SALAM

1. SALAM Presented by: Ali Sheikh Mohamed Omar Ali Sheikhdon AbdiMohamed Abdi Jama Abdirahman Mohamed Hassan.

2. Definition &Concept • Seller agrees 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.

3. SALAM The basic conditions for a validity of a sale in Shriah are three: (1)The purchased commodity must be existing, (2)The seller should have acquired the ownership of that commodity, (3)The commodity must be in the physical There are only two exceptions to this principle in Shariah: (1)Salam (2)Istisna

4. Background of Salam Before prohibition of interest farmers used to get interest based loans for growing crops and harvesting. After prohibition of interest, they were allowed to do Salam transactions. This helped them to get money in advance for their needs.

5. Purpose of Salam • To meet the needs 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 working capital • To meet the needs of liquidity problem. • To meet the need of traders for import and export business.

6. BenefitsSalam is beneficial to the seller, because he receives the pricein advance, and it is beneficial to the buyer also, because normally, the price in salam used to be lower then the price in spot sales.

7. 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, because the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not be achieved.

8. Cont, 2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified 3. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute.

9. (4)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. (5)The exact date and place of delivery must be specified in the contract.

10. (6) there should be actual delivery of commodity.

11. Difference b/w Salam & Murabaha Murabaha • In Murabaha purchased goods are delivered at spot, price may be either on spot or differed. • In Murabaha price may be on spot or differed. Salam • In Salam, purchased goods are deffered, price is paid on spot. • In Salam price has to be paid in full in advance.

12. Difference b/w Salam & Murabaha Murabaha • Murabaha can be executed in particular commodity. • Murabaha can be executed in those things. Salam • Salam is not executed in the particular commodity but commodity is specified by specifications. • Salam cannot be effected in respect of things, which must be delivered at spot. e.g Salam b/w wheat and barley.

13. Delivery of Salam goods • Before delivery, goods will remain at the risk of seller. • After delivery, risk will be transferred to the purchaser. • Possession of goods can be physical or constructive. • Transferring of risk and authority of use and utilization/consumption are the basic ingredients of constructive possession.

14. PARALLEL SALAM

15. Parallel Salam • Parallel Salam is an arrangement by buyer to sell the commodity he purchased from some one; • The buyer can not sell the commodity before he takes the possession from seller in a Salam contract as we discussed earlier; • But the buyer may sell the commodity he bought it on Salm to another person on Salam basis; • This arrangement is called 'Parallel Salam';

16. A parallel Salam transaction Salam 1 Contract on 25 June Delivery on 20 August Salam 2 Contract on 05 July Delivery on 23 August Mr Ahmed Mr Khalid Parallel Salam • Lets assume Mr. 'Ahmed' enters into a Salam Contract with Mr. 'Basheer' to purchase one thousand bags of wheat a price 100,000/= per bags to be delivered on 20 August; • In this contract (“Salam A”): • Mr. 'Ahmed' is a Purchaser/Buyer; and • Mr. 'Basheer' is a Seller; • Mr. 'Ahmed' can enter into another Salam with Mr. 'Khalid' to sell the same wheat at a price of 105,000/= per bags on a 21 August; • In this contract (“Salam B”): • Mr. 'A' is a Seller; and • Mr. 'Khalid' is a Purchaser. Mr Basheer

17. Parallel Salam: important points • Parallel Salam is allowed with a third party only; • The seller in the first contract cannot be made purchaser in the parallel contract of Salam; • It will be a buy-back arrangement, which is not permissible; • If the purchaser in the second contract is a separate legal entity, then it is necessary that it should not be a subsidiary or sister concern of the seller company in the first contract; • The arrangement will not be allowed because in practical sense it will be a 'buy-back' arrangement.

18. Agency agreement • If the bank has no expertise to sell the commodities received under Salam contract, then the bank can appoint the customer as its agent to sell the commodity in the market/third party, subject to Salam agreement and Agency agreement are separate from each other. • A price must be determined in agency agreement on which the agent will sell the commodity but if the price is increased, the benefit can be given to the agent.

19. Promise to purchase • Before maturity bank can take promise to purchase from a third party, after taking delivery, bank will sell the same commodity to the promissee, and he will be bound to purchase the same according to his undertaking. • This promise should be unilateral.

20. Penalty for non performance • Seller can undertake in the Salam agreement that in case of late delivery of Salam goods, he shall pay to the charity account maintained by the bank a sum calculated on the basis of….% per annum for each day of default, bank will spend this amount in charity purpose on behalf of the client.