Does Shariah allow transacting in a non-existent commodity?

In-Depth Analysis

Last week we completed the discussion on the Murabahah contract which is regarded as the most transparent process to conduct trading where the seller is required to disclose to the buyer the cost at which he/she bought the goods, any direct expenses added to acquire the goods (such as transportation, labor, insurance, customs and such) and the amount of profit he/she is charging to the buyer. Leaving all this behind, we shall, from today, talk about the next Shariah sale contract called 'Salam' (not Salaam). At the outset, Salam is the sale of a certain quantity of commodity(ies) which are non-existent at the time of concluding the contract but are required to be delivered at a certain future time and the full purchase price is paid by the buyer at the time of concluding the Salam contract. In comparison to Murabahah, Salam is also a sale contract but the stark difference between them is that in Murabahah, the goods are delivered upfront and the payment can be deferred but in Salam, it is totally opposite whereby the full payment must be made upfront by the buyer and the delivery of goods is deferred by the seller. This is based on the Shariah principle that in a trading contract, the parties cannot defer both considerations, such as the delivery of goods and the payment, together at the same time. Either the payment shall be deferred or the delivery but both cannot be deferred simultaneously. This is because the deferment of both shall result in a forward contract which is considered void in Shariah. The reason why forward contracts are impermissible in Shariah is because on the future delivery date, there is a possibility that the price of the agreed commodity may have gone up or down. If the price went up, the seller shall be the loser since he/she has already committed to selling the commodity at a price which is lower than the market price at the time the commodity is delivered under the forward contract. On the other hand, if the market price has fallen, the buyer shall incur the loss as he/she will be buying the commodity at a higher than market price. The advocates of forward contracts promptly bring in the argument of hedging against the price fluctuation. We all know that hedging was tested in the financial crisis a decade ago with a highly disappointing outcome whereby the financial institutions providing the so-called hedge themselves went bankrupt. Scholars of early Islam and from the modern age are unanimous that Salam is permissible in Shariah on a dual count such as Quran (the holy book) and Sunnah (the traditions of the Holy Prophet Muhammad). There is a verse in the Quran which relates to the transactions with future delivery action. It is verse 282 in Sura Al Baqara (the Cow). This long verse differentiates between spot transactions and the ones where the obligation is deferred. As for spot transactions, the divine guidance is that it is not necessary to write them down since they take place hand to hand, leaving no future obligations on the contracting parties. However, for the transactions with future obligations, God Almighty emphasizes to write such contracts down, and if the parties cannot write, a literate person should scribe the contract in a manner that the one who is under the obligation should dictate to him/her. Scholars declare the verse to be the central guidance for the permissibility of a Salam contract. As for the Sunnah, Ibn Abbas (a companion and cousin of Prophet Mohammed) narrated that when Prophet Mohammed came to Medina, he saw that people were selling dates with a deferred delivery of one and two years. Prophet Mohammed refined the practice and said that whoever pays (upfront) for dates for a deferred delivery, should do so on the basis of a specified quality, weight and date of delivery.