Wan Mohd Ashraf Adlin

[email protected]
ISLAMIC
FINANCIAL MARKETS
ISLAMIC FINANCIAL OPERATIONS
 CONTENTS
2

 BASIC CONCEPT OF ISLAMIC FINANCIAL

OPERATIONS
 OVERVIEW OF CONTRACTS IN ISLAMIC
FINANCIAL OPERATIONS
 OVERVIEW OF PRODUCTS IN ISLAMIC
FINANCIAL INSTITUTIONS
THE RELATIONSHIP BETWEEN THE FOUR INTRODUCTORY THEORIES

1. Theory of Ahliyyah
(Legal Capacity)

4. Theory of Aqd
(Contract)

Contract

3. Theory of
Milkiyyah
(Ownership)

2. Theory of Mal
(Property)
 SHARIAH STANDARD OF BUSINESS CONTRACT
4

 Literally:
 Fastening and attaching/tying accordingly, guarantee, or
promise.
 Technically:
 A connection between an offer and as acceptance in a lawful
manner created on the basis of desire of two or more parties
which has its effect on the subject matter.
 Contract is highly respected in Islam as it represents agreed
commitment and obligations based on mutual consent
between the contracting parties. Each party has agreed to
carry out certain matters or actions required by the
counterparty. The dealings between individuals and
institutions will never be reliable and consistent unless with
their agreement on the sanctity of the contract.
 SHARIAH STANDARD OF BUSINESS CONTRACT
5

 Contract is an indication and proof of consent which

forms the core of any muamalat dealing. The mutual
consent of the contracting parties is the underlying
principle for ownership transfer in Islam.
 Since consent or intention of a person is intangible
and hidden, it must be manifested by expressions by
the contracting parties. The consent must be genuine
in nature where the contracting parties freely express
their intentions, understand the effects of their
expressions, have valid information about the subject
matter and not misguided. Thus, any practice that
distorts the genuineness of the consent is condemned
in Islamic jurisprudence.
6

 Contract as a mechanism of dealings between people

must be guided with the Shariah guidelines in order to
maintain stability and avoid hostility between the
contracting parties. The topic of contract is very crucial
subject in the area of Fiqh Muamalat discipline.
 TYPES OF ISLAMIC BUSINESS CONTRACT
7

Legality/ Permissibility

Nomenclature

Purpose
Based on
Reciprocity

Validity

Executability

Bindingness

Possession Requirement

Effectiveness of the Commitment

 PILLARS (CORNERSTONE) OF CONTRACT
8

Pillars of Contract

Format: Offer and

Acceptance (al- Contracting Parties Subject Matter
Sighah: al-Ijab and (al-’Aqidan) (Mahall al-Aqd)
al-Qabul)
 PILLARS (CORNERSTONE) OF CONTRACT
9

Elements & Conditions

Format: Offer and Contracting Parties Subject Matter

Acceptance (al-Sighah: al-
Ijab and al-Qabul) (al-’Aqidan) (Mahall al-Aqd)

~Understood by all parties.

~Immediate confirmation. ~Legally permissible.
~Offer & acceptance ~Valuable.
connected in one single ~Perfect capacity. ~Details of quality, the
session. sum, types, etc.
~Prudence & Puberty.
~All contracting parties to ~Legally owned by the
~Willingness & consent.
remain to have full seller.
capacity until end of ~Deliverability of the
transaction. owner.
~Appropriate acceptance.
 PILLARS OF CONTRACT
10

 Format: Format of Offer and

Acceptance

Words Action

Verbal/ Oral Gestures

Written Give-and-Take

Silence (Situation/
Context)
 PILLARS OF CONTRACT
11

 Contracting Parties
Contracting Parties

Offeror Offeree

 They must be must at the age of puberty and sane. The contracting party could
be an natural individual or an institution.
 The contracting parties must enjoy the required legal capacity during the
performance of the contract. The contracting party could be one of the
followings:
i. The owner of the subject matter who has authority on the subject matter.
ii. An agent appointed by the owner who performs the contract based on agency
(wakalah) contract.
iii. A third party which has neither wilayah nor wakalah on the subject matter.
His transaction on the subject matter is known in Islamic jurisprudence as
fadalah.
 PILLARS OF CONTRACT
12

 Subject Matter: Subject Matter

Exchange Contracts Charitable Contracts

(uqud al-mu’awadat) (uqud al-tabarru’at)

Compensated Item or
What is Exchanged for The donated Item
(al-Mu’awwad bih) (al-Mutabarra’ bih)

Compensation or What is
given/ paid in exchange
(al-Iwad)
 DEFINITION OF SUBJECT MATTER
13

 Definition
 Refers to the contracted object upon which the legal
rulings and effects of the contract are manifested.
 The subject matter may take the form of corporeal
property (‘ayn maliyyah) such as the subject matter of a
sale contract (al-mabi’) or pledged object (al-marhum) in
a pledge contract and usufruct in a lease contract.
 The subject matter can also be something of an
incorporeal property such as a woman in a marriage
contract. However, it is worthy to note that not everything
is legally or customarily eligible to be contracted as the
subject matter since shariah has laid down some essential
conditions of the subject matter that need to be fulfilled.
14

 Muslim jurists had laid down FOUR (4) conditions

for the subject matter:
 It must be in existence at the time of the contract.
 It can be delivered (maqdur al-taslim).
 It must be suitable for transactions according to
Shariah (mashru’).
 It can be ascertained (ma’lum)
 CONDITION OF SUBJECT MATTER
15

 1. The subject matter must exist.

 Islamic law requires that subject matter must be in
existence at the time when an ‘aqd (contract) is
concluded. Otherwise an ‘aqd is void, even if the subject
matter would exist in the future.
 Therefore the sale of the animal fetus yet to be born while
it is still in the mother’s womb is void if the mother is not
part of the sale.
 Exception is given to bay al-salam (are by advance
payment for the future delivery), bay al-istisna (contract
of manufacture), ijarah (contract of hire) and musaqat
(contract of irrigation) based on necessity and customs.
 CONDITION OF SUBJECT MATTER
16

 2. The subject matter can be delivered

 Islamic law requires that subject matter must be able to be
delivered to the contracting parties. Otherwise an ‘aqd is
void. Furthermore the delivery must be possible without
causing any damage to the subject matter, otherwise the
‘aqd becomes voidable. If the parties tolerate the damage,
then the contract is valid.
 All mazhab have agreed that anything which cannot be
delivered or anything which its deliverability cannot be
assured is not subject to be traded.
 Hence, it is void to sell a bird on the sky, fish in the sea or
runaway horse.
 CONDITION OF SUBJECT MATTER
17

 3. The subject matter must be legal

 Lawfulness requires the object to be lawful and
permissible to be traded in the eyes of Islam.
 Islamic law requires that subject matter must be of
commercial value, otherwise an ‘aqd is void. Even if a
particular country allows such object to be in trade, the
transaction will still be considered void if Islam forbids it.
 Therefore the sale of the wine, blood, pork is void even if
these articles are of value to others or according to civil
law.
 Similarly, the sale of items that can be acquired
gratuitously without purchase, such fish in the sea, bird in
the air, etc., But once acquired, it can become the subject
matter of transaction.
 CONDITION OF SUBJECT MATTER
18

 4. The subject matter must be ascertainable

 Islamic law requires that subject matter must be
ascertainable and known to contracting parties. Sufficient
knowledge about the subject matter is necessary to avoid
future disputes.
 If the subject matter of the ‘aqd is of different kinds or
articles, it is necessary to determine individually. But if it
is of similar articles, it is sufficient to determine one to
these articles in order to attain knowledge of the subject
matter.
 Civil law also subscribes to this injunction as it provides
that an agreement which is uncertain or is not capable of
being made certain is void.
 IGNORANCE (JAHALAH) IN FINANCIAL CONTRACTS
19

Serious Ignorance • Denotes an occurrence that may lead to dispute among the
contracting parties, and hence renders the contract void.
(Jahalah • E.g., the sale of the fetus of an animal in its mother’s
Fahishah) womb.

• Refers to one in which the occurrences does not amount to

Minor Ignorance dispute among the transacting parties, and hence renders
the contract valid.
(Jahalah Yasirah) • E.g., the sale of a house with an unknown basis.

Moderate • The one that jurists are disagreeable whether to categorise

Ignorance it under serious ignorance or minor ignorance.
• If it falls under serious ignorance, it assumes the same
(Jahalah legal ruling as serious ignorance and so if otherwise in
minor ignorance situation.
Mutawassitah)
 TERMINATION OF CONTRACT
20

Termination of
Binding Contract
(Aqd Lazim)

Termination of Non-
Binding Contract
(Aqd Ghayr Lazim)

Termination of
Suspended
Contract (Aqd
Mawquf)
 TERMINATION OF CONTRACT
21

 Termination of Binding Contract (Aqd Lazim)

 Refers to the contract that cannot be terminated
unilaterally except with the mutual agreement of both
contracting parties. Sale and lease are examples of
binding contract. The binding contract could be
terminated through:
i. Completion of the contract: could take place by two
main methods:
a. Achievement of the contract objective.
b. Expiration of time agreed in the contract.

ii. Dissolution (faskh) of the contract.

iii. Death of one of the contracting parties.
 TERMINATION OF CONTRACT
22

 Termination of Non-Binding Contract (Aqd Ghayr Lazim)

 Refers to the contract where the contracting parties or one of them
have the right to dissolve the contract at any time they desire. Thus,
non-binding contract could be divided into two types:
a. The mutually non-binding contract such as wadi’ah, ‘ariyah,
shirkah, wakalah etc, could be terminated with:
i. Dissolution (faskh) by the contracting parties or one of them.
ii. Death of the contracting parties or one of them.
b. The unilaterally non-binding contract such as rahn is not binding on
the pledgee but only binding on the pledgor, could be terminated
with:
i. Dissolution of the contract by the party which owns the right to
dissolve it. In the case of rahn and kafalah, the pledgee (murtahin)
and beneficiary of the guarantee contract have the right to dissolve
the contract accordingly.
ii. Death of the contracting parties or one of them.
 TERMINATION OF CONTRACT
23

 Termination of Suspended Contract (Aqd

Mawquf)
 Will be terminated if the principal owner who has
authority on the contract performance does not
endorse the contract.
24

Q&A
 OVERVIEW OF CONTRACTS IN ISLAMIC FINANCIAL OPERATIONS

25

• Musharaka
Partnership
Contract h
• Mudarabah

Security • Kafalah
Contract
• Rahn

Charitable • Hibah
Contract
• Wadi’ah

Leasing
Contract • Ijarah
 OVERVIEW OF CONTRACTS IN ISLAMIC FINANCIAL OPERATIONS

26

Agency
Contract
• Wakalah

• Hiwalah
Supportin • Muqasah
g Contract • Ibra’
• Wa’d
• Bay’ al-Murabahah
• Bay’ al-Istisna’
Ex- • Bay’ al-Salam
change- • Bay’ al-Dayn
based
Contract • Bay’ al-Sarf
• Bay’ al-Inah
• Bay’ al-Tawarruq
27

Research Task
*PowerPoint presentation of IFM research activity (GROUP)
28
 DEFINITION
29

 Literally:
 From word al-ribh (‫ )اـــلرـبــح‬which means increase in capital or
profit of trading
 Technically:
 Sale in which the mark up is disclosed to the purchaser as per the
seller’s purchase price for a trust-sale for a certain specific asset.
 Murabahah is a type of contract, a form of sale, where the
seller expressly mentions the cost of the sold commodity he
has incurred, and sells it to another person (the buyer) by
adding some profit or mark-up thereon.
 Mechanism has to be conducted with complete sincerity/trust
by the seller/financier by stating the cost price of the
purchase and the total profit incurred clearly and truthfully.
Hence, a sale based on trust (amanah).
 EVIDENCES
30

 Al-murabahah is a legitimate contract in Islam.

 Majority of fuqaha comprising the sahabah (companion of
the prophet), the tabien (followers of the sahabah) , and
imam of the mazhab considered al-Murabahah as a
permissible contract based on rukhsah principle.
 Al-Quran
 EVIDENCES
31

 Hadith
 Some scholars made murabahah analogous to a form
of sale called Tawliyyah (sale at purchase price
without making profit)
 It was reported that when Prophet (s.a.w) was
preparing for hijrah to Madinah, Abu Bakar bought 2
camels for the journey. The Prophet (s.a.w) said to
Abu Bakar: Sell to me (at cost without profit) one of
them. Abu Bakar said: It is yours for nothing. The
Prophet (s.a.w) said: I would not take it without price.
 PILLARS OF AL-MURABAHAH
32

Murabahah Pillars
Merch
andise
Seller Buyer Price Sighah
or
goods
 FLOWS OF AL-MURABAHAH
33

Payment of purchase price +

Payment of purchase price Premium

Suppliers of
Goods
Islamic Bank Customer

Sale of asset Sale of asset

 CONDITIONS OF AL-MURABAHAH
34

Product and Contracting Offer and

 5 important elements for condition of al-
selling price parties acceptance

murabahah:No riba trading The initial contract

shall be involved must be valid
 CONDITION OF AL-MURABAHAH
35

1. Product and selling price

 Product must be clearly defined including its type, quantity
and other descriptions.
 Selling price - its cost and profit must also be disclosed
clearly and truthfully.
 Act of concealing cost price and/or margin of profit render
transaction null and void.
2. Contracting parties
 Seller/ financier – responsible for supplying the product
ordered by the buyer.
 Buyer/ customer – obligated to pay for the product he
purchased according to agreed terms of the agreement.
 Both must be adults, rational, intelligent and can be held
accountable.
 CONDITION OF AL-MURABAHAH
36

3. Offer and acceptance

 It shall contain the two important elements mentioned i.e.. Cost price and
rate of profit.
 The original price must be fungible i.e.. The price at which the seller
obtained the goods must be measured by weight, volume or number of
homogeneous goods.
4. No riba trading shall be involved
 Products traded cannot be paid by barter system from ribawi items
prohibited by the Prophet (s.a.w)
 i.e.. Gold for gold, silver for silver, wheat for wheat, flour for flour, dates for
dates and salt for salt and barley for barley unless weight, measurement and the
calculations are equal.
 Also forbidden egg. Selling 100kg of good flour at the price of 120kg of
sub quality flour – constitutes riba.
5. The initial contract must be valid
 The traded item or property must be lawfully owned by the seller
according to Shariah requirements.
 CONDITIONS OF PROFIT
37

 The amount of profit charged can be in several form:

1. Ratio : Charge RM100 for every RM1000
2. Percentage : Charge 15% profit from cost
3. Fixed amount: Charge fixed amount of money
 Minimum amount of profit recommended is the
amount that can sufficiently cover payment of
business zakat (2.5%) and other expenses bear by
the trader.
 No limit to the amount of profit the traders can
legitimately charge the customers since no evidence
that specifies any amount permitted for the traders to
do so.
 NON-SPECIFICATION OF PROFIT RATE IN TRADE
38

 Reason to the non-specification of amount of profit in trade:

1. Limitation of profit rate allowable is something against the rule of fair
and justice.
2. Differences between types of goods that have fast circulation in nature
compared to product that have rather slow circulation or slow demand;
hence profit rate for the former should be different from the latter.
3. Differences between traders sell product in small quantity than those
sell massive amount of product.
4. Differences between traders deal in cash compared to those that can
accept credit or deferred payment.
5. Differences between goods that considered necessity (dharuriyyah)
compared to complementary (hajiyyah) and luxury (kamiliyyah) goods.
Necessity goods should be charge lower profit as it is needed item.
6. Differences between traders that easily acquire their product from those
that can only acquired it through difficult process. Or traders that sell
raw product compared to modified product.
 APPLICATION
39

 Islamic financial institutions aim to make use of bay

al-Murabahah in circumstances where they will
purchase raw materials, goods or equipment etc. and
sell them to a client at cost, plus a negotiated profit
margin to be paid normally by installments.
 Among others applications of contract of murabahah
in Islamic banking are:
 Murabahah financing
 Bank’s treasury product through murabahah commodity
 Issuance of sukuk murabahah
 International trade financing
 MODERN APPLICATION
40

 Tri-partied Murabahah
 Based on Murabahah lil-amir bisshira (Murabahah to
the purchase order) concept.
 Widely applicable because used as one of financing tools
by Islamic banks worldwide.
 Murabahah to the purchase orderer (MPO) for a pre-
agreed selling price, which includes a pre-agreed profit
mark-up over its cost price, this having been specified in
the customer's promise to purchase. The payment is
payable within a fixed future date in lump sum of by
fixed installments
 It is one of the usual practicalities adopted by the Islamic
banks in Malaysia for assets like car, house and etc.
 TRI-PARTIED MURABAHAH
41

Islamic Bank

2 4 3

Customers 1 Real Estate Agent/ Car Agent

 MODERN APPLICATION
42

 Sukuk Murabahah
 Sukuk defined as trust certificate or participation
securities which grant the investor a share of an asset
along with the cash flows and risk commensurate
with such ownership.
 Sukuk holder are entitled to shared in the revenues
generated by the sukuk assets and proceeds of the
realization of the sukuk assets.
 SUKUK MURABAHAH
43

Sell
3
Sell
1

Investor Murabahah Sukuk SPV

4
Primary Subscriber Sukuk Issuer

5
Proceed Payment

Sell 2
6 Murabahah
Sukuk

Company In Need of
Secondary Market
Capital
44

Research Task
*PowerPoint presentation of IFM research activity (GROUP)
45
 DEFINITION
46

 Literal:
 Loan or advanced payment
 Technical:
 The selling of an asset with a mark up price on
deferred payment, with the intention to sell the same
asset to the debtor with lower cash price, which is
meant to settle his debt.
 DEFINITION
47

 Imam al-Shafii:
 It is a credit purchase of an asset which is later sold to the
original owner or a third party, whether at a deferred or spot ,
higher or lower price than the first contract, or for an
exchange of goods.
 Ibn Qudamah:
 It is a sale of an asset with a deferred price, and buys back the
same asset at a lower price.
 It is a bargaining (musawamah) sale and purchase contract
i.e. without disclosing or referring to what the cost price
is.
 Bay` al-`Inah conceptually refers to a sale of an asset,
which is later repurchased at a different price, whereby the
deferred price is higher than the cash price.
 EVIDENCES
48

 Hadith:
 Rasulullah (s.a.w) has ordered Amru ibn al As
to prepare the army for the battle. He then
purchased a camel in exchange for a delayed
payment of 2 camels
 Narrated by al-Bukhari
 EVIDENCES
49

 Muslim scholars:
 Permissible based on analogy, the contract is similar
to other sale and purchase contracts i.e. the transfer of
ownership is taken place.
 The majority view that such a sale is forbidden. They
are Hanafis, Malikis, Hanbalis and some Shafi’is.
 Imam Shafi’i, Abu Yusuf, Abu Daud and Abu Thur
are of the view that this contract of sale is not
contrary to Shariah principles.
 PILLARS OF BAY’ AL-’INAH
50

Seller Merchan
and dise/ Price Sighah
buyer goods
 FLOWS OF BAY’ AL-’INAH
51

3)Pay cash money

Price

A B

1) Sell Asset 2) Buy back Asset in

in deferred cash
payment

Asset
 CONDITIONS OF BAY’ AL-’INAH
52

 Shariah Advisory Council of Bank Negara Malaysia

resolved that bay’ al-'inah is still necessary in
Malaysian context.
 However market player are required to strengthen and
enhance their operational process and documentation
to comply with the features of bay’ al-'inah permitted.
 Bay’ al-'inah is permissible subject to the following
condition:
 The transaction of al-’inah must strictly follow the
mechanism which is accepted by the Shafie school.
 The transacted item must not a ribawi item.
 The buyer must receive (take possession) the good before
selling it back to the original seller.
 OPINION OF SCHOLARS
53

 Scholars are divided into two group:

1. Those that prohibit
 Majority of the scholar including Hanafi, Maliki and
Hanbali prohibit al-’inah transaction.
 The same result adopted by the Shariah council of
AAOIFI and majority of Shariah Advisory Council in
Malaysia and Brunei.
2. Those that permit
 Includes Imam Shafie and supported by Ibn Hazm and
Shariah Advisory Council of Bank Negara Malaysia.
 JUSTIFICATION OF THOSE THAT
54
PROHIBIT
 It is hilah to riba.
 The underlying issue on bay’ al-'inah is the difference
between the muqtada al-’aqd  and the actual motive of
the contracting parties, whether to have a real contract
of sale or as hilah for liquidity or monetary purposes.
 The polemic in the issue of permissibility of bay’
al-'inah is the status of hilah.
 As far as hilah is deemed as demeaning the religion,
bay’ al-'inah will not be acceptable.
 However, if hilah is regarded as a mode to solve
problems (makhraj) that is much needed by the
people, bay’ al-'inah transaction may be acceptable.
 JUSTIFICATION OF THOSE THAT
55
PERMIT
 Shafii approved bay’ al-’inah as financing mode.
 A sale which is followed by a subsequent sale but
without any intention to have al-’inah arrangement.
 Al-’Inah that involves two contracts of sale in
which the price of each contract (either cash or
deferred) is similar to the other.
 Al-’Inah which is concluded on an asset with a gap
of time between the two contracts, the purchase and
sale contracts.
 Al-’Inah which is concluded on an asset which has
changed in certain aspect.
 APPLICATION
56

 Bay’ al-'inah has been used to construct numerous

financing product offered by the bank in Malaysia:
 Personnel financing
 Working Capital Financing
 Istisna’ between 2 parties
 BBA financing products
 Islamic credit card
 Sukuk BBA
 Sukuk Murabahah
 Islamic Overdraft
 Murabahah Trade Financing
57
 INTRODUCTION
58

 This contract is crucial during the time of prophet

hood and at the time where agricultural sector
become outstanding and supreme.
 The wisdom of making salam permissible lies in
the fact that salam facilitates a types of financing
for people in need of it.
 By using salam contract, the buyer may benefit
from its permissibility as well, by acquiring the
commodity at a price below the market price.
 DEFINITION
59

 Literally: salam means giving (‘ita’), advance

(taslif) and leaving
 Technically:
 Sale contract over prescribed commodity sold as a
deferred liability on one party, in exchange for a price
that is received during the contract session.
 Maliki defined it as a sale in which capital sum
(price) is paid in advance and the object of sale is
deferred to a specified term.
 AAOIFI defined salam as the purchase of
commodity for deferred delivery in exchange for
immediate payment.
 DEFINITION
60

 Bay’ as-Salam or Salam means a contract in which

advance cash payment is made for goods to be
delivered later on.
 The seller undertakes to supply some specific
goods to the buyer at a future date in exchange of
an advance price fully paid at the time of contract.
 Salam- also know as sales by order.
 EVIDENCE
61

 Al-Quran
 .

 lbnu Abbas commented that: ‘I bears the witness that al-Salaf (Al-
Salam) stipulated for a stated term had been made legal by Allah in His
holy book and His permission is in it”. He then recites the above verse.

 Hadith
 Narrated by lbn Abbas: The Messenger of Allah (s.a.w) came to Medina
and the society used to pay in advance the price of fruits to be delivered
within one or two years (the sub narrator is in doubt whether it was one
to two years or two to three years)
 The Prophet S.A. said, “Whoever pays money in advance for dates (to
be delivered later) should pay it for known specified weight and
measure (of the dates).
 EVIDENCE
62

 Ijma’
 Every single jurist that we came across had given their
consensus with regards to the permissibility of Bay’
Al-Salam particularly because the product in sale is
one of counter-values in a contract (similar to the
permissibility of postponing the monetary payment
which is one of the counter — value as well).
 There is also the need of the people in it. The owners
of the agricultural products and businesses also
needed some financing to support themselves or to
fund their crops until the day of harvesting. Hence, it
is made permissible to fulfill these needs.
 NATURE OF BAY’ AL-SALAM
63

 Salam transaction occurs if the buyer has paid the

purchase price to the seller in full at the time of sale.
This is necessary so that the buyer can show that they
are not entering into debt with a second party in order
to eliminate the debt.
 Salam is actually an exception from the general ruling
on the illegality of selling non—existence items (Bay’
Ma’dum) since it can achieve certain economic
objectives, as a rukhsah (exception) and an assistance
for the people.
 Debt does not necessarily involve cash money but it
can also involves every single item and property by the
business society as a tradable item.
 PILLARS OF AL-SALAM
64

AL-SALAM PILLARS

Rabb as-
Muslam Ra’s al- Al-Musallim
salam/
Fih
Sighah
Musallim Ilaihi Mal
The Buyer The Seller The Price The Product Offer & Acceptance
 FLOWS OF BAY’ AL-SALAM
65

1) Ijab (Offer)

3)
Ra’s al-Mal
(Price)

Rabb as-salam/
Muslam Ilaihi
Musallim
(Seller)
(Buyer)

Musalllim Fih
4)
(Product)

2) Qabul (Acceptance)
 TYPES OF SALAM CONTRACT
66

Ordinary salam Parallel salam

contract contract
•The normal salam •Contractual agreement consists of
two different and independent
contract that involves contracts; one in which the bank is
two transacting a buyer and the other in which the
bank is a seller.
parties; the buyer •The two contract cannot be tied up
and performance of one contract
(musallim) and the should not be contingent upon the
seller (musllam ilayh) other.
 THE OBJECTIVES OF BAY’ AL-
67
SALAM
 Provide the financing for small and medium
enterprises
 The economic reality underlying the contract of Salam,
the ordering of goods to be delivered later for a price paid
in advance, was the financing of the business of a small
trader or artisan by his customers.
 Benefits the trader or producer
 Provides Islamically accepted financing alternative and
avoids any involvement in riba.
 Benefits the purchaser
 Provides goods and products at a discounted price in
return for the willingness of the purchaser to help the
financing of the business venture.
 CONDITIONS OF AL-SALAM
68

Conditions related to the price (ra’s al-mal)

• The price must be clearly determined and paid in full by the buyer at the time of undertaking the
sale to avoid later dispute.
• The seller must take possession of the price in full before daperting one another; OTHERWISE it
will be tantamount to the sale of debt for a debt which is prohibited.
• Maliki jurist allowed it to be paid within few days as long as it is not stipulated as conditions.
• If the price is ribawi item, it is not allowed to be exchanged for another ribawi item to avoid riba.
Eg: wheat with barley.
 CONDITIONS OF AL-SALAM
69

Conditions related to the purchased commodity (mussalam fih)

• Salam can be effected on commodity whose quality and quantity can be clearly specified; commodities which quality and quantity cannot be
specified cannot be sold through salam.
• The commodity must be vastly available in the market at the time of contract until the time of delivery, to ensure the capability of the trader to
deliver the product.
• The quantity, weight and measure of the commodity must be agreed upon in equivocal terms.

Conditions related to the date and place of delivery

• The exact date and place of delivery must be specified in the contract.
• Scholars differ on the shortest duration of time of delivery either 3 days, more than half
a day thirty days or up to the contracting parties to decide.
 DIFFERENCES BETWEEN BAY’ AL-SALAM & NORMAL SALES
70
 APPLICATION
71

 This concept rarely used by Islamic banks because it does not

facilitate many advantages as compared to other concepts.
 The prices of purchased commodities in as-salam should be
paid in advance while the subject matter will be delivered at a
later date.
 In general it clearly differs from numerous Islamic bank
products, which provides better position for the customer who
are in need, in which they would obtain the desired
commodity with a deferred payment term.
 Islamic banking product which are based on this concept are:
 Hybrid Salam Financing
 Salam Financing Working Capital
 Parallel Salam Financing
 HYBRID SALAM FINANCING
72

Seller

4 1

4
Bank Customer
2
 SALAM FINANCING WORKING
73
CAPITAL

Agency
appointment Normal sale
Customer A 3

2 1
Salam contract

BANK Group of Purchaser

 PARALLEL SALAM FINANCING
74

Salam A
1
BANK
2
Agent

2 Customer A

Salam B 3

Customer C
75

Q&A
76 END OF CHAPTER