Guide to types and characteristics of goods that can be traded under a Salam contract

In-Depth Analysis

We ended last week on the note of whether the Salam contract can be used for goods other than agrarian produce. The earlier articles on Salam took the example of wheat for ease of understanding but that does not mean that the Salam contract cannot be entered into over other goods which may not necessarily be agricultural-based. Shariah principles permit entering into a Salam contract with a 100% downpayment to the seller, provided certain aspects are clearly known to both parties in relation to the object of the Salam contract. This is keeping in view that the Salam goods must be fungible in nature. What is meant by fungible? From an economic perspective being fungible is the property of a certain good or commodity whose individual units are easily interchangeable, and each of its parts is indistinguishable from another part. This is different from the barter trade which is used for the exchange of commodities that are totally different in nature from each other. For example, since one tonne of pure aluminium is equivalent to any other tonne of pure aluminium, in any form — such as ingots, sheets or panels — aluminium is classified as fungible because it is easily interchangeable or replaced. In other words, certain goods being fungible refers simply to the uniformity or indistinguishability of each unit of a commodity with the other units of the same commodity. Moreover, for certain goods to be fungible, these must either be easily weighed, graded, measured (based on volume or length) or counted. The following necessary characteristics must be found in a commodity intended to be traded under a Salam contract: What is the type or kind of Salam goods? Is it grain, or liquid (such as edible oil, crude oil, milk) or textiles or metal or any other goods fulfilling the Shariah criteria for Salam goods? What are the physical characteristics of the Salam goods? This will include the precise explanation such as the grade or quality (for example grade one basmati rice, or premium quality cotton). What is the quantity, weight or volume of the Salam goods? Quantity will come into play if the Salam goods are to be counted in number such as the rolls of copper cable, weight where there is a need to verify the load such as certain tonnes of barley and the volume which is measured for the goods in liquid form which could include crude oil or gas in liquefied form. At what price are the Salam goods being traded between the contracting parties? This means the upfront payment to be made by the buyer to the seller under the Salam contract. We have discussed in the previous article that it could well be in cash or kind. What is the time period for the delivery of the Salam goods? Contemporary Shariah scholars do not set any explicit time limit and the deferment period is left to the consent of the contracting parties. The argument that such uncertainty could stretch to years does not hold water since the Salam buyer who makes a full downpayment will obviously not allow any unusually long period to the seller for the delivery of Salam goods. Where are the Salam goods required to be delivered by the seller upon completion of the deferment period? The place of delivery must be predefined in the Salam contract, such as the buyer's warehouse or the business place of a third party with whom the Salam buyer may have entered into a parallel Salam contract. The Salam goods may also be delivered in parts provided it is stipulated in the Salam contract at the outset. All of these have been beautifully summed up in a Hadith (saying) of Prophet Mohammed (peace be upon him) when he said: 'Whoever partakes in a forward sale (such as Salam), he should buy a known volume, or known weight for a known deferment period.' The goods that contemporary Shariah scholars allow to be part of the Salam contracts, in addition to all types of agricultural produce, are any of the items needing time for processing and preparation for delivery to the Salam buyer (hence the deferment period). These could be processed food such as sugar, salt, edible oil, milk and dairy products, eggs, nuts, biscuits, textiles, garments and any other item which fulfills the detailed criteria enumerated as aforementioned, provided it is not from among the ones prohibited in Shariah. Another important aspect is that the subject matter of the Salam contract should not be a mix of two or more commodities but an individual item. Should there be an intention to purchase different items, the buyer should enter into different Salam contracts for each of them. The gist of the aforementioned discussion is that a Salam contract can be entered into between parties for Shariah compliant goods which require a certain time period to be delivered and whose characteristics are beyond any ambiguity and that the quality or state of being diverse in character or content is remote.