Understanding Islamic Finance - Doha Academy of Tertiary Studies

Forward Sales: Salam and Istisna‘a 255The market risk would result from the buyer being unable to market the goods at the timeof delivery, or selling them at a sale price lower than the cost to him. These risks can bemitigated by the structure of the deal.In Bahrain, for example, aluminium has been designated the underlying asset for issuingSalam Sukuk. The Bahrain government sells aluminium to the buyer in the future market.The Bahrain Islamic Bank (BIB) purchases the aluminium and it has been nominated torepresent the other banks wishing to participate in the Salam transaction. As consideration forthis advance payment, the government of Bahrain issues Salam certificates and undertakesto supply a specified amount of aluminium at a specified date.10.9 SUMMARY OF SALAM RULES• In Salam, the seller undertakes to supply specific goods to the buyer at a future date inexchange for an advanced price fully paid on the spot.• As the object of sale in Salam is a debt, payment of the price cannot be delayed, otherwiseit will be a sale of debt for debt, which is prohibited.• The capital (price) of Salam is money, but it can also be a service or a usufruct.• A debt of the buyer in Salam against the seller or against any third party cannot be usedas capital in Salam.• The object of exchange must be fungible, clearly describable in terms of weight, size,volume, colour, quality, grade, and the like in a way that avoids disputes in the future.Negligible variation can be tolerated. Salam has to be in things that usually exist inmarkets but are not in the possession of the seller at the time of contracting. The objectsof Salam can be agricultural, industrial or natural goods or any well-defined service.• Salam cannot take place in money or currencies. Salam is not permitted for anythingspecific like “this car”, land, buildings or trees or for articles whose value changesaccording to subjective assessment.• It must also be ensured that the commodity is able to be delivered when it is due.• The place and time of delivery of the object have to be specified. Instalments in deliveryof the Salam goods are permissible.• Salam goods can be delivered before the stipulated date if it does not cause the buyerinconvenience/loss.• Salam involves no cash settlement. Actual physical delivery is a must. However, if thecontract is rescinded for any reason, the actual price paid has to be recovered.• The seller in Salam need not necessarily be an owner or a producer of the goods.• The Salam contract is conclusive and binding. It can be altered or revoked only with theconsent of both parties.• Banks should not offset their receivables for payment of the Salam price, as a Salam salecannot be contracted against a loan, or partly cash and partly loan, in which case thecontract will be effective only to the extent of the cash payment.• If a bank advances money for more than one item, it will be advisable to lay down abreakdown of the value of each item. This will facilitate readjustment of the contract incase of its partial fulfilment. The contract should also expressly provide for the periods ofdelivery of different items. The same will apply if the contract stipulates different placesof delivery.• If the seller is willing to hand over the contracted goods on the due date, the bank isduty-bound to take possession of the goods, failing which the former will be absolved ofhis liability. The bank can refuse to accept the goods only if the goods do not fulfil the