1
CASE STUDY
Mohammed needs money in order to renovate his house. The
cost of renovation is BHD90,000.His wife, Najma, has savings
up to BHD30000 and needs additional financing of
BHD60,000. Mohammed knows that he can always borrow
from any bank in Bahrain but he wants a Sharia compliant
financing.
Mohammed seeks your advice on a number of issues before
he can make his decision on which financing best suit his
needs i.e
Why is conventional borrowing not sharia compliant for
Mohammed.
What are Shariah compliant alternatives for him.
Advise Mohammed accordingly.
Salam & Istisna’
Financing
Dr. Farkhanda Shamim
2
Salam & Istisna’
–
Exceptional Sale
Basic conditions for the validity of sale is that the
Commodity must be in existence
Seller must own commodity
Seller must have physical possession of
commodity
Two
exceptions
are made to this general
Shari’ah
principle
–
salam
and
istisna’
Salam Contract
3
Salam
Definition
Salam : the purchase of a pre-specified commodity
for deferred
delivery in exchange for immediate payment.
In a Salam :
•
The asset does not need to exist.
•
The seller does not need to have ownership of the asset.
•
The buyer have to pay the full price in advance.
•
Gharar (uncertainty) is avoided in Salam because the subject matter of salam is
specified in detail in the contract.
Salam
beneficial to seller because price is received in advance
Salam
beneficial to buyer because typically, the
salam
price is
lower than the spot price
Salam Structure
Ali ( Buyer) wants 1000 KG of Red
Apple on Jan 2013
Mohd (Farmer) has an Apple Farm
and the red apple will mature on
Jan every year.
Ali enter a Salam contract with Mohd to
deliver him 1000 KG of Apple by Jan for 1
BD per KG , Ali paid the amount in full
now
Mohd deliver 1000 KG of red apple to Ali on
the Jan 2013
Ali may secure Mohd delivery commitment with a mortgage , guarantee or letter of credit
.
If Mohd farm could not produce 1000 KG of red apple , Mohd has to buy apples from the market and
deliver it to Ali on Jan 2013.
