SS 10 · Trade

SS 10: Salam and Parallel Salam

What this standard is about

Salam is a purchase where the buyer pays the full price in advance (the salam capital) for goods delivered at a future date. Parallel salam is a second, separate salam contract in which the bank sells the same goods onward. The two contracts must stay independent of each other.

Why it exists

Farmers and manufacturers need cash before production. Buyers want future supply. Salam gives advance funding without a loan. Because the goods do not exist yet, the standard demands precise specifications. This removes the uncertainty that could cause disputes.

The key rules, simply put

The full price must be paid at the time of contracting.
The goods must be clearly specified: kind, quality, quantity, and delivery date.
The goods must be fungible — measurable, weighable, or countable, with no major differences between units — or standardized manufactured goods.
Salam cannot be for a unique item, land, trees, gold, silver, or currency (when the price was paid in currency), or things valued subjectively like precious stones.
Delivery may happen in installments. Early delivery is allowed.
The buyer cannot sell the goods before taking delivery of them.
In parallel salam, the second contract must be independent. It cannot be conditional on the first.

An everyday example

A bank pays a wheat farmer $50,000 now for 100 tons of specified-grade wheat to be delivered in six months. The bank then signs a separate parallel salam to sell 100 tons to a miller for $55,000 on the same delivery date. The $5,000 difference is the bank's profit.

Words to know

Salam — an advance-payment purchase for future delivery.
Salam capital — the price paid in advance.
Fungible — interchangeable units of the same kind, like tons of wheat.
Riba — interest; any guaranteed extra on a loan. Not allowed in Islamic finance.

Source

AAOIFI Shariah Standard No. 10 — https://islamicmarkets.com/education/salam-mode-of-financing