Guide to a few remaining points on Salam contracts

In-Depth Analysis

Wrapping up the discussion on Salam contracts, today we shall touch on the few remaining points needing an explanation. We discussed parallel Salam contracts last week. The question arises whether it is necessary for the buyer or seller under the master Salam contract to enter into a parallel Salam contract to be able to buy or sell Salam goods. The answer to that is no. Any Salam seller may either produce the goods himself or purchase them from the market closer to the delivery date and fulfill his commitment by completing the Salam delivery. He will have various options to procure the goods such as enter into a parallel Salam contract (as explained in the last article), or purchase the goods on a spot basis, or enter into a Murabahah or Musawwamah contract with the suppliers or do a barter trade with them. Next, can a Salam seller enter into several Salam contracts at the same time with different buyers? Of course he can do so if he believes he has the capacity to fulfill the delivery of all the committed Salam consignments. In fact, the Salam seller can also enter into more than one Salam contract with the same Salam buyer. It was explained earlier that the Salam capital could also be paid in kind by the Salam buyer. In this context, is it possible if the Salam price is paid to the Salam seller in the shape of a certain indirect financial benefit? Yes, Shariah principles also allow the flexibility to pay the Salam price by way of providing a certain benefit which could be measured in financial terms. An example is the usufruct of a movable or immovable asset whereby the Salam buyer allows the Salam seller to occupy his property for a certain period of time which is equal to the Salam price in monetary terms. In this case, the downpayment shall be considered to have been paid by the Salam seller when he delivers the possession of the property to the Salam seller. However, the Shariah condition is that the delivery of the property must be handed to the Salam seller immediately upon signing the Salam contract by the parties so as to comply with the Shariah condition of upfront payment of the Salam price. A delay in doing so shall make the Salam contract void. Can the debt be treated as the Salam price in the sense that the Salam seller is indebted to the Salam buyer who offers to treat the debt as the Salam capital so that he can receive the goods toward the settlement of debt? It is impermissible under Shariah to treat a debt as the Salam price even if the Salam seller directly owes any amount to the Salam buyer. Shariah principles require that the Salam buyer must pay the Salam price on an upfront basis regardless of any legacy transaction between the parties resulting in a debt on the Salam seller. What happens if the Salam goods delivered by the Salam seller turned out to be inferior? Similarly, what if the quality of the Salam goods received by the Salam buyer is of superior quality? Well, in the case of substandard quality of the Salam goods delivered by the Salam seller, the Salam buyer has the right to refuse the delivery and demand the goods specified in the Salam contract or claim the return of the Salam price paid by him in full. Otherwise, the Salam buyer may accept the goods at a condition that the Salam seller will extend a proportionate reduction in the price and refund the difference in cash or kind. In the situation where the delivered Salam goods are superior to the agreed quality, this will be considered a voluntary act by the Salam seller and the Salam buyer will not be required to compensate the Salam seller on account of the higher quality of the goods received by him. Can the Salam buyer seek any security/collateral from the Salam seller against the full downpayment in order to protect himself from the Salam seller's default? Yes, it is acceptable under Shariah principles for the Salam buyer to require the Salam seller to furnish any acceptable third-party guarantee or mortgage over certain movable or immovable assets up to the part of full value of the Salam contract. Can a Salam seller issue Sukuk Salam aimed at receiving the Salam price upfront? Yes, this is permissible and in this case, the Salam seller will be obliged to deliver the Salam goods to a trustee representing the Sukuk investors who will then sell the Salam goods in the market and redeem for the Sukuk investors their proportionate capital and profit. It is important to note that the Sukuk Salam cannot be listed at a bourse since the instrument is not tradeable based on the deep-rooted Shariah principle that a debt cannot be traded. In this case, the Shariah principles consider the Sukuk Salam capital as a debt on the Salam seller until such time that the Salam goods are delivered. As such, Sukuk Salam investors will have to hold on to the Sukuk until the Salam goods are disposed of and the Sukuk redeemed along with capital and profit.