1

Assalamo alaikum
SALAM AS MODE OF FINANCING 2
Submitted to: 3

Respectable sir
Hazrat Wali Khatak

submitted by:
Izhar ul haq
 Preface
4
It is the nature of human beings that they love money, and they struggle for earning it
on different ways, some people earn it on halal ways and some other don’t see this is
halal or haram and collect money from everywhere, and specially in the present time
many people they don’t differentiate between halal and haram, and sometimes use
Islamic words like salam, mudaraba, musharaka etcetera for the attraction of people,
but they don’t follow the rules and regulations of these contracts, and eat people’s
money delusively.
So we need to study these contracts in the light of shariah, define it and inform people
about the real form of these contracts.
So I have chosen one of these contracts for study that is “salam”.
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Chapter 1
Definition of Salam its Legitimacy
and its features
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Definition of Salam:

Literally, Salam means to advance.

Technically, Salam refers to a sale in which advance
payment is made to the seller for deferred supply of
goods.
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Legitimacy of Salam contract:

The legitimacy of Salam contract is founded on the

basis of the Holy Quran, the Sunnah of the Prophet
Muhammad, Peace Be Upon Him (PBUH) and the
consent of Muslim Jurists (Ijma’).
The Holy Quran: 8

Surah al-Baqarah, verse 282:

َ ‫(يَا أَيُّ َها الَّذِينَ آ َمنُواْ ِإذَا تَدَايَنتُم ِبدَي ٍْن ِإلَى أَ َج ٍل ُّم‬
.)ُُ‫َس ىًّى ََا ْْتُُُو‬
“O you who believe! When you deal with each other, in
transactions involving future obligations in a fixed period
time, reduce them to writing.”
Ibn Abbas said I declare that a salaf (Salam) contract in
which the Commodity is guaranteed for future delivery
has been permitted by Allah. It is reported that Ibn
Abbas said this verse is a revelation for the particular
purpose of making Salam permissible.
Tafseer attabari (6/43)
The Sunnah of the Prophet Mohammad (PBUH): 9
The Narration of Ibn Abbas
Ibn Abbas had narrated during the migration of Prophet Muhammad
(peace be upon him) from Makkah to Madinah, he found that the people
used to pay in advance the price of fruit (or dates) to be delivered within
one, two and three years. However, such sale was carried out without
specifying the quality, measure or weight of the Commodity or the time of
delivery. The Holy Prophet said: “Whoever pays money in advance (for fruit)
(to be delivered later) should pay it for a known quality, specified measure
and weight (of dates or fruit) along with the price and time of delivery.”

Sahih Bukhari, )3/85,book of salam,2239) and Sahih Muslim,( 3/1226,chapter

of salam,127)
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The ijma’ of the Muslim jurists:

Ijma’ constitutes a juristic basis for the legality of Salam. Ibnu Munzir
said that the scholars agreed that a Salam contract is permissible.
In addition, legality of Salam is also recognized by contemporary
established Shariah bodies
such as International Islamic Academy of Fiqh under the patron of
Organization of the Islamic Conference (OIC).
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Features of the salam contract:

The principal features of Salam are:-

i) Binding contract;
ii) Price of Salam;
iii) Subject matter (Salam asset);
iV) Delivery of Salam asset.
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Binding nature of salam contract:

Salam contract may be concluded using the word

salam, or salaf, or sale, or any other terminology which
indicates sale of a prescribed commodity for deferred
delivery in exchange for an immediate payment of the
price.
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Price of salam:

1- The price of Salam shall be in the form of cash. In this

case, the currency, amount and mode of payment shall
be clearly defined.
2- The price of Salam should be made known between
the seller and purchaser to eliminate uncertainties and
avoid the possibility of dispute.
3- The price of Salam shall be paid immediately at the
place where the contract is concluded. However, the
payment may be delayed up to a maximum of three
days.
4- Debt cannot be recognized as the price of Salam
since debt may be obtained or otherwise.
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Subject matter of salm:
1- The subject matter of Salam must be from fungible
goods, which may be weighed, measured or counted,
the attributes of which do not differ in any significant
manner.
2- Subject matter of Salam should be known.
3- Subject matter of Salam is not permitted in Items that
have subjective variable values, like jewellery and
antiques.
4- Both seller and purchaser must know the quantity of
the subject matter of Salam. The quantity of each item is
determined according to its condition and nature with
regard to weight, measurement, volume and number.
5- It is not permissible for both the subject matter of Salam and the 15
price of the Salam contract to be from the same class like. Gold and
silver, or wheat and barley.
6- The subject matter of Salam must be specifiable so that the seller
may be held responsible for its conformity to the specification.

7- The specification of subject matter of Salam must be

unambiguous in accordance with the customary practices present
in the place and at the time in which the Salam contract is
concluded.

8- The date of delivery for the subject matter of Salam must be

clearly specified and known by both parties.

9- Subject matter of Salam may be secured by a pledge or a

guarantee or any other permissible means of securing payment.
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• Delivery of Salam Asset:

1- The seller has the obligation to deliver the Salam asset to the buyer on the
due date at the place of delivery (as per 6.3.1) in accordance with the terms
of the contract, such as agreed specifications and quantity.

2- If the seller offers delivered goods of a better quality than is required in the
contractual specifications, the purchaser must accept the goods unless the
seller seeks a higher price for the better quality. However this applies only if
the inferior description specified in the contract is not itself deemed
absolutely necessary.
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3- If the quality of the delivered asset is lower than is required by the contractual
specifications, the purchaser has the right to either reject or to accept the asset in such
condition. If the purchaser accepts, it is permissible for the contracting parties to agree
to a settlement on terms of acceptance of the asset even at a discounted price.

4- It is not permitted to stipulate a penalty clause in respect of delay in the delivery of

Salam asset.
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Chapter 2
Application of salam contract

In the time of Holy Prophet (PBUH) the salam was taking

place generally in agriculture field, and sometimes in
other things.
Salam in agriculture field: 19

Ibn Abbas had narrated during the migration of Prophet

Muhammad (peace be upon him) from Makkah to Madinah, he
found that the people used to pay in advance the price of fruit (or
dates) to be delivered within one, two and three years. However,
such sale was carried out without specifying the quality, measure or
weight of the
Commodity or the time of delivery. The Holy Prophet said: “Whoever
pays money in advance (for fruit) (to be delivered later) should pay
it for a known quality, specified measure and weight (of dates or
fruit) along with the price and time of delivery.”
So the salam was taking place generally in agriculture.
Salam in animals:
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Scholars are disagreed on the legality of salam in animals.
Hanafi scholars said that salam is not permissible in animals
according to the narration of ibne Abbas: [that the Holy
Prophet (PBUH) prevented salam in animals].
And Maliki, Shafi’i, and Hanbali scholar allowed salam in
animals with measurement of the legality of loan contract in
animals.
Abu daood narrated: [that Prophet (PBUH) ordered Abdullah
ibnul a’mar ibnul a’as to purchase one camel against two
camels for a specific time].
And this is salam because the contract took place for a
specific time and also there is increase in amount.
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Salam in meat:

Imam abu Hanifa said: “salam is not permissible in

meat with bones”.
And two students of Abu Hanifa and maliki, shafi’i,
and hanbali scholars allowed salam in meat with
some conditions, like:
Meat , beef, one year old two years old, and
weight, two kilo three kilo etc.
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Salam in fish:

The scholars agreed that the salam

contract is permissible in fish.
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Salam in clothes:

Salam is permissible in clothes, ibnu

munzir said: ( that scholars are agreed
that salam is permissible in clothes ) .
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Application of salam in banks

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Purpose of salam contract:
To meet working capital requirements to manufacture or acquire
goods by the customer and to deliver it to the Bank on Due Date. It
also covers financing to meet short term or day to day liquidity
requirements for both core and overheads expenses. However, the
major purpose under Salam is financing for manufacture or
acquisition of specified goods. Salam shall be used for:

• Working capital financing for manufacturing and purchase of

goods.
• Export Financing, for all Pre shipment facilities.
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Need for salam:

– Empirical findings of a survey conclude that agriculture income

represents only up to 60 percent of the income of an average
farm household. About 70 percent of farmers participate in the
credit market. They need money to purchase crops inputs, to pay
the labour and to hire rental machinery. Farmers believe that they
can save up to 25 percent in costs if they purchase inputs on cash.
The survey also discloses that middlemen are the larger financers
and buyers of crops in the rural economy whereby only 10
percent of transactions are conducted on a purely cash basis.
Farmers usually return the money after the sale of the crop.
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Rules and regulations of state bank

for salam contract.
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i) Salam (advance payment against deferred delivery of
goods) means a kind of sale
whereby the seller undertakes to supply specific goods to a
buyer at a future date in consideration of a price fully paid in
advance at the time the contract of sale is made. .
ii) The buyer shall pay the price in full to the seller at the
time of effecting the sale.
Otherwise, it will be tantamount to a sale of debt against debt,
which is expressly prohibited in Shariah.
iii) The specifications, quality and quantity of the commodity
must be determined to avoid any ambiguity which could
become a cause of dispute.
iv) Date and place of delivery must be agreed upon but can be
changed with mutual consent of the parties.
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v) Salam can be effected in respect of ‘Dhawatul-Amthal’
which represent such commodities the units of which are
homogenous in characteristics and which are traded by counting,
measuring or weighing according to usage and customs of trade.
Therefore, other things such as precious stones, cattle heads etc.
cannot be sold through the contract of Salam because every stone
or individual animal is normally different from the others.
vi) It is necessary that the commodity which is the subject of Salam
contract is normally expected to be available at the time of delivery.
vii) Salam cannot be effected in respect of things which must
be delivered on spot.
Examples are exchange of gold with silver or wheat with barley
where it is necessary according to Shariah that the delivery of both
be simultaneous.
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viii) Salam cannot be tied to the produce of a particular farm, field or
tree.
ix) In a Salam transaction, the buyer cannot contractually bind the seller
to buy-back the commodity that will be delivered by the seller to the
buyer.
x) In Salam transactions the buyer shall not, before taking
possession (actual or constructive) of the goods sell or transfer
ownership in the goods to any person.
xi) The IBI (buyer in Salam) can enter into a Parallel Salam contract
without any condition or linkage with the original Salam contract. In one
of them, the IBI will be the buyer and in the second the seller. Each one of
the two contracts shall be independent of the other. They cannot be tied
up in a manner that the rights and obligations of original contract are
dependent on the rights and obligations of the parallel contract. Further,
Parallel Salam is allowed with a third party only.
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xii) In order to ensure that the seller shall deliver the commodity on the
agreed date, the IBI can ask him to furnish a security.
xiii) In case of multiple commodities, the quantity and period of delivery
for each of them should be separately fixed.
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xiv) It can be stipulated while entering into the agreement
that in case of delay in delivery of the commodity by the
seller, he shall and be deemed to have irrevocably
authorized the IBI to recover from him an amount
calculated at a predetermined percentage per day or per
annum as compulsory contribution to Charity Fund constituted
by the IBI. This contribution to Charity Fund shall not
constitute income of the IBI. The IBIs can also approach
competent courts for award of damages, at discretion of the
courts, which shall be determined on the basis of direct and
indirect costs incurred, other than opportunity cost.
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Foreign Bill Discounting:

‘Export bill discounting’ is commonly used term in international
trade.
As you know, finance plays a major role in Business. Especially in
exports, the volume of finance requirement is higher than
domestic sales because of its volume of business.
Let the business contract with overseas buyer be on credit
basis, the exporter needs finance immediately up on shipment
of his exported goods. Here he approaches his banker to
finance against his exported goods by producing documentary
proof of export, and avail finance. Export bill discounting is
common in International trade.
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As per the guidelines of government of each country, almost all

banks extends export bill discounting facility to exporters with a
low interest rate.

And it is a prohibited contract according to shariah because here

salam took place in commodities from one class and it is riba
annasa.
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State bank instruction for foreign bill discounting:

The State Bank of Pakistan (SBP) issued instructions to Islamic banks and
conventional banks dealing in Islamic banking to standardize Shariah
practices of Islamic banking institutions (IBIs) regarding foreign bill
discounting.
In order to standardize Shariah practices of Islamic banking institutions
(IBIs) regarding foreign bill discounting, the following instructions are
issued which will be applicable with immediate effect:-
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i. Salam of foreign currency is not a preferred transaction; however if
any IBI is interested in undertaking such transaction, the same shall be
executed at ‘the weighted average rate of previous day’s
transactions’ executed by the IBI with its clients.

ii. In case ‘Qard-e-Hasanah cum Wakalah’ model is used for bill

discounting, it shall be ensured that the agency fee charged for
collecting the proceeds of the bill is based on ‘Ujratul Mithl (market
fee)’ and shall not be linked to the bill amount and the tenor etc.

iii IBIs may also use Murabaha, Musawama, Salam and Istisna-cum-
Wakalah etc to meet financing needs of their customers independent
of foreign bill.
Conclusion 37

I have concluded my assignment in following points:

1- Salam refers to a sale in which advance payment is made

to the seller for deferred supply of goods.

2- The legitimacy of Salam contract is founded on the basis of

the Holy Quran, the Sunnah of the Prophet Muhammad,
Peace Be Upon Him (PBUH) and the consent of Muslim Jurists
(Ijma’).

3- Salam is a binding contract.

which may be weighed, measured or counted, and its
quality, quantity and nature must be known.
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4- The price of Salam shall be in the form of cash, and it shall be

paid immediately at the place where the contract is concluded.

5- Debt cannot be recognized as the price of Salam since debt

may be obtained or otherwise.

6- The subject matter of Salam must be from fungible goods,

7- The seller has the obligation to deliver the Salam asset to the
buyer on the due date at the place of delivery
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8- It is not permitted to stipulate a penalty clause in respect of delay

in the delivery of Salam asset.

9- In the time of Holy Prophet (PBUH) the salam was taking place
generally in agriculture field, however it can also takes place in
animals clothes and fish etc.

10- Salam is prohibited in foreign bills discounting.

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‫والحمد هلل في األولى واآلخرة‪.‬‬