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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:
Structure of Parallel Salam
First Salam Contract
Between
Second Salam Contract
Between
Case Study: Parallel Salam in Wheat Financing
First Salam Contract
Parties
Buyer (
Muslim
)
Islamic Bank
Seller (
Muslam Ilayh
)
Wheat Farmer
Contract Details
Second Salam Contract
Parties
Buyer
Flour Manufacturing Company
Seller
Islamic Bank
Contract Details
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:
Why Is Parallel Salam Used?
Parallel salam allows Islamic banks to:
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:
❌ 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:
Important Principle
Parallel salam is permissible because:
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.
- must remain independent;
- cannot be legally linked;
- performance of one contract cannot depend on the other.
- Islamic banks;
- commodity traders;
- Islamic financial institutions.
Structure of Parallel Salam
First Salam Contract
Between
- Islamic bank;
- supplier/farmer.
- purchases future commodities;
- pays full price upfront.
Second Salam Contract
Between
- Islamic bank;
- final buyer/customer.
- 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
- RM400,000 upfront to farmer.
- 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
- RM480,000 upfront to Islamic bank.
- 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.
- 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.
- 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.
❌ 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.
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