• Advance payment–Deferred Delivery Sale¹⁾

i) Salam (advance payment against deferred delivery of goods) means a kind of sale whereby the seller undertakes to supply specific goods to a buyer at a future date in consideration of a price fully paid in advance at the time the contract of sale is made.²⁾

ii) The buyer shall pay the price in full to the seller at the time of effecting the sale. Otherwise, it will be tantamount to a sale of debt against debt, which is expressly prohibited in Shariah.³⁾

This statement essentially outlines a principle in Islamic finance related to the concept of “bai' al-dayn,” which translates to “sale of debt against debt.” In Islamic finance, transactions must comply with Shariah (Islamic law), which prohibits certain practices such as riba (interest), gharar (uncertainty), and maisir (gambling). In the context of the statement, it means that when a buyer purchases goods or services from a seller, they are required to pay the full price at the time of the sale. Delaying payment or engaging in transactions where debts are offset against each other is not permissible according to Shariah. This prohibition is based on the principle that financial transactions should involve tangible assets and should not involve speculative or uncertain elements. By paying the full price at the time of sale, both parties are ensuring transparency and avoiding any element of uncertainty or speculation, which aligns with Islamic principles of fairness and justice in economic transactions.

iii) The specifications, quality and quantity of the commodity must be determined to avoid any ambiguity which could become a cause of dispute.⁴⁾

iv) Date and place of delivery must be agreed upon but can be changed with mutual consent of the parties.⁵⁾

v) Salam can be effected in respect of ‘Dhawatul-Amthal’ which represent such commodities the units of which are homogenous in characteristics and which are traded by counting, measuring or weighing according to usage and customs of trade. Therefore, other things such as precious stones, cattle heads etc. cannot be sold through the contract of Salam because every stone or individual animal is normally different from the others.⁶⁾

vi) It is necessary that the commodity which is the subject of Salam contract is normally expected to be available at the time of delivery.⁷⁾

vii) Salam cannot be effected in respect of things which must be delivered on spot. Examples are exchange of gold with silver or wheat with barley where it is necessary according to Shariah that the delivery of both be simultaneous.⁸⁾

viii) Salam cannot be tied to the produce of a particular farm, field or tree.⁹⁾

ix) In a Salam transaction, the buyer cannot contractually bind the seller to buy-back the commodity that will be delivered by the seller to the buyer. However, after the delivery is effected, the buyer and the seller can enter into a transaction of sale, independently, with their free will.¹⁰⁾

x) In Salam transactions the buyer shall not, before taking possession (actual or constructive) of the goods sell or transfer ownership in the goods to any person.¹¹⁾

xi) The bank (buyer in Salam) can enter into a Parallel Salam contract without any condition or linkage with the original Salam contract. In one of them, the bank will be the buyer and in the second the seller. Each one of the two contracts shall be independent of the other. They cannot be tied up in a manner that the rights and obligations of original contract are dependant on the rights and obligations of the parallel contract. Further, Parallel Salam is allowed with a third party only.¹²⁾

xii) In order to ensure that the seller shall deliver the commodity on the agreed date, the bank can ask him to furnish a security.¹³⁾

xiii) In case of multiple commodities, the quantity and period of delivery for each of them should be separately fixed.¹⁴⁾

xiv) A penalty can be agreed ab initio in the Salam contract for delay in delivery of the concerned commodity by the client i.e. seller of the commodity. In that case, the client shall be liable to pay penalty calculated at the agreed rate in percent per day/annum. However, that penalty shall be used for the purposes of charity. The banks can also approach competent courts for award of damages, at discretion of the courts, which shall be determined on the basis of direct and indirect costs incurred, other than opportunity cost. Also, security or collateral can be sold by the bank (purchaser) without intervention of the court.¹⁵⁾