Simplified Shariah Structures Guide: Salam

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In this simple guide, we will look at the following:

  1. What is Salam?
  2. Benefits of Salam
  3. Key terms of Salam
  4. Key requirements of Salam
  5. Contemporary Applications of Salam

  1. What is Salam?

Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot.

Ibn Abbas (May Allah be pleased with him) narrated: Allah’s Apostle (Peace be upon Him) came to Medina and the people used to pay in advance the price of fruits to be delivered within one or two years. (The sub-narrator is in doubt whether it was one to two years or two to three years.) The Prophet Muhammad (Peace be upon Him) said, “Whoever pays money in advance for dates (to be delivered later) should pay it for known specified weight and measure (of the dates).” (Sahih al-Bukhari).

Bank Negara Malaysia defines Salam as the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the Salam capital, is paid at the time of contracting while the delivery of the item to be sold is deferred. (BNM, 2016).

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) refers to Salam as the purchase of a commodity for deferred delivery in exchange for immediate payment (AAOIFI, 2016).

Islamic Financial Services Board (IFSB) meanwhile defines Salam much more comprehensively than BNM and AAOIFI, where it is stated that Salaam is the sale of a specified commodity that is of a known type, quantity and attributes for a known price paid at the time of signing the contract for its delivery in the future in one or several batches (IFSB, 2016).

  1. Benefit of Salam

Salam was beneficial to the seller, because he received the price in advance, and it was beneficial to the buyer also, because normally, the price in salam used to be lower than the price in spot sales. The permissibility of salam was an exception to the general rule that prohibits the forward sales, and therefore, it was subjected to some strict conditions.

  1. Key terms of Salam

(a)  The term salam applies to the contract as a whole and is also used to refer to the object or good which is to be delivered later.

(b)  The term al-muslim refers to the owner of capital, the party purchasing the object or goods.

(c)  The term al-muslam ‘ilayhi refers to the party who takes on the obligation to deliver the object or goods at a future date.

(d)  The term al-muslam fihi refers to the subject of the contract, the object or goods to be delivered.

(e) Finally, the term ra’s-mal al-salam refers to the capital, the price paid in advance of delivery of the sale object.

  1. Key Requirements for Salam transaction
  • Buyer pays in full at time of contract execution.
  • Only those items can be sold through salam which can be precisely quantified.
  • Cannot specify the source of the product.
  • Complete specification of sale item.
  • Quantity of sale items specified.
  • Specification of date and place of delivery.
  • Cannot take place in riba assets.
  1. Contemporary Applications of Salam

Among the different applications of Salam, one application is in personal financing. Salam as a personal financing works in the following manner:

  1. The bank pays the price in the contract to the bank customer so that he can have the immediate use of funds to cover his financial needs.
  2. The bank customer abides by the contract to make a delivery of the commodity on the specific due date.
  3. At the time of delivery on the specific due date the bank has several options to choose from: the bank receives the commodity on due date, and sells it either for cash or on credit; or it can authorize the seller to sell the commodity on its behalf against fees (or without fees); or it can direct the customer to deliver the commodity to a third party (the buyer) according to a previous promise of purchase, where the promise is that the buyer will purchase from the bank.
  4. Once the delivery has been arranged by any of the above-mentioned options, the commodity is sold through a sale contract between the bank and the buyer.
  5. In this contract, the bank agrees to sell the commodity for cash or a deferred price higher than the Salam purchase price paid by the bank to the customer.
  6. The buyer agrees to purchase and to pay the price according to the agreement.