Two Different and Independent Contracts

ISLAMIC BANKING AND FINANCE

SALAM
Short Term Production Finance

Salam is a short-term financing technique in which banks provide financing to the farmers for
agriculture purpose. Banks give advance payment to the farmers and in return farmers will give
their commodities to the banks. The general requirement of a contract is the existence of subject
matter at the time of contract but in the case of Salam, there is no existence of subject time at
the time of contract. Banks can do advance full payment to the farmers. Salam is a type of
forward contract. It is important here to ensure the rights of both the parties because the delivery
of goods will occur in the future. Financer will receive commodity in the future and earns more
profit by selling it to other party. In Salm the commodity must be delivered on time. Farmer
must deliver the exact commodity to the financer on the decided date. There is no flexibility in
delivery of goods. Farmer will have to deliver the same quality and quantity of goods to the
financer. Financer then earns more profit by selling that commodity to the other party. It’s a
short-term financing technique and not applicable to manufacturing goods.

There are two different and independent contracts in Salam.

1. First is when bank is the buyer of the commodity.
2. Second is when bank is the seller of the commodity.

The risk management is an important aspect in Salam contract for Islamic banks. The client
can default after taking the advance payment. Islamic banks need to take proper measurements
to reduce this risk. Salam is a good financing technique for short period of time. It helps poor
people to get money for their crops. But they provide commodity in return to the financer.
Islamic banks can deal in Salam contract as it is allowed in Islam, but farmer will pay the
decided quantity of commodity on the decided date. Islam allows to earn profit on
commodities. We can’t earn money on money as it becomes interest. That is why there is an
involvement of asset and economic activity in Islamic Banking.
 SALAM
Short Term Production Finance

PROCESS OF SALAM CONTRACT

The Process for a Salam Contract is explained below:

 Firstly, the client who needs money go to the bank for Salam contract.
 Bank and client communicate with each other about Salam contract.
 Bank communicates his client every minor detail regarding Salam contract and clearly
explains all the terms and conditions.
 The Contract Price then decided which bank would pay to the client.
 The Goods also decided that client would supply to the bank in return.
 Principal Documents are required in this contract which are this Agreement and the
Security Documents.
 Secured Assets are also mentioned as those assets which supplier would provide to
the bank (Description of assets in respect of which charge may be created).
 Written Offer and Acceptance between the supplier and the bank.
 Fees and Expenses on the preparation and execution of Principal Documents and
amendments in it shall bear each party.
 In the Payment of Contract Price, the bank is required t deduct withholding taxes
under various laws in force.
 Goods Receiving Note for the confirmation of receipt of goods.
 Notice of delivery of goods is also included in this contract.
 If supplier would make a delay in delivery of goods to the bank, he will be charged
with penalties.
 Supplier must provide the exact commodity in decided quantity on the decided date to
the bank.
 Bank earns profit from that commodity by dealing it with another party.
 Model Salam Agreement by State Bank of Pakistan

n the Name of Allah, the Merciful, the Compassionate

MODEL SALAM AGREEMENT

| Salam Agreement | Salam Agreement-1 | Salam Agreement-2 |

THIS SALAM AGREEMENT

(the “Agreement”) is made at______________ on __________ day of _______________ by and

BETWEEN

______________________________________________________________, (hereinafter referred to as the “Supplier” which

expression shall where the context so permits mean and include its successors in interest and permitted assigns) of the one part

AND

______________________________________________________________, (hereinafter referred to as the “Institution”

which expression shall where the context so permits mean and include its successors in interest and assigns) of the other part.
 Model Salam Agreement- Document 1
Written Offer

In the Name of Allah, the Merciful, the Compassionate

MODEL SALAM AGREEMENT

Salam Document # 1
| Salam Agreement | Salam Agreement-1 | Salam Agreement-2 |

WRITTEN OFFER

Date: ________________

To:
__________________________________
[Insert name and address of the Institution]
___________________________

Dear Sirs,

Written offer for Sale of Goods [insert descriptions]

(1) Please refer to your recent inquiry for the sale of the above referred Goods. In this regard, we are pleased to
offer the Goods as per following terms and conditions:

(a) Description of the Goods:

Sr. No. Specification of Goods Quantity Sale Price

(b) Validity of the Offer:

(c) Delivery Date:

(d) Terms of delivery:

(e) Place of delivery:

(2) We certify that:

(a) There are no circumstances (i) that would materially and adversely affect the carrying on of our business,
operations or prospects or financial position, or (ii) which has made the fulfilment of our obligations unlikely;

(b) The delivery of the Goods by us to you shall not result in a breach of our organizational documents, any
provision of any document to which the we are a party or by which we are bound, or any applicable law, rule or
regulation whether directly or indirectly.

Yours faithfully,

For and on Behalf of

______________________
 Model Salam Agreement- Document 2
Notice of Delivery

In the Name of Allah, the Merciful, the Compassionate

MODEL SALAM AGREEMENT

Salam Document # 2
| Salam Agreement | Salam Agreement-1 | Salam Agreement-2 |

NOTICE OF DELIVERY

Date:__________________

To: ___________________
______________________
[Insert name and address of the Institution]

Dear Sirs,

Notice of Delivery of Goods [insert descriptions]

Reference to the above we are pleased to inform you that we are ready to deliver the Goods under the above-
referred agreement as per the following details:

a) Delivery Date:
b) Place of delivery:
c) Description of the Goods:

Sr. No. Specification of Goods Quantity Sale Price

d) Additional remarks (if any):

Yours faithfully,

For and on Behalf of (Supplier)

______________________
 Model Salam Agreement- Document 2
Goods Receiving Note

GOODS RECEIVNG NOTE

Date:_____________
No. _____________

To:____________________
______________________
[Insert name and address of the Supplier]

Dear Sirs,

(1) We acknowledge having received the Goods as detailed in the Notice of Delivery aforesaid:

a) Date of Receipt:
b) Time:
c) Place of Delivery:
d) Description of Goods delivered:

Sr. No. Specification of Goods Quantity Sale Price

e) Additional remarks (if any):

(2) Subject to 1(e), we hereby confirm that there are no claims or liabilities against you.

Yours faithfully,

For and on Behalf of (Institution)