70 Islamic Finance in Practice
salaries, for example, it arranges to sell a quantity of wheat to the bank
(deliverable at a later date) for which the bank is willing to pay $20,000.
Typically insalam, to incentivize the buyer to pay upfront and receive
delivery later, the buyer will pay a below-market price, enticed by the
prospect of selling the commodity upon delivery at a profit. This is how the
bank makes its profit, on the one hand, and on the other the business fulfils
its WCF needs.
A related issue is that normally insalam, delivery is made in full on the
due date. However, since this usually necessitates the client to purchase a
large quantity from the market prior to the delivery due date, delivery in
full may pose further liquidity problems for the business. A permissible
solution is to stagger the delivery of the goods over a certain duration,
making it manageable for the client by enabling the delivery to be made in
quantity instalments.
Viewed from another angle, the abovesalam-based solution for working
capital needs is intrinsically rather similar to another possible arrangement
that may be employed to solve WCF-2 necessities, namelytawarruq.In
tawarruq, the client buys a commodity^1 on deferred payment, and then sells
the same immediately on spot to obtain the cash-in-hand that he needs, in
this case for WCF-2. The notable similarity betweensalamandtawarruqis
that in both cases, the client receives money upfront, in exchange for a
deferred financial liability. Intawarruq, this liability takes the form of an
explicit deferred money price; insalam, the liability is a deferred delivery
obligation, which implies that the client must gain access to money resources
to be able to purchase thesalamcommodity in advance of delivery. Thus, in
a way, bothtawarruqandsalamfor WCF imply money in advance being
exchanged for a subsequently higher monetary liability, using a sale
transaction as a stepping stone. In both instances, the commodity as the
subject matter of the sale is rendered more or less insignificant, since the
sole purpose is to receive the finance.
Interestingly, whiletawarruqis considered to be controversial by some
across the Islamic finance spectrum, the same view is not usually expressed
aboutsalam, despite the similarity of purpose and operation described in
the paragraph above. Therefore, so far, the use ofsalamfor WCF is broadly
accepted, whiletawarruqis not. However, there may be three reasons for
this. Firstly,salamfor WCF is not widely used across the Islamic finance
industry. As a result, it has probably not received the same kind of attention
thattawarruqhas, given the ubiquity oftawarruqin particular with regards
to being a liquidity management tool currently used by virtually all Islamic
banks. Secondly, insalam, the entire period between payment and delivery
(usually a few months long, or more) is set aside for the “production” of the
deliverable commodity. This appears to lend more acceptance to the overall
arrangement, rather thantawarruq, where the credit purchase and the(^1) In practice, some kind of metal (eg. aluminium) is normally preferred for tawarruq transactions, since it is
subject to very low depreciation, and hence acts as a good store of value.