58 Islamic Finance in Practice
statement of understanding or intent cannot rise to the level of a binding
agreement.Salam contracts
Asalamcontract differs from amurabahain that when it is entered into,
the goods do not exist. Historically,salamhas been used for the financing of
agricultural products, although it can be used for other items.General parameters
The sale price is paid immediately and the ownership in thesalamgoods is
also transferred, but subject to a restriction that the purchaser cannot
dispose of the goods until they are delivered to it.
Thesalamgoods will not be in existence when thesalamcontract is
entered into. The general rule is that the description of thesalamgoods
cannot mention a specific asset on the basis that as the asset does not exist,
it is only possible to refer to goods in a general manner. However, the
specifications of the goods, their quality, quantity and other relevant details
must be clearly stated.
It is up to the seller to source goods thatmeet the specific requirements.
Using an agricultural example, if the salamcontract was to describe
100 kilograms of wheat from a particular field, there is the potential for the
contract to become void if the wheat in the field was destroyed. It is for this
reason that the goods must be described in enough detail for the seller to
deliver the required goods to the purchaser but must not describe a specific
source.Specific matters
Mode of financing
Salamwas originally used to assist farmers who needed to purchase seeds
for their crops. The Islamic financier would agree to purchase the crop before
it existed and would pay the purchase amount upfront. This would enable
the farmer to purchase the seeds.Can the Islamic financier onward sell?
The Islamic financier will not want to retain the goods. It is permitted for
the Islamic financier to onward sell but within limitations. It can sell using
a back-to-backsalam, but the date of delivery to its purchaser must be after
when it has received delivery of the goods that its customer has agreed to