Islamic Mode of Financing Salam l How Salam works ?

In any Islamic modes of financing institution how Salam works is defined below.

Definition and Concept

• Seller agrees to sell the commodity to the buyer at future date in exchange of the advanced price fully paid at spot.
• Price in cash but the delivery of goods is differed

Background of Salam

• Before prohibition of interest farmer used to get loans on interest based from usurers to grow their crops and harvesting.After prohibition of interest they were allowed to do Salam transactions.This helps them to get money in advance to fulfill their needs.
• During the days of our Prophet (S.W) the caravan used to get interest based loans for purchasing the commodities.After prohibition of interest they were allowed to do Salam.
  

Purpose of Salam

• To meet the needs of small farmers who need money to grow their crops and feed their family up to the time of harvest.
• To meet the need of working capital.
• To meet the need of traders for import and export business.
• If the client belongs to agricultural sector then Salam can be used.
• Under Salam the seller undertakes the supply of goods to the buyer at future date in exchange of advance price fully paid at spot.
• Price is in cash but the supply of goods is deferred.
• Farmer can sell their crops to bank in advance.
• After receiving their cash,farmer can easily undertake their work.
• This is beneficial for the farmer as he receives the price in advance and for the bank as well because the Salam price is lower then the spot price.

Conditions of Salam

1. It is necessary for the Salam that the buyer pays the price in full to the seller at the time of effecting sale,because the basic wisdom for allowing Salam is to fulfiill the instant need of the seller.
2. Only those goods can be sold through Salam in which quantity and quality can be exactly specified e.g. precious stone cannot be sold on the basis of Salam because each stone is differ in size,weight,quality and their exact specification is not possible.
3. All details in respect of quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute.
4. It is necessary that the quantity of the commodity is agreed upon in absolute terms.It should be measured or weighted in its usual measure.
5. Salam cannot be effected on a particular commodity or on a product of particular field or farm e.g . supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility,the delivery remains uncertain.
6. The exact date and place of delivery must be specified in the contract.
7. Salam cannot be effected in respect of things which must be delivered at spot e.g. Salam b/w wheat and barley.
8. The commodity of Salam contract should remain in the market right from the day of contract up to the date of delivery or at least at the date of delivery.
9. There should be actual delivery of commodity.

Benefits of Salam

Salam is the beneficial to the seller,because he receives the price in advance,and it is beneficial for the buyer also,because he receives lower price than the spot sale.   

These are the definitions and concepts of Salam how Islamic mode of Financing Salam works.