SALAM CONTRACT

DEFINITION OF SALAM
• Known as bay salaf or bay mafalisa
• Sale or purchase of a deferred item for an immediate price
• Price is paid in advance while delivery of commodity is deferred at agreed future date.
• According to shafi’I, this is a sale of a defined commodity which would be delivered
in future.
• According to Hanbalis, this is a sale where the seller undertake to supply some
specific goods at a future date for an advanced spot payment. Same expression is
using by Malikis.
• From the above definition we can summarized that salam is basically a sale with
advanced payment for future delivery.
• The forward buyer is called rabb al-salam and forward seller is al-muslam ilayhi; the cash price
is ra’s al-maland the purchased commodity is al-muslam fihi.
• According to shariah this kind of sale is unlawful because sold commodity does not exists at the
time of contract but permissibility of this contract is confirmed from the tradition of prophet
(s.a.w)
 LEGALITY OF SALAM

• The legality of this contract is proofed from Quran and Sunnah.

• The Prophet (pbuh) allowed this contract and named it salaf (borrowing).
• In Surah al-Baqarah (2.282) Allah says:
• “ O you believe, when you deal with each other in transactions involving future obligations in a fixed
period of time, put them in writing.”

• The Prophet (pbuh) practiced this contract during his life and then followed by Caliph.
• Muslim jurists unanimously agree on its permissibility.
• Initially it was just to fulfill the needs of growers.
 CONDITIONS OF SALAM CONTRACT

• Like the other contracts, salam contract also concluded by offer and acceptance.
• According to Malikis, Hanafis and Hanbalis any term can be used for salam contract along with
the condition of forward contract while Shafis are very strict to use only forward term rather than
bay.
• Competency in salam same like other contracts such as legal age, sanity and freedom of choice.
• All basic conditions in salam similar to ordinary sale except the possession of commodity. The
grower can produce the commodity by himself or can arrange from other person for buyer.
• The advanced payment is the main requirement of this contract to facilitate the small farmers.
• The commodity must be elaborated with proper specifications.
 CONDITIONS OF SALAM COMMODITY (AL-
MUSLIM FIHI)
• In contrast to ordinary sale the subject matter is not existed in salam and istisna contract.
• Goods specified by specification but should not be specified a product of particular farm or tree.
• Salam commodities clearly known to contracting parties to avoid any ambiguity.
 CONDITIONS OF SALAM COMMODITY (AL-
MUSLIM FIHI)
• Commodities must be commonly available in normal circumstances. According to Hanafis the
commodity remains available in the market from the day of contract till delivery. Other schools
are opposed of this condition. Secondly there is no proof from hadiths about this condition.
• Salam commodity must be delivered in future. Hanafis, Hanbalis and Malikis are in favor of this
deferment of delivery. There is also a proof of this legality from Prophet’s (pbuh) saying:
• According to Shafi’I this contract is allowed without any deferred delivery condition.
 PARALLEL SALAM CONTRACT

• In a Parallel Salam contract the bank enters into two different contracts. In the first contract the
bank is the buyer and in second contract the bank play a role as a seller. These two contracts
should be independent in nature. The right and obligations of one contract should not be
dependent on the other contract. Basically in Parallel Salam contact once Salam contract is
concluded, the bank can enter in the market as a seller of goods of similar specifications as it has
previously purchased on first Salam without making one contract depends on the other. Terms
can be designed to fall at the same date of delivery. The price of second contract may be little
high, and the difference of two prices is basically the profit of the bank.
EXAMPLE OF PARALLEL SALAM CONTRACT

• For example, if A has purchased 1000 bags of wheat from B by way of salam to be delivered on
31 December, A can contract a parallel salam with C to deliver to him 1000 bags of wheat on 31
December. But while contracting parallel salam with C, the delivery of wheat to C cannot be
conditioned with taking delivery from B. Therefore, even if B did not deliver wheat on 31
December, A is duty bound to deliver 1000 bags of wheat to C. He can seek whatever recourse
he has against B, but he cannot rid himself from his liability to deliver wheat to C.
• Similarly, if B has delivered defective goods which do not conform with the agreed
specifications, A is still obligated to deliver the goods to C according to the specifications agreed
with him.
 DELIVERY OF SALAM COMMODITIES

• Delivery time should be fix in salam contract.

• The seller may deliver before the fix time and purchaser is compelled to accept the commodity until unless there is a
valid reason.
• In case If seller deferred the delivery due to some valid reasons no penalty will be imposed.
• According to shariah if the seller provide commodity other than specification but a better quality then buyer must
accept. But seller is not allowed to increase the price due to better quality.
• In case if the specification is valid for the contract then the buyer has a right to reject the commodity even it is better.
• In case of lower quality than specification, buyer has a right to accept or reject.
• If due to unavailability the seller fails to deliver salam commodity, in this case the buyer has certain options either to
wait until the object available, cancel the contract and replacement of agreement goods.
• In case of replacement only goods can be exchanged not the price of salam.
 TIME OF DELIVERY OF SALAM
COMMODITIES
• In salam contract the delivery must be deferred.
• According to Hanafi and Hanbali the time of delivery should not be less than one month to give
enough time to small farmer.
• According to Malikis this time period should not be less than fifteen days.
• According to Shafis and some Hanafi jurists Prophet (pbuh) has not specified minimum period
of delivery, the only condition is the clear fixation of delivery time.
• According to contemporary jurists the fixation of delivery date should be decided on case to case
basis.
 PLACE OF DELIVERY OF SALAM
COMMODITIES
• Location of delivery must be specified specially in case where the additional transportation
expenses are exists.
• This is permissible condition in the view of Hanafi.
• The object can be delivered any location if it is easily moveable.
 CONDITIONS OF THE PRICE OF SALAM
(RA’SAL-MAL)
• Price of the salam contract must be known by the parties.
• Buyer must pay full price to seller at the time of contract to fulfill the purpose of the contract.
• Messenger said: “Pay the forward price (salam) for a known volume.
 TERMINATION OR REVOCATION OF A
SALAM CONTRACT
• In salam contract the seller is bound to deliver the goods.
• In case of death of the seller the contract would be terminated and buyer has a right to claim his
money from heirs.
• In case of the death of buyer the contract would not be terminated.
• Damage of the goods would only be considered if it is exceeded from normal damage.
• According to majority of jurists both the parties fully or partially cancel the contract before the
delivery of commodity.
• Imam Malik does not support the partial cancellation.
 TERMINATION OR REVOCATION OF A
SALAM CONTRACT
• In general rule the parties can revoke the contract before delivery.
• Salam is made irrevocable contract to avoid any dispute in case of change in market price.
• Only exception of revocation is unavailability or inaccessibility of commodity.
 SALAM AS A MODE OF FINANCING

• Initially salam was allowed to fulfill the needs of small farmers and traders but it is extended to
products as well.
• Price is fixed at lower rate than spot delivery.
 MODE OF PAYMENT

• Prompt payment
• No hard cash to seller from bank, it is in the form of line of credit or pay order in favor of seller.
• In salam there is exchange of commodity for price
 DIFFERENCES BETWEEN SALAM AND
OTHER TYPE OF SALE
• Delivery period is fix in salam but not in ordinary sale
• Possession of commodity necessary in ordinary sale but this is not a condition in salam.
• Precisely determined goods in terms of quality and quantity can be sold in salam while in sale
everything is saleable other than prohibited items.
• Existence of subject matter is necessary in sale which is not in salam.