The Salam transaction in the Islamic tradition and its application in Islamic banking

Abstract

This article reveals some features of the “Salam” contract which refers to the purchase of a commodity for deferred delivery in exchange for immediate payment. The structure of the Salam Contract changes the logic of ordinary sales contracts, hereby article focuses on differentiation between pre-paid Salam Contract on the one hand and the sales of goods contract (bay’) and the concept of advanced payment on the other hand. Part 2 of the article highlights the Salam Contract as a type of pre-delivery finance instrument based on the Islamic banking theory and practice. As a banking instrument, the salam agreement is primarily aimed at implementing pre-delivery financing of the real sector of the economy, which makes it possible to adjust, plan, replenish and accelerate the turnover of funds of both Islamic banks themselves and their counterparties. Nevertheless, the mechanism of implementing salam in the activities of Islamic banks is primarily aimed at forming contractual relations with reliable and financially stable counterparties. With the help of salam, the Islamic bank acts as a participant in trade in the domestic and foreign markets. Under the Salam agreement, the Islamic bank mainly buys goods whose prices are quoted on international commodity exchanges or on Islamic financial and trading platforms. Along with cooperation with companies operating in the export-import industry, this type of purchase and sale is an effective way of pre-delivery financing of agricultural producers. The article observes also a discussion over Salam Contract application for the market of shares. One point of view on this issue is that the shares have the signs of the individually defined things and thus do not meet the mandatory feature of the salam transaction. Another opinion insists that the shares correspond to all the characteristics of generic items, including the ability to determine their properties and the ability to order (deliver) them. There are also other intermediate points of view.