Sharia Banking and the Financial Industry

Bay al-salam is a contract for deferred delivery that was originally to facilitate the trading activities of farmers who were awaiting the harvest of crops. In more modern times it has also been applied to the production of raw materials and fungible goods in general. Generally agreed conditions for bay al-salam are that:
a) the goods sold need not be in existence at the time of contracting.
b) the delivery date and location must be specified.
c) full advance settlement of the agreed trade price is required at the time of contracting, otherwise the contract would sanction the trading of one debt for another which is not deemed permissible in Islam.
d) the quality of the items to be delivered should be defined. Items must be fungible in nature. Hence, rare items, or those that are not precisely specifiable, cannot be the subject of the bay al-Salam contract. If the quality of the items upon delivery are found to be other than specified, the buyer has the right of refusal.
e) the quantity of the items to be delivered should be defined and fixed according to the normal method of measurement of those items and should not depend upon unforeseeable factors. The quantity of goods purchased under the bay al-salam contract cannot for example be defined as that resulting from the cultivation of a given plot of land since such a quantity may vary according to unforeseeable factors.
f) the buyer does not enjoy ownership of the goods until delivery has taken place.
g) the buyer has the right to take surety from the seller as a form of performance bond.
h) where the seller is unable to produce the contracted items on the delivery date, the buyer may nullify the bay al salam contract and exercise the performance bond.
i) the seller may deliver the contracted items irrespective of the buyer’s circumstances on the delivery date.

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Salam Project

Salam is a sales contract in which the price is paid in advance at the time of contracting, against delivery of the purchased goods/services at a specified future date. Not every commodity is suitable for a salam contract. It is usually applied only to fungible commodities. Some basic rules governing the salam sale are given below:

i) The price should be paid in full at the time of the contract.

ii) Goods whose quality or quantity cannot be determined by specification cannot be sold through the contract of salam. An example is precious stones.

iii) Goods can be sold only by specifying the attributes. They cannot be particularized to a given farm, factory or area.

iv) The exact date and place of delivery must also be specified.

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