Why is Sukuk Salam not tradable?

In-Depth Analysis

We are nearing the completion of our discussion on the Salam sales contract. In this regard, we shall find out why we do not observe the issuance of any Sukuk Salam by the regular Islamic capital market players, such as the sovereigns, quasi sovereigns, government related entities (commonly known as GREs) or private sector corporate entities. The reasons for us not seeing Sukuk Salam issuances in the market are as follows: a. As per Shariah principles, the full price paid by the buyer under a Salam contract is considered as a debt on the seller until such time that the seller is able to fulfill the obligation of delivering the full quantity of Salam goods to the buyer. Readers would recall our discussion earlier in this space that Shariah does not allow trading in debt. This is the reason for Islamic banks not to offer the lucrative discounting, factoring or forfaiting facility to customers. This was the first difference I perceived when I entered into Islamic banking almost two decades ago. In my conventional banking role as a corporate banker, I used to push my customers to utilize such facilities since these provided higher yields to the bank (upfront interest and discounting fee). I still remember the conversation I had with the Islamic bank's corporate banking director when I enthusiastically offered to introduce to him my best discounting facility customers from the conventional bank I had just left behind. He smiled and said: 'Thank you very much and please let your ex-bank continue to enjoy the lucrative earnings from those customers.' Later I realized that the Islamic bank I had switched sides to does not have the discounting, factoring or forfaiting options for customers due to the Shariah restriction of not allowing trading in debt. A few years down the road, the full impact of a discounting disaster was to dawn on me by way of the notorious financial crisis of 2008. b. The popularity of Sukuk is that it is a fixed income instrument with an exit route by way of listing at a local or foreign bourse which enables free trading of the instrument as and when needed by investors. However, as aforementioned, since a debt cannot be traded in Shariah, the Sukuk Salam do not hold any attraction for issuers since such a Sukuk facility cannot be listed and traded on a stock exchange being pure debt in nature. Moreover, if a Sukuk Salam facility is somehow issued through private placement, it will be very difficult to find investors who will be ready and willing to hold on to the Sukuk until the receipt of goods from the seller, their onward sale in the market, the realization of proceeds of the Salam goods and their distribution among Sukuk investors. The Central Bank of Bahrain regularly issues Sukuk Salam to manage domestic liquidity. However, the maturity of such issuances is usually a short period of three months and these are not listed or traded. As such, investors of the CBB's Sukuk Salam are required to hold on to them until maturity when they are redeemed with profit. I am not aware of any other jurisdiction using Sukuk Salam as a liquidity management tool. Do you? Let us now move on to the third Shariah sales contract in Islamic finance called Istisna. Istisna could be called a sibling of Salam since it also deals with the trading of a non-existent object. Istisna is a fixed price sale and purchase contract for an object (mainly a non-existent movable or immovable asset, and not a commodity since it is traded under the just-concluded subject of Salam). Such an asset is yet to be developed or constructed or manufactured by the seller. In other words, the subject matter of an Istisna contract has not come into existence at the time of entering into the Istisna contract. It is essential for the validity of an Istisna contract that the price and complete specifications of the asset (to be developed/constructed/manufactured) are clearly agreed between the parties from the outset and are made part of the contract no matter how detailed they may be. There are a few similarities and differences between Salam and Istisna. To start with, as discussed in the foregoing, both are contracted over a non-existent object at the time of entering into the contract. While the 100% price under a Salam contract must be paid in advance by the buyer, in Istisna it can be paid in installments commensurate with the progress of development and can be entirely upfront or even after the delivery of the Istisna asset.