salam & istisna final

8/13/2019 Salam & Istisna Final

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Debt Based Financing Product-II

Presented By: Huma Ayub

Assistant Professor

Bahria University, Islamabad.

Salam(Deferred Delivery Sale) Facility

Istisna ( Manufacturing Sale) Facility

Week # 10


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Source: Islamic Banking Bulletin Dec 2010


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Presentation Outline

Fiqh Principles on Counter values

(CV)

Bay al-Salam

Bay al-Istisna


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Fiqh principles on CV

In principle, based on the texts of the

Shariah, the counter values (price

and good) must be

Present during the time of the

contract

Exchanged on the spot


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Fiqh principles on CV

However, the Shariah text made

exception in two situations where one

of the counter values may be deferred

and hence absent during the time of

the contract:

Al-Bay Bithamanin Ajil (price deferred)

Bay al-Salam (good deferred)


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Bay al-Salam

DefinitionLiterally al-Salam means to advance

or to pay upfront. Another term for al-

Salam is al-Salaf.Technically, it is a sale where the

price is paid upfront and the good is

delivered in future.Salam was originally designed as a

financing mechanism for small

farmers and traders.


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Bay al-Salam

Shariah Evidence

Al-Quran: 2:282, Ibn Abbas r.a.: reported that

this verse was revealed in relation to al-Salam.O you who have believed, when you contract a

debt for a specified term, write it down.

Al-Sunnah:

The prophet s.a.w. prohibited the sale of what isnot in possession but made a concession in

relation to al-Salam. (Narrated in all the sunan)


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Bay al-Salam

Necessary Conditions:

The kind, type and attributes of price

and good must be known and

specified.

The amount or unit of price and good

must be specified.


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Necessary Conditions:

The price should be paid upfront and the good

delivered later in future. Al-Imam al-Shafii opinesthat the good can also be delivered in the

immediate future because the term specific time

frame in the hadith refers to point in time and not

duration. On the other hand, al-Imam Malik is ofthe opinion that advancing the price could be

delayed but not exceeding 3 days

Bay al-Salam


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The good should be homogeneous and real.Currencies cannot be the object of al-Salam.

The exchange must be free from ribawiitems.

The good must be present any time during the

duration of the contract.

No Khiyar al-Shart, i.e. the option of condition

that would change the nature of al-Salam such as

deferring payment or spot delivery of good.The point of delivery must be specified, e.g. port

etc especially when cost is involved

Bay al-Salam


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How to get Profit from Salam?

Since the spot price that the bankpays is pegged lower than theexpected future price, the

transaction should result in a profitfor the bank.

Possession condition before bank

can get back its investment andprofits.

Islamic banks are exposed to Price

Risk (mitigation technique Parallel


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Bank Farmer

Market Farm

1) Cash

3) Produce o

4) Produce

5) Produce6) Revenue

Bay al-Salam: Application

Model 1Direct involvement of Islamic

Bank in Bay al-Salam


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Bay al-Salam: Application

Bank Client

Supplier

Installment

3) Asset

1) Cash2) Asset

* Duration between Bankand Client is longer that

the duration between

Bank and Supplier.

Model 3: Hybrid

Al-Salam

BBA


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Back to back Salam Facility (to

mitigate Price Risk)


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Steps in Back to back Salam Facility


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Application of Salam

Pre-shipment Export Finance:This is undertaken in the following steps.

1. Bank receives an export letter of credit (LC) in favor

of its client, covering certain goods; Client gives the

letter of credit under bank's lien. Thus, allowing the

bank to assume the role of seller to the foreign

buyer.

2. To comply with the LC requirement, bank agrees to

buy the goods from its client under a salam contractand makes upfront payment to him. Salam contract

devised for this purpose should include specific

delivery date and place. Delivery date should be

reasonably ahead of the latest shipment date stated


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Application of Salam

3. As for the place, it should be the port ofdestination mentioned in the LC. Submission of

in-order shipping documents (viz. bill of lading

and certificate of origin) by the client may be

deemed equivalent to the satisfactory delivery.4. The agreed payment (pre-shipment finance)

made by the bank to its client will be lower than

the amount of the export LC, difference being

bank's profit.


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Al-Istisna

Definition

Literally al-Istisna means to create or

Manufacture something.

Technical it is a contract with artisan

or manufacturer to make something ofa given description (An artisan is a

skilled workman).


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Al-Istisna

Shariah EvidencesThe Jumhur deem al-Istisna invalid on the

basis of Qiyas because both counter

values (price and good) are absent duringthe time of initiating the contract.

The Jumhur secure al-Istisna by al-salam

(if the material is provided by the

manufacturer or al-Ijarah (if the material is

provided by the customer).


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Shariah Evidences

However, al-Istisna has been allowed(especially by the Hanafi scholars) on

the basis of Istihsan (hidden qiyas).

How?

Al-Istisna


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Necessary Conditions

The good must be of specific kind,

type, amount and attribute.The good must be known and

familiar to the two contracting parties.

Al-Istisna


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Al-Istisna

Necessary Conditions

Conditions before the good is

manufactured

Conditions after the good ismanufactured


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Al-Istisna

Bank Client

Supplier

1) Installment

4) Asset

2) Cash/Installment3) Asset

* Duration between Bank and Client

is longer that the duration between

Bank and Supplier. Two separatecontracts.

Model 1:Involvement of IB as an

intermediary (Parellel al-Istisna)


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Al-Istisna

Bank Govt

PLUS

Installment

3) Asset

1) Cash2) Road

* Duration between Bank and Govt islonger that the duration between

Bank and PLUS.

Istisna

BBA

Model 3: Hybrid

salam & istisna final

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