Application of Salam

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Date added: 17-06-26

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Application of Bai’ Salam In Bai’ Salam is a type of product that the bank or financial institution will give the liquidated cash or capital in advance to the needy to produce their commodities and later the commodities will be deliver to them. While in Bai’ Salam itself it can be divided into three difference type of contracts. They are parallel Salam, Hybrid Salam and also Salam financing working capital. Firstly, the parallel Salam is a common salam that use by the bank and the customer. In a parallel Salam, the bank itself will be entering into two different contracts with two different parties. In this two different contracts, the bank acted as different role. In the first contract the bank will acted as a buyer while entering the second the bank’s role had change from buyer to a seller. As we can know from the name of this contract, parallel salam, which also means that both contract that entered by the bank or financial institution cannot be tied together with each other. In other words, both contracts must not have any relations and must be independent from each other. All the rights and obligations that had been imposed or set in each contracts will stand alone and independent. Those regulations performance shall not be look as a whole or put together as both contracts must be independent. Therefore, both contracts must not contingent with each other. The flows of this type of contract will be start when the bank acted as a buyer and entered a contract with the another party who acted as a seller by selling his or her commodities to the bank. The bank will first give liquidated cash and capital that need by the seller before he can produce his commodities. The payment will be done in advance and also in full and the delivers of commodities will be done later. Next, after received the commodities from the seller, the bank will change his role to a seller and entered another contract with the customer or buyer who will buy the commodities from the bank. The payment will be given in a purchase price along with the profit margin. The bank will gain from the profit margin that paid by the customer. For example, Islamic Bank had entered a Salam contract with Farmer A to purchase 2000 sack of rice which will be delivered 6 months from the dated the agreement entered. The bank will give RM 500 000 to Farmer A to plant crops until harvest, packaging in advance. Later, Farmer A will deliver the 2000 sack of rice to the bank on the agreed date. Meanwhile, the bank had entered another salam contract with Customer B to sell the 2000 sack of rice in the purchase price RM 500 000 plus the profit margin RM 500 000. As both contract should not have any relation, the delivery of 2000 sack of rice to the Customer B have nothing relations to the delivery 2000 sack of rice from Farmer A to the Bank. So, even when the time to deliver the 2000 sack of rice by the farmer A to the Bank had reached but the Farmer A had not deliver or cannot produce that amount of commodities to the Bank, the bank cannot rid from the liability of failing to deliver the rice. The duty to deliver the 2000 sack of rice to Customer B is bound on the Bank. The bank must take any other way to deliver the rice to customer B for example buy the rice from the ready market. In the same situation, if the Farmer A had gave the Bank the commodities which is defect or had not reached the specifications agreed between the bank and the Customer B, is the duty or obligation of the bank to produce or find another way to deliver the agreed specification commodities to the customer. In parallel salam, it also must have a third party. This means that the seller of the first contract cannot be the purchaser in the second contract. It is not allow as in salam that cannot be a buy-back contract. This type of contract is also not allow or is prohibits in Syariah law. Even the purchaser on second agreement is a separate legal entity but is the owner of this entity is belong fully to the seller in first contract is also not allow. For example, Bank A gives cash in advance to Farmer A in return for commodities later. The bank enter an agreement to sell the commodities to Farmer A or a company owned fully by Farmer A. This will be a Buy-back Contract which is not allowed or permissible in shariah law. Second type of contract in Salam will be the hybrid salam. This type of contract also involve third party but slightly different form the parallel salam. In this contract, first the bank will enter a contract with the seller to give capital or cash in advance and exchange the commodities later. The different is here, the bank will not enter another contract with the third party which is the purchaser. The bank will be appoint the seller in the first contract to find a customer to purchase the commodities. In this sense, the seller had been appointed as an agent to buy the product. The commodities will be delivered straight by the seller to the purchaser and not pass through the bank. The payment by the purchaser will be pay to the bank straightly in the purchase price plus the profit margin. While for the seller that acted also as an agent will be give a commission by the bank. For example, Bank A had entered an agreement with the Producer B. The bank will give money in advance for the producer to produce his commodities while after the commodities had been produced, the bank will not find any other customer to buy the commodities. This will be the duty for the Producer B to find third party which is the Customer C to purchase his commodities as the bank had appointed Producer B as an agent. After the commodities had produced, Producer B will deliver the commodities to Customer C rather than delivered to the Bank A. The payment will be made by the Customer C toward the Bank A in a price of the purchase price that the Bank A purchased from the seller plus the profit margin. While the Producer B as a n agent will be given some commission from the Bank A. Therefore, the another different from parallel will be the duty to deliver the goods in a specific date, specific number and also the specific specifications that agreed previously by the customer. Lastly will be the Salam Financing Working Capital, which is much more similar to the Hybrid Salam Financing. In this type of contract, the bank at first will also entered agreement with the seller by giving capital in advance in exchange of goods. At the same time, the seller also will be appointed by the bank as an agent to find a purchaser. Until here the flow is same as the Hybrid Salam Financing. The only different between this two types of contracts will be the purchaser. In hybrid salam financing, the purchaser will be only a single person or a single legal entity. While in Salam Financing Working Capital, the purchaser must be a group of purchaser which means must be more than one person. The contract entered between the seller and the group of purchaser will be a normal sale and purchase agreement. The agent will also be give the commission by the bank when successfully found a group of purchaser and delivered the correct commodities to them. These are the three types of contracts that involved in Bai’ Salam. These three types of contracts each have their own advantages and disadvantages. The customer can choose between these three contracts which is most fits with him or her requirements.
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