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AN OVERVIEW OF BAY' AL-SALAM

Introduction
Salam is a transaction in which the price is paid immediately
for goods which are to be delivered later but are specified in
the contract.
E.g - A customer went into a boutique
shop and ask the
tailor to tailor-made
a suit, the customer pays first before
delivery of the suit at a specified
date.

PILLARS OF AL-SALAM
Rabb as-salam/ Musallim
- Buyer
Muslam Ilaihi
- Seller
Ra's al-Mal
- Price
Al-Musallim Fih
- Product
Sighah
- Ijab ( Offer )
- Qabul ( Acceptance )

CONDITIONS
i - Seller undertakes to supply goods to
buyer at a future date in consideration of
a price fully paid in advance at the time
the contract is made.
ii- Specifications, quality, quality of the
goods must be determined to avoid gharar.
iii- Date and Place of deivery must be
agreed.
iv- Buyer cannot sell back the commodity to
the Seller after delivery.

THE USE OF SALAM CONCEPT

Salam concept is mainly used in the agricutural


sector where farmers need money to grow their
crops and to maintain their family untill harvest
time.

HOW PURE SALAM CONCEPT


WORKS IN BANKING SECTOR.
Ra's al-Mal
Price

Musallim
Buyer
e.g Bank

Offer & Acceptance

Musallim Fih
Product
e.g Pineapple

Muslam Ilaihi
Seller
e.g Farmer

STEPS OF THE ABOVE CHART


Step 1 : The bank offer a purchase price to the farmer
based on credit worthiness evaluation, crop
quality,
delivery date, etc.
Step 2 : Farmer accepts the offer and sign a bai salam
contract with bank.
Step 3 : The bank pays the purchase price on the spot of
signing the contract.
Step 4 : Farmer delivers the Pineapple to the bank at
the
specified date.
Step 5 : The bank then sells the Pineapple to a 3rd
party.
NOTE : The selling price is higher than the
purchase
price and that is the profit of the bank.

RISK OF PURE SALAM


a) Commodity Price Risk - when receiving
the goods, the price may be lower than
the price originally expected, the bank
will be at loss.
b) Quality Risk- Goods received might not
meet
the desired quality.
c) Asset Holding risk - bank will incur loss in
spending money to store
the goods receive.
d) Fiduciary Risk - Seller might not deliver.

TO CURE THE RISK


Islamic Bank comes out with 3 products :
1) Parallel Salam Financing
2) Hybrid Salam Financing
3) Salam Financing Working Capital

PARALLEL SALAM FINANCING


1
BANK

SELLER
2

BUYER

HYBRID SALAM
FINANCING
1
2

BANK

SELLER

3
5
4

CUSTOMER

SALAM FINANCING WORKING CAPITAL

BANK

SELLER

Group of purchasers

APPLICATION OF SALAM FINANCING IN


MALAYSIA

AGRO Bank (formerly known as Bank Pertanian Malaysia)


AB has engaged with BERNAS, a government-owned rice
wholesaler as the third party buyer (to reduce risk of salam).
AB may purchase rice slightly more than RM560 to further
attract farmers to use the Salam facility but this depends on
the price offered by BERNAS to AB.
BERNAS will find this arrangement in its favour as it secures
them rice supply at relatively lower prices, since farmers can
sell the produce to independent rice dealers at a better price.
But the Salam contract will increase BERNAS market share
since any Salam contract made between farmers and AB
means a guaranteed supply of rice to BERNAS.

AN OVERVIEW OF BAL AL ISTISNA'


Introduction
Istisna is a contract with a manufacturer whom
provides both raw materials and labour to
manufacture a product for a determined price
and deliver it at a specified time. The price of the
manufactured product can be paid at future
date.

E.g - A customer ordered a car from the


manufacturer according to the specifications
agreed, the manufacturer then deliver the car to
the customer. Then, after delivery, the customer
will pay the price of the car in lump sum or by
installment.

PILLARS OF ISTISNA'
Mustasni'
- Customer
Sani'
- Manufacturer
Ra's al-Mal
- The Price
Masnu
- The Product
Sighah
- Ijab ( Offer )
- Qabul ( Accpetance )

CONDITIONS
i ) The subject matter must be a munufactured
product
ii) The subject matter must be such that it needed
time to be made.
iii) If failed to comply with agreed specifications,
the customer can reject the product.
iv) Payment of price of the product can be deferred
to a future date by installment or lump sum.

HOW IT WORKS IN BANKING


SECTOR

STEPS OF THE ABOVE CHART


Step 1 : Istisna agreement made between customer and
bank where bank agrees to construct a house in
accordance with specifications.
Step 2 : Of course Bank will not construct a house, it will
made a second agreement with the constructor to
build the house.
Step 3 : The constructor will then deliver the house to the
Bank.
Step 4 : The Bank will pay the total istisna amount to the
Constructor i.e. cost of building the house
Step 5 : The Bank will deliver the house to the customer
Step 6 : The Customer will pay the istisna amout i.e. the
total istisna amount to be paid to the Bank.

DIFFERENCES BETWEEN BAYAL-SALAM


AND BAYISTISNA
BAY AL-SALAM
BAY ISTISNA
SUBJECT

Salam can be effected on any thing,


no matter whether it needs
manufacturing or not.

The subject of Istisna is always a thing


which needs manufacturing

NATURE

It is necessary for Salam that the


price is paid in full in advance

Payment for Istisna can be made in


staggered basis

The contract of Salam, once


effected, cannot be cancelled
unilaterally

The contract of Istisna can be cancelled


before the manufacturer starts the work

Time of delivery is an essential part


of the sale
(The penalty amount is to paid to
charity not taken as benefit for to
the buyer)

Time of delivery of istisna product


does not have to be fixed
( Any penalty for charged late delivery
can reduce the price of an Istisna
contract)

CONTRACT

DURATION