The Application of Salam Contract in Islamic Finance-An Islamic Legal Analysis of Traditional and Modern Standards and Models

Abstract

Salam is a classical contract of sale, in which advance payment is made to the seller for deferred supply of goods. In other words, the concept of Salam is contrary to the Bay Muajjal, in which payment is deferred. It is one the prevalent modes of sale that were being practiced even before the advent of Islam. As we find in a Hadith that Allah's Messenger صلى الله عليه وسلم came to Medina and the people used to pay in advance the price of fruits to be delivered within one or two years. The Prophet صلى الله عليه وسلم said, "Whoever pays money in advance for dates (to be delivered later) should pay it for known specified weight and measure (of the dates)". The subject matter in Salam contract is not in existence, so Salam could easily be turned into an illegal trick to eat up Riba (usury). That's why, Shariah permitted it with strict rules and conditions. Therefore, It is mandatory to pay full price of Salam commodity or Muslam Fih in advance, so that the transaction can be distinguished from the transaction called "Bai Al Kali bil Kali" (Sale of debt for debt). The commodity of Salam must be fully specified, without any ambiguity in its quality and quantity, which may cause to a dispute. Moreover, the time and place of delivery of the goods should be determined. all goods that belonge to the same species can be the subject matter of Salam. However, Salam can't be done on identical goods, such as the grain of specific field, etc. 2 The Salam contract, Unlike Murabaha and Ijara muntahiya bil tamlik (Commercial Lease), has not any juristic controversy and it is also free from Hiyal (legal tricks). Furthermore, it has a broad scope in its applications, i.e. trade, agriculture, manufacturing etc. Other than the traditional use of this contract in all these domains, in modern Islamic financial engineering, a lot of products and models are introduced in which Salam can be practiced, such as parallel Salam, Salam in currency, models of Salam in microfinance and the use of Salam in financial market like financing in Sukuk of Salam, Salam in shares and other derivatives. One more factor that increases the value of this research is that, in Islamic legal point of view, Salam financing has many risks. These relate to the nature of contract, capital (Ras ul Mal), commodity (Muslam Fih) and the consumers as well. While practicing this contract, it is necessary to manage all the risks. All these factors need a deep and comprehensive research on this topic.