SALAM & ISTISNA’A

Key points
01 Definition, purpose and condition of salam

02 Application of Salam in Islamic bank

03 Istisna’a
 Salam Definition
 Seller undertakes to supply specific goods to the buyer at a future
date in exchange of an advanced price fully paid at spot.
Price is in cash but the supply of goods is deferred.
Salam - Purpose
To meet the need of small farmers who need money to grow their
crops and to feed their family up to the time of harvest.
To meet the need of traders for import and export business.
Conditions of Salam
It is necessary for the validity of Salam that the buyer pays the
price in full to the seller at the time of effecting the sale.

In the absence of full payment, it will be tantamount to sale of

a debt against a debt which is expressly prohibited by the Holy
Prophet.
 Conditions of Salam

 Only those goods can be sold through a Salam contract in which

the quantity and quality can be exactly specified.
eg. precious stones cannot be sold on the basis of Salam because
each stone differ in quality, size, weight and their exact specification
is not possible.
 Conditions of Salam
Salam cannot be effected on a particular commodity or on a product
of a particular field or farm

e.g. supply of wheat of a particular field or the fruit of a particular

tree since there is a possibility that the crop is destroyed before
delivery and given such possibility, the delivery remains uncertain.
Conditions of Salam
All details in respect to quality of goods sold must be expressly
specified leaving no ambiguity which may lead to a dispute.

It is necessary that the quantity of the commodity is agreed

upon in absolute terms. It should be measured or weighed in its
usual measure only.
Conditions of Salam
 The exact date and place of delivery must be specified in the
contract.

 The commodity for Salam contract should remain in the

market right from day of contract up to the date of delivery or at
least at the date of delivery.
Conditions of Salam
A security in form of a guarantee, mortgage may be
required for a Salam in order to ensure that the seller
delivers.
 Parallel Salam

In an arrangement of parallel Salam there must be two different and

independent
contacts; one where the bank is a buyer and the other in which it is a seller.

 The two contracts cannot be tied up and performance of one should not be
contingent on the other.
 SALAM AS A MODE OF FINANCE
Using Salam as mode of finance Bank follows the following steps;
Bank pays the full price against a commodity which will be delivered in future.
A distinct party undertakes to purchase the commodity of same quantity and
quality without referring to the first contract. Like wise Bank can make a
parallel salam contract matching the terms of first salam contract without
referring to it.
 SALAM AS A MODE OF FINANCE (cont)

Bank gets the delivery of the commodity and passes on to the other buyer in
parallel salam OR enters in to a sale agreement with the promiser OR makes the
seller of the first salam its agent to sell the commodity
ISTISNA’A
 Istisna`a Definition

Istisna’ is sale transaction where commodity is transacted

before it comes into existence.

It is an order to producer to manufacture a specific commodity

for the purchaser.
Salam and Istisna’a Difference
ISTISNA’A SALAM
The subject on which transaction of Subject can be anything.
Istisna’ is based, is always a thing
Price has to be paid in full in advance
which needs to be manufactured.
Price must be fixed, but need not
to be paid in advance
Salam and Istisna’ Difference
ISTISNA’A
 Time of Delivery does not
have to be fixed
 The contract can be cancelled
before the manufacturer starts
working.
SALAM
 Time of delivery is an
essential part of the sale
 The contract cannot be
cancelled unilaterally.
Istisna’a application
House Financing
BOT Arrangement
Government Projects
Any Questions??