Riyadh, Asharq Al-Awsat- A Bai Salam contract [where advance payment is made for goods] is one of the [financial] contracts that is permitted under Islamic Shariaa Law. In the Sahih Muslim collection of Hadith [sayings of the Prophet] Ibn Abbas narrated: The Prophet came to Medina and the people used to pay in advance the prices of the fruits that would be delivered within one or two years. The Prophet said [to them] “Buy fruits by paying their prices in advance [only] on condition that the fruits are to be delivered to you according to a fixed specified measure within a fixed specified period.” This is why Muslims unanimously approve the permissibility of this [financial] practice.
The etymology of the word Salam means, to hand over, or deliver. The scholars of the various schools [of Islamic thought] have each defined this term, and set its conditions, according to their own view. In my own opinion, the term Bai Salam is best defined as a contract for the guaranteed delivery [of a product] purchased in full at an agreed price at the time of the contracts signing.
In order for the Bai Salam contract to be applicable, the goods being paid for [and delivered at a future time] cannot be individualized [i.e. precious stone, for each individual precious stone has an individual price based upon its quality]. Rather the sold goods must be uniform, and the contract [receipt] must include the time and place the goods are to be delivered, along with the qualities of the sold goods that are used to determine its cost, such as the size of the order, the country the goods were manufactured or produced in, etc. For instance, if the product [being sold] is rice; the type, weight, and country where the rise was produced must be mentioned in the contract, as well as the size of the order, either by its weight, volume, or number. This is why the specification and size [of goods eligible for sale by Bai Salam] must be readily measurable [and uniform]. Goods purchased via Bai Salam must be paid for [in full] at the time of the contracts signing; this payment must not be postponed as this would constitute buying on credit which is forbidden under Islamic Shariaa Law.
Bai Salam contracts are considered to be one of the most important means provided by the Islamic financial system as an alternative to financing; this is because Bai Salam contracts require the [up-front] payment of goods to the sellers, who can then use this payment to finance their operations [and produce the goods in the first place].
Bai Salam contracts are also considered to be one of the earliest examples in the world of hedge contracts, since both parties [buyer and seller] hedge their financial risk; the seller hedges [protects his goods] from the depreciation of the market, while the buyer hedges [protects his investment] from price fluctuations. Bai Salam contracts are similar to the Options Contracts seen today, but without any of its inherent pitfalls. Therefore Islamic Banking should attempt to use this financial procedure [of Bai Salam contracts] in its operations, and develop this in line with its operational mechanism, and fulfill the legitimate purpose of this type of contract.
Bai Salam contracts should not be used to circumvent Islamic Shariaa Law, and permit what God has forbidden by deception, they do so by presenting certain financial practices as Bai Salam contracts, when in fact they are making Interest on a Loan. Banks are able to do so by offering their customers a personal financing package based upon Bai Salam contracts taken out with the bank, with the bank itself arranging and organizing all financial agreements, and executing [Bai Salam] contracts with relevant parties on the international market.
For example, a bank will sign a contract to buy certain commodities on a monthly basis from a global company operating in international commodities; let us call this company, Company A. At the same time the bank will sign another contract with a brokerage firm dealing in the same marker [as Company A] to sell these commodities for an agreed-upon price at an agreed-upon time. Things then progress as follows. The bank signs Bai Salam contracts with its customers for the goods it is buying from Company A, which it then sells on through the brokerage firm in accordance with the earlier agreement [thereby making a profit which it passes back to its customers by way of the Personal Financing deal].
What is the difference between using Bai Salam contracts in this way [through a third party] and the systematic use of tawaruq financing? Especially since this type of tawaruq financing was prohibited by the Islamic Fiqh Academy, due to its formalization, and the absence of any exchange of actual goods.
Isn’t the formalization in the use of Bai Salam contracts more obvious than that of tawaruq financing? Hasn’t the Islamic legitimacy of [using] Bai Salam contracts [in this manner] been nullified?
I believe that the use of Bai Salam contracts [in this manner] is invalid, as the seller is unable to deliver his goods to its actual recipient as he only has access to the international market through the bank. This clarifies to us that these banks are only interested in Bai Salam contracts as a means to circumvent [the Islamic prohibition] of usury. And so the use of Bai Salam contracts [in this way] is a ploy as clear as the bank’s [previous] use of tawaruq financing. Those that attempt to promote such fraudulent practices should fear God.