Salam literally means giving, advance or leaving.

Technically a bay’ al-salam (hereafter

salam) contract refers to a forward contract where the seller agrees to deliver specific
goods at a future date in exchange for full payment upfront.

While the Salam contract was traditionally used for financing agricultural projects, it can
also be used for financing other types of projects. In fact, modern Islamic finance has
expanded the use of the Salam contract to a wide range of industries and sectors. In
this case we used the purchase of raw materials as an example.

➢ Types of Salam contract used: Ordinary salam contract

It is a contract of salam that has been thoroughly discussed by previous jurists in
the classical books of fiqh. It involves only two transacting parties
- The buyer (musallim) and the seller (musallam ilayh)

❖ Buyer (Hengyuan Manufacturing)

❖ Seller (Southern Steel)

1. Hengyuan Manufacturing is in the process of expanding its operations and needs

to purchase 100 metric tons of steel for their production process. They enter into
a Salam contract with Southern Steel, a supplier of raw materials, to purchase the
necessary steel.

2. The terms of the contract state that Hengyuan Manufacturing will pay the full
amount of the contract upfront, which is $100,000. Southern Steel will use the
funds to produce or acquire the 100 metric tons of steel and deliver it to
Hengyuan Manufacturing on a specified date, which is three months from the
date of the contract. The contract specifies that the steel must meet certain
quality standards and be delivered in good condition. It also includes penalties
for non-performance, such as late delivery or failure to deliver the agreed-upon
quantity and quality of steel.

3. Once the contract is signed, Hengyuan Manufacturing pays the full amount of
$100,000 to Southern Steel.

4. Southern Steel uses the funds received to finance the production of steel
 5. Three months later, Southern Steel delivered the 100 metric tons of steel to
Hengyuan Manufacturing, as specified in the contract.

6. Hengyuan Manufacturing takes possession of the goods and can use them for
their industrial project.

7. The contract is considered fulfilled, and the transaction is complete.

Elements

Form of contract Hengyuan Manufacturing entered into a Salam contract with

Southern Steel, a supplier of raw materials, to purchase the
necessary steel. The offer includes the quantity and quality of
the goods to be purchased, the delivery date, and the price.

Subject of matter 100 metric tons of steel and deliver it to Hengyuan

Manufacturing on a specified date, which is three months from
the date of the contract.

Contracting parties Buyer (Hengyuan Manufacturing)

Seller (Southern Steel)

Conclusion;

Salam contracts are designed to help buyers secure the goods they need for their
projects while providing sellers with the financing they need to produce or acquire the
goods. They are commonly used in the Islamic finance industry as a way to provide
financing for projects that are compliant with Shariah law.

It is important to note that in a Salam contract, both parties must agree to the terms of
the contract and comply with Shariah law. The contract should include all necessary
details, such as the quantity and quality of the goods, the delivery date, and the payment
terms. The contract should also specify any penalties or remedies in case of
non-performance by either party.
Extra notes

Contracting The parties involved in a Salam contract for the purchase of raw
parties materials, machinery, or equipment needed for industrial projects are
typically the buyer and the seller.

The buyer is the party that requires the raw materials, machinery, or
equipment for their industrial project. They enter into the Salam
contract to secure the necessary goods in advance, with the
understanding that they will receive the goods at a future date. The
buyer pays the full amount of the contract upfront.

The seller is the party that provides the raw materials, machinery, or
equipment to the buyer at the agreed-upon delivery date. They enter
into the Salam contract to receive the full payment upfront, which they
can use to produce or acquire the goods. The seller is responsible for
delivering the goods to the buyer at the agreed-upon delivery date.

Subject of The subject matter for the purchase of raw materials, machinery, or
matter equipment needed for industrial projects in a Salam contract is specific
and pre-defined. The buyer and seller agree on the type, quantity,
quality, and other specifications of the goods that will be delivered at a
future date.

The subject matter of a Salam contract should be deliverable, fungible,

and marketable, as required by Shariah law. This means that the goods
should be capable of delivery, be homogeneous or standardized, and be
tradable in the market.

It is important to note that the subject matter of the Salam contract

should be permissible according to Shariah law, which prohibits the
sale of certain goods, such as those related to gambling, alcohol, and
pork products. Therefore, the parties involved in the Salam contract
must ensure that the subject matter is Shariah-compliant.

Form of The contract begins with an offer from the buyer, which is then
contract accepted by the seller. The offer should include the quantity and quality
of the goods to be purchased, the delivery date, and the price.