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KembaraXtra–Islamic Finance–Islamic Capital Market – Salam (Advance Payment Sale)
• Salam is a Shari’ah-compliant financial contract that requires the full payment for a commodity to be made in advance in exchange for delivery at a specified future date.
• Under a Salam agreement, payment is immediate, while delivery of the commodity is deferred.
• Salam is applied when the commodity involved is expected to experience a price increase in the future.
• This contract benefits the buyer, as it allows the purchase of goods or services at a price lower than the anticipated future market rate.
• Because delivery occurs in the future, it is mandatory that the commodity’s features, quantity, quality, and specifications are defined with complete clarity.
• Clear and detailed description of the commodity forms the basis upon which the Salam contract is concluded.
• This requirement ensures avoidance of ambiguity and uncertainty (Gharar).
• Under Salam financing, the Islamic Financial Institution makes full advance payment to the seller or exporter.
• The seller or exporter then undertakes the responsibility to produce and/or deliver the goods on the agreed future date.
• In some Salam-based arrangements, the financier may act both as a buyer and a seller.
• This specific structure is known as parallel Salam.
• In a parallel Salam, the IFI first purchases the Salam asset from the seller by making full advance payment and fixing a future delivery date.
• The IFI then enters into another Salam contract as a seller with a third party for a shorter delivery period.
• The first and second Salam contracts must remain independent and separate to ensure Shari’ah compliance.
• The profit earned by the IFI arises from the price difference, or spread, between the two Salam contracts.
• Parallel Salam is particularly useful for financing producers, as the IFI itself is neither the ultimate producer nor the end user of the goods.
• Salam contracts are characterised by specific governing principles.
• A forward purchase of a commodity is made under the contract.
• Full payment is made in advance at the beginning of the contract period.
• Goods received at the end of the contract period must strictly conform to the specifications agreed upon at contract initiation.
• If the contract cannot be completed according to the agreed specifications, appropriate remedies must be made available.
• Salam enables financing of productive economic activity while maintaining strict compliance with Shari’ah principles.
• Salam is a Shari’ah-compliant financial contract that requires the full payment for a commodity to be made in advance in exchange for delivery at a specified future date.
• Under a Salam agreement, payment is immediate, while delivery of the commodity is deferred.
• Salam is applied when the commodity involved is expected to experience a price increase in the future.
• This contract benefits the buyer, as it allows the purchase of goods or services at a price lower than the anticipated future market rate.
• Because delivery occurs in the future, it is mandatory that the commodity’s features, quantity, quality, and specifications are defined with complete clarity.
• Clear and detailed description of the commodity forms the basis upon which the Salam contract is concluded.
• This requirement ensures avoidance of ambiguity and uncertainty (Gharar).
• Under Salam financing, the Islamic Financial Institution makes full advance payment to the seller or exporter.
• The seller or exporter then undertakes the responsibility to produce and/or deliver the goods on the agreed future date.
• In some Salam-based arrangements, the financier may act both as a buyer and a seller.
• This specific structure is known as parallel Salam.
• In a parallel Salam, the IFI first purchases the Salam asset from the seller by making full advance payment and fixing a future delivery date.
• The IFI then enters into another Salam contract as a seller with a third party for a shorter delivery period.
• The first and second Salam contracts must remain independent and separate to ensure Shari’ah compliance.
• The profit earned by the IFI arises from the price difference, or spread, between the two Salam contracts.
• Parallel Salam is particularly useful for financing producers, as the IFI itself is neither the ultimate producer nor the end user of the goods.
• Salam contracts are characterised by specific governing principles.
• A forward purchase of a commodity is made under the contract.
• Full payment is made in advance at the beginning of the contract period.
• Goods received at the end of the contract period must strictly conform to the specifications agreed upon at contract initiation.
• If the contract cannot be completed according to the agreed specifications, appropriate remedies must be made available.
• Salam enables financing of productive economic activity while maintaining strict compliance with Shari’ah principles.
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