Fundamentals of Islamic Finance and Banking

CHAPTER 8Salam

Learning outcomes

Upon completion of this chapter, you should be able to:

1. Define the Salam contract and explain its important characteristics.
2. Discuss the history, Shariah acceptability and benefits of the Salam contract.
3. Describe the role of Islamic banks in the process of Salam and parallel Salam and their practical applications.
4. Elaborate the problems faced in Salam contracts and contrast them with conventional banking.

INTRODUCTION TO SALAM

Under Islamic Shariah law, to be valid, all sales contracts need to meet certain conditions. These are that the asset, which is the subject of the contract, needs to exist at the time of the contract. Moreover, the asset should be owned by the seller and be in physical or constructive possession of the seller. Islam allows practical flexibility in its rules, as needed by the community to perform various business transactions legally and conveniently. Salam and Istisna are the two Islamic finance products that do not follow these Shariah regulations, and they are the permitted exceptions.

In the case of a Salam contract, the payment is made fully in advance at the time of the contract and the delivery of the asset is deferred to a specific time in the future. A Salam contract is like a forward sale contract in conventional finance, with advance payment and deferred delivery. The buyer of the asset is called the Muslam, the seller is the Muslam Ileihi, the payment for the asset is called the Ras al Maal and the ...