In the previous article, we have discussed the basic rules of bay al-salam. Today, we are going to learn how the concept of salam is used in modern Islamic financial institutions. The salam contract is used by Islamic banks for different purposes especially to finance agriculture sector. It is most effective financing tools to provide microfinance services to small and needy farmers. Generally, the parallel salam is used in modern Islamic financial institutions. However, to get the complete picture, it is pertinent to discuss both types of salam contract.
Types of bay al-salam
The salam contract may be divided into two types: ordinary salam and parallel salam.
It is a normal salam contract which is discussed by jurists and scholars in classical fiqh books. As we discussed in the previous article, it is a type of contract in which the seller undertakes to deliver the commodity to the buyer at future date. The price is fully paid in advance. So, it involves only two contracting parties: the buyer and the seller just like any other ordinary contract.
Mechanism of ordinary salam in Islamic banks
1) The customer approaches the Islamic bank to get financing for a specified commodity.
2) The Islamic bank (as buyer) enters into a salam contract with the customer (as seller).
3) The Islamic bank pays the full price at the time of contract execution to customer for a specified commodity.
4) The customer delivers the commodity to Islamic bank on pre-agreed date.
It is not allowed for buyer in salam contract to sell the commodity before he takes the possession of that commodity. However, it is allowed for buyer in salam contract to make a parallel salam contract for the same goods. The following two conditions must be observed in this type of arrangement.
First and foremost, there must be two independent and separate contracts. They cannot be tied up in a manner that the performance of one contract is dependent on other. For example, if A purchased 100 tons of rice form B thorough salam contract. The rice will be delivered on future date (say: 30 May 2018). Now A can enter into another salam contract with C in which he sells the same amount of rice at the same date. This parallel salam transaction is permissible with the condition that delivery of rice to C would not conditioned on delivery from B. In other words, A has responsibility to deliver the 100 tons of rice to C on due date whether he gets the rice from B or not. A cannot make an excuse if B fails to provide him the commodity on due date.
The second condition for parallel salam arrangement is that it cannot be used for buy back facility. In other words, it is not allowed that the seller in first contract is the buyer in the second contract. This facility of parallel salam is only allowed for third party.
Mechanism of parallel salam in Islamic banks
The problem with ordinary salam is that Islamic banks and financial institutions receive commodities from their clients rather than receiving money. Therefore, they can manage their risk to enter into a parallel salam contract with another client. The price in second transaction may be a litter higher than the price in first transaction. So, the difference between two prices would be the profit for Islamic bank or financial institution.
The following steps are involved in a parallel salam contract.
1) The bank (as buyer) enters into a salam contract with the customer and pays full cash in advance for the commodity which will be delivered on future date. (for instance, 100 tons of rice on 30 May 2018)
2) The bank (as seller) enters into a parallel salam contract with another customer (buyer) to sell the commodity specified in the first salam contract. The customer pays the price fully at the time contract and the commodity will be delivered on future date. (100 tons of rice on 30 May 2018)
3) On 30 May 2018, the commodity is delivered to the Islamic bank.
4) Islamic bank delivers the commodity to his client on pre-agreed date (30 May 2018 in our case according to parallel salam contract).