salam & istisna final
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Debt Based Financing Product-II
Presented By: Huma Ayub
Assistant Professor
Bahria University, Islamabad.
Salam(Deferred Delivery Sale) Facility
Istisna ( Manufacturing Sale) Facility
Week # 10
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Source: Islamic Banking Bulletin Dec 2010
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Presentation Outline
Fiqh Principles on Counter values
(CV)
Bay al-Salam
Bay al-Istisna
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Fiqh principles on CV
In principle, based on the texts of the
Shariah, the counter values (price
and good) must be
Present during the time of the
contract
Exchanged on the spot
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Fiqh principles on CV
However, the Shariah text made
exception in two situations where one
of the counter values may be deferred
and hence absent during the time of
the contract:
Al-Bay Bithamanin Ajil (price deferred)
Bay al-Salam (good deferred)
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Bay al-Salam
DefinitionLiterally al-Salam means to advance
or to pay upfront. Another term for al-
Salam is al-Salaf.Technically, it is a sale where the
price is paid upfront and the good is
delivered in future.Salam was originally designed as a
financing mechanism for small
farmers and traders.
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Bay al-Salam
Shariah Evidence
Al-Quran: 2:282, Ibn Abbas r.a.: reported that
this verse was revealed in relation to al-Salam.O you who have believed, when you contract a
debt for a specified term, write it down.
Al-Sunnah:
The prophet s.a.w. prohibited the sale of what isnot in possession but made a concession in
relation to al-Salam. (Narrated in all the sunan)
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Bay al-Salam
Necessary Conditions:
The kind, type and attributes of price
and good must be known and
specified.
The amount or unit of price and good
must be specified.
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Necessary Conditions:
The price should be paid upfront and the good
delivered later in future. Al-Imam al-Shafii opinesthat the good can also be delivered in the
immediate future because the term specific time
frame in the hadith refers to point in time and not
duration. On the other hand, al-Imam Malik is ofthe opinion that advancing the price could be
delayed but not exceeding 3 days
Bay al-Salam
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The good should be homogeneous and real.Currencies cannot be the object of al-Salam.
The exchange must be free from ribawiitems.
The good must be present any time during the
duration of the contract.
No Khiyar al-Shart, i.e. the option of condition
that would change the nature of al-Salam such as
deferring payment or spot delivery of good.The point of delivery must be specified, e.g. port
etc especially when cost is involved
Bay al-Salam
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How to get Profit from Salam?
Since the spot price that the bankpays is pegged lower than theexpected future price, the
transaction should result in a profitfor the bank.
Possession condition before bank
can get back its investment andprofits.
Islamic banks are exposed to Price
Risk (mitigation technique Parallel
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Bank Farmer
Market Farm
1) Cash
3) Produce o
4) Produce
5) Produce6) Revenue
Bay al-Salam: Application
Model 1Direct involvement of Islamic
Bank in Bay al-Salam
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Bay al-Salam: Application
Bank Client
Supplier
Installment
3) Asset
1) Cash2) Asset
* Duration between Bankand Client is longer that
the duration between
Bank and Supplier.
Model 3: Hybrid
Al-Salam
BBA
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Back to back Salam Facility (to
mitigate Price Risk)
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Steps in Back to back Salam Facility
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Application of Salam
Pre-shipment Export Finance:This is undertaken in the following steps.
1. Bank receives an export letter of credit (LC) in favor
of its client, covering certain goods; Client gives the
letter of credit under bank's lien. Thus, allowing the
bank to assume the role of seller to the foreign
buyer.
2. To comply with the LC requirement, bank agrees to
buy the goods from its client under a salam contractand makes upfront payment to him. Salam contract
devised for this purpose should include specific
delivery date and place. Delivery date should be
reasonably ahead of the latest shipment date stated
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Application of Salam
3. As for the place, it should be the port ofdestination mentioned in the LC. Submission of
in-order shipping documents (viz. bill of lading
and certificate of origin) by the client may be
deemed equivalent to the satisfactory delivery.4. The agreed payment (pre-shipment finance)
made by the bank to its client will be lower than
the amount of the export LC, difference being
bank's profit.
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Al-Istisna
Definition
Literally al-Istisna means to create or
Manufacture something.
Technical it is a contract with artisan
or manufacturer to make something ofa given description (An artisan is a
skilled workman).
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Al-Istisna
Shariah EvidencesThe Jumhur deem al-Istisna invalid on the
basis of Qiyas because both counter
values (price and good) are absent duringthe time of initiating the contract.
The Jumhur secure al-Istisna by al-salam
(if the material is provided by the
manufacturer or al-Ijarah (if the material is
provided by the customer).
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Shariah Evidences
However, al-Istisna has been allowed(especially by the Hanafi scholars) on
the basis of Istihsan (hidden qiyas).
How?
Al-Istisna
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Necessary Conditions
The good must be of specific kind,
type, amount and attribute.The good must be known and
familiar to the two contracting parties.
Al-Istisna
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Al-Istisna
Necessary Conditions
Conditions before the good is
manufactured
Conditions after the good ismanufactured
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Al-Istisna
Bank Client
Supplier
1) Installment
4) Asset
2) Cash/Installment3) Asset
* Duration between Bank and Client
is longer that the duration between
Bank and Supplier. Two separatecontracts.
Model 1:Involvement of IB as an
intermediary (Parellel al-Istisna)
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Al-Istisna
Bank Govt
PLUS
Installment
3) Asset
1) Cash2) Road
* Duration between Bank and Govt islonger that the duration between
Bank and PLUS.
Istisna
BBA
Model 3: Hybrid
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