Salam
Salam is a sale in which the buyer pays the full price at the time of contract for goods of a precisely specified type, quantity and quality, to be delivered on a fixed future date.
Also called: bay' al-salam · bai salam · salaf · advance purchase · forward purchase
Salam is a recognised exception to the general rule that one cannot sell what one does not yet own. It was used historically to finance farmers before harvest, and the conditions are strict precisely because it is an exception: the price must be paid in full at the outset, and the goods must be fungible and described closely enough that there is no meaningful gharar about what will be delivered.
Modern uses include agricultural and commodity finance and working capital for producers. A bank that buys under salam can hedge by selling the same specification to a third party under a separate, parallel salam, provided the two contracts are independent.
In practice
Salam cannot be used for gold, silver or currency exchanged against money, because those exchanges must be settled on the spot. Nor can the buyer resell the goods before taking possession of them.
Example
In March a bank pays a cooperative US$200,000 for 400 tonnes of a specified grade of wheat to be delivered in August. The cooperative uses the money to fund the harvest; in August it delivers the wheat, which the bank sells.
Commonly confused with
| Term | How it differs |
|---|---|
| Istisna' | Salam is for fungible goods with the price paid upfront. Istisna' is for something to be manufactured or built, and the price may be paid in instalments. |
See also
- Istisna'Istisna' is a contract to manufacture or build a specified asset for an agreed price, which may be paid in advance, in instalments or on delivery. It is widely used in project, construction and infrastructure finance.
- GhararGharar is excessive uncertainty or ambiguity in the essential terms of a contract — the subject matter, the price, the delivery — of a kind that can make one party's gain depend on the other's ignorance.
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
- Forward ContractA forward contract is an agreement to exchange one currency for another on a future date at a rate fixed today. It creates a binding obligation on both sides — which is what makes it useful for certainty and dangerous if the underlying payment never happens.