Islamic Finance: Forward sale concept in Sharia under special circumstances

It is absolutely essential in Murabaha that the physical or constructive possession of the commodity, along with its ownership, exists with the seller at the time of sale.

Could there be a way in Sharia whereby the sale of a commodity takes place without its physical presence? This is important since it may be difficult to provide the physical availability of a number of commodities at the time of entering into a sale transaction.

Yes, it is possible under two circumstances, viz. 'Salam' and 'Istisna'. Both are sale transactions of special nature. Today we will discuss the underlying concept of Salam and its parameters.

Salam could be defined as a sale whereby the seller undertakes to supply certain commodity to the buyer at a future date in exchange of a financial consideration paid at the spot. In other words, the payment for the commodity is made immediately whereas its delivery takes place in future.

Grasping the terminology as we go along, here the buyer will be called 'Rabb-ul-Salam', seller 'Muslam Elaih', the payment 'Ras-al-Mal' and the commodity is termed 'Muslam Fih'. However, for the ease of understanding I will stick to the English terms.

Before the advent of Islam, needy farmers had always depended upon usurious loans as bridge finance to pull them along till such time that their crops are harvested. The borrowed funds were utilised to take care of crops as well as to feed the dependents.

However, when the borrowing and lending on interest was declared forbidden, Islam gave them the concept of Salam as an alternate channel to raise funds since they were allowed to 'sell' their future agricultural produce against cash in advance.

Another dimension of Salam was developed to provide substitute to the traders to export indigenous goods to the other places and to import commodities, which were not available locally.

For ages, the traders too had depended on interest bearing loans to undertake such activities. This practice also came under the umbrella of Salam with the abolishing of interest.

It was, therefore, allowable for traders to sell the goods (to be imported), in advance. Upon receiving the sale proceeds, they were in a position to buy the local merchandise and sell them in the outside markets to buy the goods covered under a Salam contract. Hence, the entire trade cycle of this type was successfully shifted to an interest-free mechanism.
Main Sharia parameters of this forward sale concept are:

• Settlement of purchase consideration
Buyer must pay the agreed price in full to the seller at the time of entering into a Salam transaction. The non-fulfilment of this condition will render the transaction similar to a debt swap, which is repugnant to Sharia. Further-more, the primary purpose for permissibility of Salam is to fulfill seller's immediate funding needs. If he does not get paid in full, the purpose of Salam will be defeated.

• Purchase price under Salam should be lower than prevalent market
The purchase price for buyer under Salam should be fixed at a rate lower than the spot price in the market at the time of entering into the transaction. This is to allow the buyer to benefit from the difference between the two prices as a reward for helping out the seller as well as for waiting to receive the goods.

At the same time, the buyer is not allowed to compel the seller to reduce the price to an unreasonable extent. What should be the reasonable price? Scholars say that it should be the price agreed to by the seller at his free will since he is the one who knows best what could be an acceptable sale price.

• Quantitative and qualitative specifications of goods
The transaction of Salam can only be undertaken for the goods the quality and quantity of which can be specified without ambiguity. Here, the quantity covers weight (kilograms) as well as measure (metres or litres, etc).

For example, it is possible to do a Salam deal for 50 metric tonnes of A grade mangoes since both, the quantity and the quality, can be specified in exact terms. Similarly, Salam contract can also be entered into for 2,000 meters of fine Chinese silk. However, how would you do Salam for precious stones, as each one of them is different in quality, weight and the other specifications?

• Date and place of delivery should be predetermined
The seller must specify the date and place where he will deliver the goods. As such, all the labour and transportation costs for moving the produce from the field/ warehouse to the agreed destination will be borne by the seller.

However, if the buyer subsequently changes the place prior to the delivery, additional expenses, if any, from the pre-agreed destination to the new location will have to be met by the buyer.

• Non-fixation of the origin of goods
It is not allowable under a Salam transaction to prefix the origin of produce to a particular farm or origin. To understand it better, the buyer cannot insist to have the tomatoes grown in a particular farm in Ras Al Khaimah. Seller will be deemed to have successfully completed his obligation under a Salam contract if he has delivered the required quantity and quality of tomatoes, irrespective of where they were grown.

This is also to protect buyer's interest since it is quite possible that the crop of a particular field or fruit of a particular tree is destroyed, hence making the delivery uncertain. This rule equally applies to any commodity the supply of which may be uncertain and hence cannot qualify under a Salam contract.

• Salam is not for the spot trade transactions
Salam cannot be conducted in respect of goods which are required to be delivered at spot. For example, if certain quantity of gold is purchased in exchange of silver, in Sharia it is necessary that the delivery of both be undertaken simultaneously. Such transactions are covered under Mura-baha or Musawama, and not under Salam.

• Availability of Salam goods in the market
Majority of the four Islamic schools of thought are of the view that the availability of the commodity in the market at the time of contract is not a condition for the validity of Salam. Important aspect is the availability of commodity with the seller at the agreed time and place of delivery.

• No limitations on fixing the delivery tenure
There is no bar on the time limit, be it minimum or maximum, for a valid Salam contract. The only condition, as per Sharia, is that the time of delivery must be clearly defined.

As different commodities may take different timeframe to deliver, parties to the contract may, therefore, fix the date of delivery with mutual consent.

If adopted in the right spirit, Salam can provide invaluable financial assistance to the farmers from poor countries who are deprived of extracting full potential from their fertile lands.


The author is the head of risk management at Dubai Islamic Bank.