Salam Sukuk explained: Forward sale certificates for commodity-linked returns

In-Depth Analysis

Salam Sukuk are based on the Salam (forward sale) contract — one of the few exceptions in Shariah to the general prohibition on selling what one does not possess. In a Salam contract, the buyer pays the full purchase price upfront for a specified quantity of a commodity to be delivered at a future date. In the Sukuk context, this structure is used to provide investors with returns linked to commodity markets while maintaining Shariah compliance. In a typical Salam Sukuk structure, the SPV uses the Sukuk proceeds to enter into a Salam contract with the originator, paying the full price upfront for a specified quantity of a commodity (such as oil, aluminum, or agricultural products) to be delivered at a future date. The SPV simultaneously enters into a parallel Salam contract with a third party, agreeing to sell the same type and quantity of commodity at a higher price for delivery on the same future date. The difference between the parallel Salam sale price and the original Salam purchase price represents the profit for the Sukuk holders. It is important to note that the Salam and parallel Salam must be two separate, independent contracts — they cannot be linked or conditional upon each other, as this would create a prohibited arrangement. The SPV bears the risk that the originator may fail to deliver the commodity, and separately bears the risk that the parallel Salam buyer may not accept delivery. Like Murabahah Sukuk, Salam Sukuk face significant tradability restrictions. Once the Salam payment has been made, the Sukuk represents a right to receive a commodity in the future — essentially a receivable. Trading this receivable at a discount or premium is not permitted. Salam Sukuk must therefore be traded at face value, which severely limits secondary market liquidity. Salam Sukuk have been used primarily by commodity-producing nations, particularly Sudan, which was one of the pioneers of this structure. The Central Bank of Sudan issued Salam Sukuk (known as Shihab certificates) backed by agricultural commodities as a key monetary policy tool. The government of Bahrain has also issued Salam Sukuk as part of its Islamic money market instruments. Despite their limited use compared to Ijarah or Wakalah Sukuk, Salam Sukuk serve an important function in the Islamic finance ecosystem. They provide a Shariah-compliant mechanism for commodity-linked financing and can be particularly useful for economies dependent on natural resource exports. The requirement for full upfront payment also provides the commodity seller with immediate working capital, which mirrors the original purpose of the Salam contract in agricultural financing.