to the terms of the promise.