Islamic Contract – Contemporary Criticism and Sharī‘ah Debate on Bay‘ al-‘Īnah
Q1: Why is Bay‘ al-‘Īnah controversial in contemporary Islamic finance?
Answer
Bay‘ al-‘Īnah is:
strongly criticised by most contemporary Sharī‘ah scholars and international Islamic finance authorities.
Among institutions disapproving it are:

• International Islamic Fiqh Academy (IIFA-OIC)
• AAOIFI
• Dallah Albaraka
• Kuwait Finance House
• Dubai Islamic Bank

The main objection is:
‘īnah may function as a legal stratagem (ḥīlah) to legalise ribā through sale and buy-back arrangements.


Q2: What is the main Sharī‘ah criticism against Bay‘ al-‘Īnah?
Answer
Critics argue that:

• although the structure formally appears as:
  • two sale contracts,
• its economic substance resembles:

a cash loan with interest.


Case Scenario 1 – Why Scholars Criticise ‘Īnah
Step 1
Islamic bank sells asset to customer:

• RM120,000 deferred.

Step 2
Customer immediately resells same asset to bank:

• RM100,000 cash.

Financial Effect
Customer receives:
✅ RM100,000 cash now.
Customer later pays:
✅ RM120,000.


Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000


Critical Analysis
Most contemporary scholars argue:
The commodity merely circulates temporarily to legitimise an increment over cash financing.
Thus:

• the commodity may not be genuinely intended for trade;
• the arrangement may merely replicate:

interest-bearing lending.


Q3: Did Imam al-Shāfi‘ī actually approve ribā through ‘Īnah?
Answer
No.
Many contemporary scholars clarify that:
Imam al-Shāfi‘ī did not intentionally legalise ribā.


Al-Shāṭibī’s Clarification
Abu Ishaq al-Shatibi explained that:
It is incorrect to claim that al-Shāfi‘ī approved means leading to ribā.
Rather:

• al-Shāfi‘ī judged contracts based on:

their outward legal validity,
unless:

• unlawful intention becomes manifest.

Q4: What was Imam al-Shāfi‘ī’s actual reasoning?
Answer
Muhammad ibn Idris al-Shafi’i argued that:
if a contract fulfils the apparent Sharī‘ah requirements,
it should not be invalidated merely because of suspected intentions.


Al-Shāfi‘ī’s Legal Philosophy
He distinguished between:
✅ outward legal form (ẓāhir);
and
❌ hidden intentions (niyyah).


Example Given by al-Shāfi‘ī – Selling a Sword
A seller sells:

• a sword to someone.

The seller suspects:

• buyer may use it unjustly.

However:

• the sale itself remains legally valid because:

unlawful intention is not certain.


Example Given by al-Shāfi‘ī – Selling Grapes
A seller sells:

• grapes to buyer.

The seller suspects:

• buyer may produce wine.

Still:
✅ sale remains valid outwardly,
unless:

• unlawful purpose becomes explicit.

Application to ‘Īnah
Similarly, al-Shāfi‘ī argued:

• if:
  • two sales are legally independent;
  • Sharī‘ah conditions fulfilled;
    then:
    ✅ contracts remain outwardly valid.

Even if:

• parties internally intend liquidity financing.

Important Limitation
However:

• al-Shāfi‘ī still disliked arrangements:

intentionally designed to circumvent Sharī‘ah prohibitions.
He only refused to invalidate contracts:

• solely based on suspicion.

Q5: Why do contemporary scholars still reject ‘Īnah despite al-Shāfi‘ī’s view?
Answer
Contemporary scholars place strong emphasis on:
economic substance,
not merely:
legal form.


Critical Contemporary Argument
Modern scholars argue that:

• systematic institutionalised ‘īnah
  is no longer:
  • isolated individual trade;
    but:
  • organised financing mechanism.

Thus:

• intention becomes commercially obvious;
• artificiality becomes apparent.

Case Scenario 2 – Organised Banking ‘Īnah
An Islamic bank:

• repeatedly executes thousands of identical buy-back transactions.

The customer:

• never intends to use asset;
• only seeks cash financing.

The bank:

• never expects customer to retain asset.

Critical Analysis
Contemporary scholars argue:
the commercial reality clearly reveals financing intent.
Thus:

• the form of sale merely disguises:

cash-for-cash financing with increment.


Q6: Why does Malaysia still permit Bay‘ al-‘Īnah?
Answer
Malaysia adopts:
a regulated and pragmatic Sharī‘ah approach.
Both:

• Shariah Advisory Council of Bank Negara Malaysia
  and
• Shariah Advisory Council of Securities Commission Malaysia

accept:
conditional permissibility of ‘īnah.


Malaysian Regulatory Safeguards
Malaysia imposes:
✅ independent contracts;
✅ proper sequencing;
✅ genuine ownership transfer;
✅ right of delivery;
✅ separate documentation;
✅ prohibition of binding repurchase promises.


Practical Reason for Malaysian Acceptance
Malaysia considers:

• commercial necessity;
• banking practicality;
• minority juristic opinions.

However:

• regulators continuously tighten requirements
  to reduce:
• abuse;
• artificiality;
• resemblance to ribā.

Q7: Why has the use of ‘Īnah declined in modern Islamic finance?
Answer
The use of ‘īnah has reduced because:

• stricter regulatory scrutiny exists;
• international Sharī‘ah criticism increased;
• tawarruq structures became more widely accepted.

Practical Shift in Islamic Banking
Islamic banks increasingly prefer:
➡ tawarruq;
➡ commodity murābahah;
➡ genuine trade-based structures.
This is because:

• they are generally viewed as:
  • less controversial;
  • more internationally acceptable.

Overall Critical Analysis
Two Main Approaches Exist
Classical Formalist Approach
(Focus on outward legal validity)
Represented by:

• al-Shāfi‘ī’s methodology.

Main Principle
If contracts satisfy:
✅ legal requirements,
they remain valid outwardly.


Contemporary Substance-Based Approach
(Focus on economic reality)
Represented by:

• most contemporary Sharī‘ah councils.

Main Principle
If transaction economically functions as:
interest-bearing financing,
then:
❌ legal form alone cannot legitimise it.


Modern Sharī‘ah Trend
Contemporary Islamic finance increasingly emphasises:
✅ genuine ownership;
✅ real transfer of risk;
✅ authentic commercial substance;
✅ avoidance of legal stratagems (ḥiyal).
Thus:

• Bay‘ al-‘Īnah remains:

one of the most debated and controversial contracts in Islamic finance.

​

Islamic Contract – Legality of Bay‘ al-‘Īnah
Q1: Why do Muslim jurists differ regarding the legality of Bay‘ al-‘Īnah?
Answer
Muslim jurists differ because of:
their different approaches toward:

• form (ṣūrah);
• substance (ḥaqīqah);
• intention (niyyah);
• legal stratagems (ḥiyal);
• blocking harmful means (sadd al-dharā’i‘).

The debate revolves around an important question:
Should a contract be judged only by its outward legal form, or should the underlying intention and economic substance also be considered?


Q2: What was Imam al-Shāfi‘ī’s approach regarding contracts?
Answer
Muhammad ibn Idris al-Shafi’i generally held that:
the legal validity of a contract is determined by its outward form and expression.
Meaning:

• if a contract fulfils Sharī‘ah legal requirements outwardly,
  then:
  ✅ the contract is legally valid.

Important Principle in al-Shāfi‘ī’s Methodology
According to al-Shāfi‘ī:
hidden intentions are not legally enforceable unless they are expressed or clearly manifested.
Thus:

• courts and judges should not invalidate contracts merely based on suspicion.

Case Scenario 1 – Hidden Intention Not Expressed
A customer purchases:

• a commodity from a bank
  for:
• RM120,000 deferred payment.

Later:

• he independently sells it back for RM100,000 cash.

No:
❌ written promise;
❌ verbal agreement;
❌ mandatory repurchase clause
exists.


Critical Analysis
According to al-Shāfi‘ī’s legal methodology:
✅ the contracts remain outwardly valid.
Why?
Because:

• each contract independently fulfils legal requirements;
• unlawful intention was not expressly stated.

Q3: Did all Shāfi‘ī jurists completely prioritise form over substance?
Answer
No.
Some later Shāfi‘ī jurists clarified that:

• the Shāfi‘ī School sometimes considers:
  • form;
    and at other times:
  • substance and intention.

Among these jurists were:

• Al-Sharbini
• Al-Ramli
• Al-Shirwani
• Ibn Hajar al-Haytami

Critical Analysis
This demonstrates:
the Shāfi‘ī position is more nuanced than commonly assumed.
It is incorrect to simplistically claim:
“The Shāfi‘ī School fully endorses ‘īnah.”
Rather:

• the school distinguishes between:
  • presumed intention;
  • manifested unlawful intention.

Q4: How are hiyal and dharā’i‘ related to Bay‘ al-‘Īnah?
Answer
The legality of ‘īnah is closely connected to:

• legal stratagems (ḥiyal);
• blocking harmful means (sadd al-dharā’i‘).

What Are Hiyal?
Hiyal
Refers to:
legal devices or stratagems used to achieve a result indirectly.


What Is Sadd al-Dharā’i‘?
Sadd al-Dharā’i‘
Means:
blocking lawful means that may lead to unlawful outcomes.


Position of Mālikī and Hanbalī Schools
The:

• Mālikī;
• Hanbalī

schools strongly emphasise:
✅ substance;
✅ intention;
✅ prevention of corruption.
Thus:

• they reject arrangements that:

outwardly appear lawful but effectively produce ribā.


Case Scenario 2 – Artificial Financing Arrangement
A bank repeatedly performs:

• immediate sale and buy-back transactions.

The customer:

• never intends to use asset;
• only seeks cash.

The commodity:

• merely circulates temporarily.

Critical Analysis
According to Mālikī and Hanbalī reasoning:
❌ the arrangement becomes prohibited.
Why?
Because:

• the apparent sale merely serves as:

a cover for interest-based financing.
Thus:

• allowing such arrangements undermines:

the objectives of Sharī‘ah (maqāṣid al-sharī‘ah).


Q5: What was Imam Abū Ḥanīfah’s position on ‘Īnah?
Answer
Abu Hanifa generally emphasised:
outward contractual form.
However:
❌ he still prohibited ‘īnah.


Basis of Prohibition
Abū Ḥanīfah relied upon:
the narration of Ibn ‘Umar regarding ‘īnah.
The hadith states that:
when people engage in ‘īnah transactions and abandon higher religious obligations,
disgrace will prevail over them.


Critical Analysis of the Hadith
Some scholars:

• authenticated certain narrations;
• while others considered some versions weak.

Nevertheless:

• many jurists accepted the hadith’s meaning due to:
  • supporting Sharī‘ah principles;
  • anti-ribā objectives.

Q6: Why did Imam Mālik and Imam Ahmad prohibit ‘Īnah?
Answer
Both:

• Malik ibn Anas
  and
• Ahmad ibn Hanbal

prohibited ‘īnah because:

• it may function as:

a disguised ribā arrangement.


Their Main Principles
They relied upon:
✅ consideration of intention;
✅ blocking harmful means;
✅ preserving Sharī‘ah objectives.


Critical Analysis
According to them:

• even if legal form appears valid,
  the arrangement becomes prohibited if:

its real objective is unlawful.
Thus:

• means leading to ribā should also be blocked.

Q7: Is it correct to say Imam al-Shāfi‘ī outrightly endorsed ‘Īnah?
Answer
No.
This is a:
common misconception.


Important Clarification
Al-Shāfi‘ī’s position was:
more nuanced and conditional.
He did NOT ethically endorse:

• hidden ribā manipulation.

Rather:

• he distinguished between:
  • legal adjudication;
  • personal accountability before Allah.

Case Scenario 3 – Explicit Repurchase Agreement
A bank contract explicitly states:
“The customer must resell the commodity back to the bank immediately.”


Critical Analysis
According to the explanation in the text:
❌ al-Shāfi‘ī himself would prohibit this.
Why?
Because:

• the unlawful intention becomes:

openly manifested.
Now:

• the second sale is directly linked to the first.

Thus:

• the arrangement loses independent contractual nature.

Important Practical Application
Modern regulators therefore require:
✅ independent contracts;
✅ no binding repurchase promise;
✅ separate execution;
✅ genuine ownership rights.
This is partly influenced by:

• concerns raised by jurists regarding:
  • disguised ribā;
  • legal stratagems.

Q8: What is the core debate in Bay‘ al-‘Īnah?
Answer
The central debate is:
Should Sharī‘ah focus primarily on:

• outward legal form,
  or
• economic substance and underlying intent?

Two Major Approaches
Formalist Approach
(Mainly associated with al-Shāfi‘ī’s legal methodology)
Focus
✅ legal form;
✅ expressed contractual terms.


Substance-Based Approach
(Mainly associated with Mālikī and Hanbalī methodology)
Focus
✅ actual objective;
✅ economic reality;
✅ prevention of ribā circumvention.


Modern Contemporary Trend
Most contemporary Sharī‘ah scholars today emphasise:
✅ substance over mere form.
Therefore:

• organised ‘īnah structures remain:

highly controversial in modern Islamic finance.


Overall Conclusion
Bay‘ al-‘Īnah remains:
one of the most debated contracts in Islamic commercial law.
The disagreement stems from:

• different juristic methodologies concerning:
  • intention;
  • legal form;
  • economic substance;
  • legal stratagems;
  • prevention of ribā.

Modern Islamic finance increasingly moves toward:
➡ genuine trade-based financing;
➡ stronger substance-over-form analysis;
➡ stricter Sharī‘ah governance standards.

​

​Islamic Contract – Bay’ al-Salam: Date and Place of Delivery


Q1: Why must the delivery date be specified in salam?


Answer


The delivery date must be clearly known to:

• eliminate uncertainty;

• avoid disputes between contracting parties.

This is important because:

• salam involves future delivery of goods.

⸻


Scholars’ Views on Minimum Delivery Period


Muslim jurists differ regarding:

• the minimum permissible delivery period.

Some opinions include:

• minimum three days;

• more than half a day;

• at least thirty days;

• determined by agreement of parties.

⸻


AAOIFI Requirement on Delivery Date


According to AAOIFI SS No. 10 (Para 3/2/9):


the delivery date must be clearly known and free from ambiguity.


⸻


Example


Valid


“Delivery on 1 December 2028.”


Invalid


“Delivery sometime in future.”


⸻


Q2: Why must the place of delivery be specified?


Answer


The place of delivery should be specified especially where:

• transportation;

• shipping;

• logistics

are involved.


This clarifies:

• delivery obligations;

• transfer of possession;

• transportation responsibility.

⸻


Example


Valid Delivery Clause


“Delivery at Port Klang on 1 December 2028.”


⸻


Q3: Can the buyer sell the salam commodity before possession?


Answer


No.


According to AAOIFI SS No. 10 (Para 4/1):


the buyer cannot sell the muslam fīh before taking possession.


This is because:

• the buyer has not yet obtained possession;

• selling before possession may create uncertainty.

⸻


Example: Invalid Sale Before Possession


A buyer purchases:

• 100 tonnes wheat under salam.

Before delivery:

• the buyer sells the exact wheat to another party.

Problem


The buyer has not yet possessed the wheat.


Result


❌ Not permissible.


⸻


Example: Sale After Possession


After:

• wheat is delivered;

• buyer takes possession,

the buyer may:

• sell;

• lease;

• transfer the wheat.

Result


✅ Permissible after possession.


⸻


Important Principle


Salam is permitted as:


an exception to the normal prohibition of selling future goods.


Therefore:

• strict rules apply regarding:

• delivery date;

• delivery place;

• possession.

These rules minimise:

• uncertainty (gharar);

• disputes;

• injustice.

​Islamic Contract – Bay’ al-Salam: Example of Parallel Salam
Q1: What is parallel salam?
Answer
Parallel salam refers to:
two separate and independent salam contracts involving three parties.
One party acts:

• as buyer in the first salam contract; and
• as seller in the second salam contract.

The two contracts:

• must remain independent;
• cannot be legally linked;
• performance of one contract cannot depend on the other.

Parallel salam is commonly used by:

• Islamic banks;
• commodity traders;
• Islamic financial institutions.

Structure of Parallel Salam
First Salam Contract
Between

• Islamic bank;
• supplier/farmer.

The bank:

• purchases future commodities;
• pays full price upfront.

Second Salam Contract
Between

• Islamic bank;
• final buyer/customer.

The bank:

• undertakes to deliver similar commodities later.

Case Study: Parallel Salam in Wheat Financing
First Salam Contract
Parties
Buyer (
Muslim
)
Islamic Bank
Seller (
Muslam Ilayh
)
Wheat Farmer


Contract Details

• Commodity: 100 tonnes wheat
• Salam purchase price: RM400,000
• Payment: fully paid immediately
• Delivery date: 1 December 2028

The bank pays:

• RM400,000 upfront to farmer.

The farmer promises:

• future delivery of wheat.

Second Salam Contract
Parties
Buyer
Flour Manufacturing Company
Seller
Islamic Bank


Contract Details

• Commodity: 100 tonnes wheat
• Salam selling price: RM480,000
• Payment: fully paid immediately
• Delivery date: 5 December 2028

The flour company pays:

• RM480,000 upfront to Islamic bank.

The bank promises:

• delivery of wheat later.

Profit Calculation
480{,}000 - 400{,}000 = 80{,}000
480{,}000 - 400{,}000 = 80{,}000


Analysis of the Structure
First Contract
The bank acts as:
✅ buyer.


Second Contract
The bank acts as:
✅ seller.


Important Sharī‘ah Rule
The two contracts:

• must remain independent;
• cannot be conditional upon one another.

Thus the bank:

• remains responsible to deliver wheat to flour company,
  even if:
• farmer fails to deliver wheat to bank.

Why Is Parallel Salam Used?
Parallel salam allows Islamic banks to:

• provide financing to producers;
• secure future commodity supply;
• manage liquidity and commodity trading.

It is commonly used in:

• agricultural financing;
• commodity markets;
• Islamic trade finance.

Example of Invalid Linked Parallel Salam
The Islamic bank says to flour company:
“We will deliver wheat only if the farmer successfully delivers wheat to us.”
Problem
The second salam contract becomes dependent upon:

• performance of first salam contract.

Result
❌ Invalid because the two salam contracts are no longer independent.


Easy Way to Understand Parallel Salam
Step 1
Bank buys future commodity from producer.


Step 2
Bank separately sells future commodity to another buyer.


Step 3
Bank earns profit from difference between:

• purchase price;
• selling price.

Important Principle
Parallel salam is permissible because:

• each salam contract stands independently;
• genuine trading risk exists;
• the arrangement supports real economic activity without ribā.

​Islamic Contract – Bay’ al-Salam: Main Applications of Salam in Contemporary Islamic Finance
In contemporary Islamic finance, salam is mainly used for:

• short-term financing;
• agricultural financing;
• commodity financing;
• microfinancing; and
• ṣukūk structuring.

1. Short-Term Financing
Explanation
Salam is commonly used for:
short-term liquidity and financing needs.
This is because:

• payment is made immediately;
• delivery occurs within a relatively short future period.

It is suitable for:

• seasonal production;
• short production cycles;
• commodity trading.

Example
An Islamic bank enters salam contract with a wheat producer.
Contract Details

• Salam price paid immediately = RM500,000
• Wheat delivery after 6 months

Analysis
The producer obtains:

• immediate short-term working capital.

Result
✅ Salam used as short-term financing.


2. Agricultural Financing
Explanation
Salam is especially suitable for:

• farmers;
• agricultural producers.

Farmers often require:

• funds before harvest season
  for:
• seeds;
• fertiliser;
• labour;
• irrigation.

Salam enables:

• upfront financing;
• future crop delivery.

Example
A rice farmer requires financing before planting season.
Contract Details

• Commodity: 20 tonnes rice
• Salam price = RM80,000
• Delivery after 8 months

The Islamic bank:

• pays RM80,000 immediately.

The farmer:

• delivers rice after harvest.

Result
✅ Salam used for agricultural financing.


3. Commodity Financing
Explanation
Salam is widely used in:
commodity trading and financing.
This involves:

• standardised fungible commodities.

Examples:

• wheat;
• sugar;
• crude palm oil;
• metals.

Example
An Islamic financial institution purchases:

• 100 tonnes crude palm oil through salam.

Contract Details

• Salam price = RM400,000
• Delivery after 5 months

Analysis
The producer obtains:

• production financing.

The institution secures:

• future commodity supply.

Result
✅ Salam used for commodity financing.


4. Microfinancing
Explanation
Salam is highly suitable for:

• small farmers;
• rural entrepreneurs;
• low-income producers.

This is because salam:

• provides upfront capital;
• avoids ribā-based borrowing.

It supports:

• financial inclusion;
• small-scale economic activity.

Example
A chilli farmer requires:

• RM15,000 for farming operations.

An Islamic microfinance institution enters salam contract.
Contract Details

• Commodity: 3 tonnes chillies
• Salam price = RM15,000
• Delivery after 4 months

Result
✅ Salam used for Islamic microfinancing.


5. Ṣukūk Structuring
Explanation
Salam can also be used in:
ṣukūk al-salam structures.
Under this arrangement:

• investors provide funds upfront;
• future commodities are delivered later.

The structure is commonly used for:

• commodity-based financing.

Example
A government-linked entity issues:

• RM100 million ṣukūk al-salam.

Structure

• Investors pay capital immediately.
• Commodities delivered after 6 months.
• Commodities subsequently sold in market.

Result
✅ Salam applied in ṣukūk structuring.


Important Principle
Salam is important in Islamic finance because it:

• provides working capital;
• supports real economic activity;
• assists producers and farmers;
• promotes Sharī‘ah-compliant financing.

However:

• strict conditions apply regarding:
  • full upfront payment;
  • commodity specification;
  • delivery certainty;
  • possession.
  
  

Islamic Contract – Bay’ al-Salam: Commodity (Muslam Fīh
) in Salam Contract
​
Q1: What is muslam fīh
in a salam contract?
Answer
Muslam fīh refers to:
the commodity or goods to be delivered in the future under a salam contract.
Since salam involves:

• deferred delivery of goods,

the commodity must be:

• clearly specified;
• standardised;
• deliverable;
• recognised by the Sharī‘ah.

Q2: What are the conditions of the salam commodity?
Answer
The salam commodity must fulfil several conditions.


1. Commodity Must Be Valuable and Sharī‘ah-Compliant
The commodity must:

• have commercial value;
• be lawful according to Sharī‘ah.

Examples
✅ Rice
✅ Wheat
✅ Palm oil
✅ Sugar
Invalid Examples
❌ Wine
❌ Pork


2. Commodity Must Be Clearly Specifiable
The commodity’s:

• type;
• quality;
• quantity;
• grade;
• specifications

must be clearly known.
This avoids:

• uncertainty (gharar);
• disputes.

Example
Valid Specification

• 10,000 kg Grade A Thai rice.

Invalid Specification

• “some good rice.”

The second description is too vague.


3. Quantity Must Be Precisely Determined
The quantity must follow market custom.
If Sold by Weight
Weight must be specified.
Example

• 5,000 kg wheat.

If Sold by Volume
Exact volume must be specified.
Example

• 2,000 litres palm oil.

If Sold by Count
Exact quantity must be specified.
Example

• 1,000 identical bricks.

Important Rule
What is normally sold:

• by weight → must remain by weight;
• by volume → must remain by volume.

4. Commodity Must Be Generally Available in Market
The commodity should normally:

• exist in market supply at delivery time.

This reduces:

• risk of non-delivery.

Example
Valid
Standard market wheat.
Invalid
Rare collectible item unavailable in market.


5. Commodity Cannot Be a Specific Identified Asset
Salam must involve:
a liability upon the seller,
not:
a specific identified asset.


Example
Invalid Salam
“I sell you THIS specific car after 6 months.”
Problem
The contract concerns:

• a specific identified asset.

Result
❌ Invalid salam contract.


AAOIFI Requirements Regarding Muslam Fīh
1. Salam Cannot Be for Specific Asset
(Para 3/2/3)
Example
❌ “This exact vehicle.”


2. Currency, Gold, and Silver Restrictions
(Para 3/2/4)
If salam capital is:

• currency;
• gold;
• silver,

then the salam commodity cannot also be:

• currency;
• gold;
• silver.

This avoids:

• ribā.

Example
A buyer pays:

• gold now
  for:
• gold later.

Result
❌ Invalid salam.


3. Commodity Must Be Precisely Specifiable
(Para 3/2/5)
The seller must be capable of delivering:

• according to exact specifications.

4. Commodity Must Be Clearly Known
(Para 3/2/6)
Specifications must eliminate:

• ambiguity;
• uncertainty.

Case Study: Valid Salam Commodity
A buyer enters salam contract for:

• 50 tonnes Grade A wheat.

Contract Details

• Weight clearly specified.
• Quality clearly specified.
• Delivery date fixed.

Analysis
The commodity is:

• fungible;
• measurable;
• market available.

Result
✅ Valid salam commodity.

Islamic Contract – Bay’ al-Salam: Types of Salam
Q1: What are the types of salam contracts?
Answer
There are two main types of salam contracts:

1. Ordinary Salam
2. Parallel Salam

Both involve:

• advance payment;
• future delivery of commodities.

However, they differ in:

• number of parties involved;
• contractual structure.

1. Ordinary Salam
Definition
Ordinary salam involves:
only two contracting parties.
The parties are:

• the buyer (muslim); and
• the seller (muslam ilayh).

Under this arrangement:

• the buyer pays the full purchase price upfront;
• the seller delivers the specified commodities at a future date.

Main Features of Ordinary Salam

• Two parties only.
• Single salam contract.
• Full advance payment compulsory.
• Commodity delivered later.

Case Study 1: Ordinary Salam
A rice farmer requires financing before harvest season.
A trader enters into salam contract with the farmer.
Contract Details

• Commodity: 20,000 kg Grade A rice
• Salam price: RM120,000
• Payment: fully paid immediately
• Delivery date: 1 December 2028

Structure
Buyer (
Muslim
)
Trader
Seller (
Muslam Ilayh
)
Farmer


Analysis

• Only two parties involved.
• Buyer prepays full price.
• Farmer delivers rice later.

Result
✅ Valid ordinary salam contract.


2. Parallel Salam
Definition
Parallel salam consists of:
two separate and independent salam contracts involving three parties.
One party acts:

• as buyer in one salam contract; and
• as seller in another salam contract.

This structure is commonly used in:

• Islamic banking;
• commodity financing.

Important Rule in Parallel Salam
The two contracts:

• must remain independent;
• cannot be legally linked;
• performance of one contract cannot depend on the other.

This rule is similar to:
parallel istisnā‘.


Main Features of Parallel Salam

• Three parties involved.
• Two separate salam contracts.
• Contracts must remain independent.
• Common in Islamic finance institutions.

Case Study 2: Normal Parallel Salam
An Islamic bank finances a wheat producer.


First Salam Contract
Between

• Islamic bank;
• wheat farmer.

Contract Terms

• Commodity: 100 tonnes wheat
• Salam price paid by bank: RM400,000
• Delivery period: 6 months

The bank prepays the farmer.


Second Salam Contract
Between

• Islamic bank;
• food processing company.

Contract Terms

• Commodity: 100 tonnes wheat
• Salam selling price: RM480,000
• Delivery period: 6 months

The bank undertakes to supply wheat to processing company.


Profit Calculation
480{,}000 - 400{,}000 = 80{,}000
480{,}000 - 400{,}000 = 80{,}000


Analysis

• Two independent salam contracts.
• Bank acts:
  • as buyer in first contract;
  • as seller in second contract.
• Contracts are not legally contingent on each other.

Result
✅ Valid parallel salam.


Q2: Why must the two contracts in parallel salam remain independent?
Answer
If the contracts become linked:

• the arrangement may create excessive uncertainty (gharar);
• or resemble prohibited resale before possession.

Therefore:

• each contract must stand independently;
• rights and obligations in one contract cannot automatically depend on the other.

Case Study 3: Invalid Linked Parallel Salam
An Islamic bank tells a wheat buyer:
“We will only deliver wheat to you if our farmer successfully delivers wheat to us.”
Problem
The second contract becomes dependent upon:

• performance of first contract.

Analysis
This violates:

• independence requirement of parallel salam.

Result
❌ Invalid linked structure.


Difference Between Ordinary Salam and Parallel Salam
Ordinary Salam
Number of Contracts
One contract.
Number of Parties
Two parties.
Structure
Direct buyer-seller relationship.
Common Use
Farmer financing.


Parallel Salam
Number of Contracts
Two separate contracts.
Number of Parties
Three parties.
Structure
Intermediary enters:

• one salam as buyer;
• another salam as seller.

Common Use
Islamic banking and commodity financing.


Easy Way to Remember
Ordinary Salam
➡️ “One buyer and one seller.”


Parallel Salam
➡️ “Back-to-back salam contracts with independent obligations.”

​

​Islamic Contract – Bay’ al-Salam: Basic Rules and Conditions of Salam
1. Offer and Acceptance in Salam Contract
Explanation
A salam contract may be concluded using:

• the word salam;
• the word salaf;
• the word sale; or
• any wording that clearly indicates:

a sale of specified commodities for future delivery in exchange for immediate payment.
What is important in Islamic contracts is:

• the meaning and intention of the contracting parties,
  not merely:
• the exact terminology used.

Therefore, any wording that clearly reflects:

• advance payment; and
• deferred delivery of specified goods

may validly establish a salam contract.


Key Elements Reflected in the Contract Wording
The wording must indicate:

1. immediate payment of the price;
2. future delivery of goods;
3. clearly specified commodities.

Example 1: Using the Word “Salam”
A trader says:
“I enter into a salam contract to purchase 5,000 kg of rice for RM40,000 to be delivered after 6 months.”
The farmer accepts.
Analysis

• The word salam is expressly used.
• Future delivery and upfront payment clearly stated.

Result
✅ Valid salam contract.


Example 2: Using the Word “Salaf”
A buyer says:
“I make a salaf agreement with you for delivery of 100 tonnes of wheat after harvest in exchange for RM300,000 paid today.”
Analysis

• The term salaf historically refers to salam.
• Immediate payment and deferred delivery specified.

Result
✅ Valid salam contract.


Example 3: Using Ordinary Sale Wording
An Islamic bank says:
“We purchase 200 tonnes of crude palm oil from you for RM800,000 paid immediately, with delivery after 8 months.”
Analysis
Although the word “salam” is not used:

• the contract clearly indicates:
  • immediate payment;
  • deferred commodity delivery.

Result
✅ Valid salam contract.


Example 4: Invalid Unclear Arrangement
A buyer says:
“I may pay you later if I agree, and you can supply goods whenever available.”
Analysis
The statement lacks:

• certainty of payment;
• certainty of delivery;
• precise contractual obligation.

This creates:

• uncertainty (gharar);
• ambiguity.

Result
❌ Invalid salam contract.


Important Principle
In Islamic commercial law:
contracts are judged by their substance and meaning,
not merely by labels or terminology.
Thus:

• any wording clearly establishing:
  • advance payment;
  • future delivery;
  • specified commodities

may constitute a valid salam contract.


Summary Notes
Salam Contract May Use:
✅ Salam
✅ Salaf
✅ Sale
✅ Any wording clearly indicating deferred commodity delivery for upfront payment.


Essential Meaning That Must Exist
The contract must clearly show:

• full advance payment;
• future delivery;
• specified commodity;
• agreed delivery date.

Islamic Contract – Bay’ al-Salam: Price (Ra’s al-Māl) in Salam Contract 
Q1: What is ra’s al-māl
in a salam contract?
Answer
Ra’s al-māl refers to:
the purchase price or capital paid by the buyer in a salam contract.
In salam:

• the buyer pays the price immediately;
• while delivery of the commodities is deferred to a future date.

Q2: Why must the salam price be fully paid immediately?
Answer
The salam price must be:

• clearly determined; and
• fully paid at the contract session.

This rule exists to avoid:
exchange of one deferred countervalue for another deferred countervalue,
which is known as:
bay‘ al-kāli’ bi al-kāli’
(sale of debt for debt).


What Is Bay‘ al-Kāli’ bi al-Kāli’?
Explanation
It occurs when:

• both payment and delivery are deferred.

This creates excessive uncertainty and resembles prohibited debt trading.


Example of Invalid Bay‘ al-Kāli’ bi al-Kāli’
A buyer says:
“I will pay RM50,000 after 6 months for rice to be delivered after 6 months.”
Problem

• payment delayed;
• delivery also delayed.

Both obligations are deferred.
Result
❌ Invalid because it resembles sale of debt for debt.


Q3: Why must the seller receive full payment before leaving the contract session?
Answer
The seller must take possession of the salam capital immediately because:

• salam was permitted to provide immediate liquidity to producers and farmers.

If payment is delayed:

• the purpose of salam is defeated.

Immediate payment also:

• prevents uncertainty;
• distinguishes salam from prohibited debt exchanges.

Q4: Did any jurists allow slight delay in payment?
Answer
Yes.
The Māliki jurists allowed:

• minor delay of a few days,

provided:

• the delay is not stipulated as a contractual condition.

Similarly, AAOIFI allows:

• payment delay of:
  • two or three days at most
    as an exception.

Q5: Can an existing debt be used as salam capital?
Answer
No.
According to AAOIFI SS No. 10 (Para 3/1/4):
an existing debt cannot be recognised as the capital of salam.
This means:

• salam capital must involve actual payment;
• not merely set-off or conversion of existing debt.

Example of Invalid Debt as Salam Capital
A farmer owes trader:

• RM30,000 from previous transaction.

The trader says:
“I will treat that debt as salam payment for future wheat delivery.”
Problem
No actual new payment occurs.
Result
❌ Invalid salam capital according to AAOIFI.


Q6: Why are ribawi items problematic in salam pricing?
Answer
If the salam price itself is:
a ribawi item,
certain exchanges become prohibited to avoid:

• ribā al-faḍl; and
• ribā al-nasī’ah.

What Is Ribā al-Faḍl?
Occurs when:

• ribawi items of same genus are exchanged unequally.

Example:

• 1 tonne wheat exchanged for 1.5 tonnes wheat.

What Is Ribā al-Nasī’ah?
Occurs when:

• one ribawi item is delivered immediately;
• the other is deferred.

This naturally occurs in salam because:

• commodity delivery is deferred.

Example of Invalid Ribawi Salam
A buyer pays:

• wheat today
  for:
• barley delivered later through salam.

Problem
Both:

• wheat;
• barley

are ribawi food commodities.
The exchange creates risk of:

• ribā al-nasī’ah.

Result
❌ Not permissible through salam.


Q7: What are the AAOIFI requirements regarding salam capital?
Answer
According to AAOIFI SS No. 10:
1. Salam Capital Must Be Clearly Known
(Para 3/2/1)
The price must be clearly determined to:

• remove uncertainty;
• avoid disputes.

2. Salam Capital Must Be Paid Immediately
(Para 3/1/3)
Payment should occur:

• at the contract session.

Exception:

• delay of two or three days may be tolerated.

3. Debt Cannot Be Salam Capital
(Para 3/1/4)
Existing debts cannot be converted into salam payment.


Case Study 1: Valid Salam Payment
A trader enters salam contract with rice farmer.
Contract Details

• Commodity: 10,000 kg rice
• Salam price: RM80,000
• Delivery date: 1 December 2028

The trader:

• pays RM80,000 immediately during contract session.

Analysis

• Full payment immediate.
• Delivery deferred.
• Valid salam structure.

Result
✅ Valid salam contract.


Case Study 2: Invalid Deferred Salam Price
A buyer agrees:

• to pay RM100,000 after 4 months
  for:
• palm oil delivered after 6 months.

Analysis
Both:

• payment;
• delivery

are deferred.
This creates:
bay‘ al-kāli’ bi al-kāli’.
Result
❌ Invalid salam contract.


Case Study 3: Invalid Debt Conversion
A supplier owes customer:

• RM50,000.

Customer proposes:
“Use the debt as salam payment for future wheat delivery.”
Analysis

• No actual payment occurs.
• Salam capital not genuinely transferred.

Result
❌ Invalid according to AAOIFI.


Important Principle
Salam is permitted as:
an exception to normal prohibition of selling future goods.
Therefore:

• strict rules apply to reduce uncertainty and ribā.

The most important rule is:
full upfront payment of the salam capital.

​