Salam and Istisna Financing - CASE STUDY Mohammed needs money in order to renovate his house The cost of renovation is BHD90,000.His wife Najma has

Salam and Istisna Financing - CASE STUDY Mohammed needs...

This preview shows page 1 - 5 out of 11 pages.

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
Image of page 1
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
Image of page 2
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.
Image of page 3