Salam sale contract, let us explore why the Shariah principles do not allow us to connect the origin of a Salam commodity to a specific source, such as the produce of a particular farm, field or orchard.
Although it is implied that if a wheat-growing farmer is entering into a Salam contract for want of needed cash to grow the wheat crop and deliver the agreed quantity to the Salam buyer, the Shariah principles do not permit the attachment of the origin of the commodity to his own field. Why?
It is because of the possibility of the crop getting damaged due to floods, infestation of insects, heatwaves, earthquakes or any other reason beyond human control. And if that happens and the origin of the wheat per se is mentioned to be the farmer’s own field, the Salam buyer will incur the entire loss since that particular field connected to the Salam goods will fail to produce the required quantity of wheat for that cultivation cycle.
So what happens if the wheat crop grown by the Salam seller (farmer) gets damaged and the origin of the commodity is not linked to his own field? The Salam buyer’s interest is very much protected since the Salam seller shall be obliged to source the agreed quantity of commodity from the other sources (such as the open market) and deliver it to the Salam buyer as per the delivery date and place agreed in the Salam contract.
Next, what if the Salam seller does not possess the means to purchase the commodity from the market? Well, in that case the parties under the Salam contract will negotiate and arrive at either of the following solutions:
a. The Salam buyer may agree to accept an alternate commodity from the Salam seller, the quantity and quality of which shall be agreed between the parties in a manner so that it is equivalent to the amount paid by the Salam buyer to the Salam seller under the Salam contract.
Here, it has been seen that some practitioners from Islamic financial institutions attempt to incorporate the clause for the alternate commodity at the outset when the Salam contract is entered into between the bank and the customer. This is impermissible in the well-defined Shariah code of conduct since the Salam contract cannot have two different commodities at the same time for the same value of the contract.
Also, it will be improper to assume from the beginning that the Salam seller may not be able to deliver the contracted goods. As such, while the Shariah principles, being pro-trade and pro-business, do provide certain alternate solutions, it will only be permissible to apply them should such a situation arise.
b. The Salam buyer grants extra time to the Salam seller to arrange the delivery of the required goods under the Salam contract. There is no Shariah bar on how much time can be allowed as it has been left to the Salam parties to decide.
Obviously, the Salam buyer shall have genuine concern and will only agree to allow a reasonable time frame to the Salam seller. Referring to the aforesaid wheat farmer example, it may be possible that the Salam buyer extends the time frame to deliver the Salam commodity from the wheat crop to be cultivated by the Salam seller in the next cycle.
c. The entire amount of Salam downpayment received by the Salam seller is returned to the Salam buyer. Nevertheless, while doing so, the Salam buyer is not permitted to seek any cash or in-kind compensation from the Salam seller on account of the non-performance of the Salam seller. This is because the Salam downpayment received by the Salam seller upon entering into the Salam contract shall be treated as a debt on the Salam seller and any amount claimed from the Salam seller over and above the same shall be considered in Shariah as usury or interest.
d. If the Salam downpayment was received by the Salam seller in-kind rather than cash (as explained in the last article), the Salam seller will have the option to return the Salam capital either in shape of the same goods or equivalent cash to the Salam buyer.
How about a circumstance where the Salam seller has suffered the partial loss to the wheat crop? In such a situation, it will be permissible for the Salam buyer to receive a partial quantity of the commodity and cancel or defer the Salam contract for the remaining quantity. However, in case of cancelation, the Salam seller shall be required to repay the amount equivalent to the canceled quantity either in cash or kind, as per the consent of the Salam buyer.
Can the Salam contract be used for goods other than grains, fruits or other agro-based produce? This will be explained in the next article.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next Week: To examine if a Salam contract can be used for goods other than agricultural products.