Practice Question 6.

The Somali Farmers Association approached Meezan Muamalat Bank, which is actively
involved in agricultural financing, to finance the wheat crop of its members that is expected to be
harvested in the year 2015 using Salam contract. On 30 September 2015, Meezan Muamalat
Bank entered into a Salam contract whereby it bought from Farmers Association 100,000 metric
tons of wheat (the specifications of which are detailed in the contract) for $200 million. It was
agreed that Farmers Association would deliver the wheat after 6 months from the date of signing
the contract. On 5 October 2015, Meezan Muamalat Bank paid the full amount of the contract
into the account of Farmers Association.

On 31 October 2015, Meezan Muamalat Bank entered into a separate parallel Salam contract
with K Company whereby it was agreed that the Bank sell to K Company 100,000 metric tons of
wheat for $250 million. The specifications of the wheat are identical to those that will be
supplied by Somali Farmers Association and it was agreed by the two parties that Meezan
Muamalat Bank would deliver the wheat after 5 months from the date of signing the contract. On
5th November 2015, K Company paid half of the amount of the contract to Meezan Muamalat
Bank.

On 31 March 2016, Somali Farmers Association delivered 100,000 metric tons of wheat to
Meezan Muamalat Bank and the bank delivered the wheat to K Company. K Company paid the
remaining amount of the wheat on the same date.

Instructions:

Prepare the necessary journal entries in the books of Meezan Muamalat Bank to record the
Salam and parallel Salam contracts;
Journal Entries for Meezan Muamalat Bank

Date Transaction Debit ($) Credit ($)

Description
30 September 2015 Dr Salam Financing A/C 200,000,000
(100,000 metric tons of
wheat)
Cr Cash A/C (Payment 200,000,000
to Farmers Association)
5 October 2015 Dr Cash A/C (Half 125,000,000
payment received from
K Company)
Cr Parallel Salam A/C 125,000,000
(Half payment for
wheat)
31 March 2016 Dr Parallel Salam A/C 125,000,000
(Remaining payment
from K Company)
Cr Cash A/C (Cash 125,000,000
received from K
Company)
31 March 2016 Dr Cost of Goods Sold 200,000,000
A/C (Wheat delivered
to K Company)
Cr Salam Financing A/C 200,000,000
(Cost of wheat
delivered)
31 March 2016 Dr Cash A/C (Revenue 250,000,000
from K Company)
Cr Sales A/C (Sales 250,000,000
revenue for wheat
delivered)
Practice Question 6.5
On the 1st of March 2010 Dahashil Islamic Bank bought 25 tons of equipments from Atco –
Agricultural equipments company- on the basis of Salam contract. The purchase price of this
quantity of the equipments was $250,000 ($10,000 per ton) paid in full to Atco on the day the
contract was signed. It was agreed that Atco would deliver the commodity in two shipments as
follows:

1. First shipment on June 15th, 2010 for the delivery of 10 tons.

2. Second shipment on July 30th, 2010 for delivery of 15 tons.

On April the 5th 2010 the bank entered into a parallel Salam contract with a trading company
based in Yemen to sell them 25 tons of the equipments for total value of $275,000 ($11,000 per
ton). The bank signed-up to deliver the commodity in two shipments as follows:
3. First shipment on the 20th of June 2010 for delivery of 10 tons.
4. Second shipment on the 5th of August 2010 for delivery of 15 tons.

Instructions:
1. Record the journal entries for the Salam and Parallel Salam transactions in the books of the
bank if deliveries, in both transactions, were made as contracted.
2. Compare and contrast the similarities and differences betweem salam financing and istisna’a’
financing

Journal Entries for Dahashil Islamic Bank

Date Transaction Description Debit ($) Credit ($)

1 March 2010 Dr Salam Financing A/C 250,000
(25 tons of equipment)
Cr Cash A/C (Payment 250,000
to Atco)
5 April 2010 Dr Cash A/C (Half 137,500
payment received from
 Yemen trading
company)
Cr Parallel Salam A/C 137,500
(Half payment for
equipment)
15 June 2010 Dr Cost of Goods Sold 100,000
A/C (10 tons delivered)
Cr Salam Financing A/C 100,000
(Cost of 10 tons
delivered)
Dr Cash A/C (Revenue 110,000
for 10 tons delivered)
Cr Sales A/C (Sales 110,000
revenue for 10 tons
delivered)
5 August 2010 Dr Cost of Goods Sold 150,000
A/C (15 tons delivered)
Cr Salam Financing A/C 150,000
(Cost of 15 tons
delivered)
Dr Cash A/C (Revenue 165,000
for 15 tons delivered)
Cr Sales A/C (Sales 165,000
revenue for 15 tons
delivered)
Comparison between Salam and Istisna’ Financing
Aspect Salam Financing Istisna’ Financing
Definition A contract in which A contract for manufacturing
payment is made in or construction where the
advance for goods to be goods are to be produced or
delivered at a future date. constructed and delivered at
a future date.
Payment Structure Full payment is made Payment can be structured as
upfront before the delivery a lump sum, in installments,
of goods. or deferred until delivery.
Delivery Timing Delivery of goods occurs on Delivery occurs upon
a specific future date as completion of the
agreed upon in the manufacturing process or
contract. construction, which may be
less certain than Salam
contracts.
Nature of Goods Typically involves fungible Suitable for goods that are
goods (e.g., agricultural either manufactured or
products, commodities). constructed, including
unique or customized items.
Risk Sharing Risk is primarily borne by Risk is shared between the
the seller since they must parties; the buyer may have
deliver the agreed quantity some responsibility for
and quality. ensuring the specifications
are met.
Market Pricing The price is fixed at the Pricing may vary depending
time of contract, providing on the complexity of the
predictability for both manufacturing or
parties. construction, and can be
negotiated based on costs
 and market conditions.
Flexibility Less flexible as payment is More flexible, allowing for
made fully upfront, and the amendments in payment
buyer has limited recourse terms and adjustments to
if the product is not specifications as required
delivered. during production.
Types of Goods Usually agricultural or raw Often involves machinery,
materials that are easily equipment, and other goods
quantifiable and have a that may require specific
standard quality. technical specifications.
Termination Difficult to terminate Offers clearer provisions for
unilaterally, but may lead termination, especially if the
to legal disputes if the product does not meet
seller fails to deliver. specified standards or
timelines.