Salam (السَلـَـم) is a form of contract that was found in pre-Islamic Arabia. At the time the Prophet arrived in Medina, he found people dealing in this form of trade.
In the Hadith of Ibn Abbas he reports:
The Messenger came to Medina and he found the people making deferred sales in fruit for one to two years, and sometimes. At this he said “Whoever makes a deferred sale, then let him do so according to a known volume or weight, and [for delivery at ] a known time.”
Generally, this form of contract was performed in the following way:
- Party A requests from Party B a certain product, specifying it in a descriptive manner in such a way that the price would differ (if in fact at delivery the product does not fit the description)
- Party B accepts to deliver the product for X amount of money on a specified date
- Party A pays Party B for the product, and waits for delivery on the agreed date
- On the agreed date, Party B delivers the product to Party A
This description of course barring circumstances such as inability to deliver, market failures, etc. and the product is deferred while the price is given up front. If delivery is not possible then the money is refunded.
- Bill goes to the farm, and requests from Jake 100 kilos of grade A California raisins, to be delivered in six months time.
- Jake accepts for the price of 10 dollars a kilo, total being $1000 USD
- In six months, Jake delivers 100 kilos of Grade A raisins to Bill.
Price-Based Deferred Sales
Similar to this method, there is another method that may be effective for Microfinance which is known as “price-based deferred sales”, where the same structure is used but instead of the product being the object of contract the price is the object.
This is performed in the following manner:
- Bill goes to the farm, and requests from Jake 1000 Dollars worth of grade A California raisins, to be delivered in six months time.
- Jake accepts and receives $1000 USD from Bill.
- In six months, Jake delivers $1000 USD of Grade A California raisins to Bill
Differences between the two:
Price-based deferred sales are contracted by Party A (Bill) in hopes that prices go down per kilos, and the quantity received is more. Party B (Jake) hopes that prices go up, or stay the same.
Benefit here is reciprocal in that Party A benefits from the time value of the money increasing or remaining the same, thus reducing loss. Party B benefits from locking in a maximum that will be paid for the product, i.e. a fuzzy number estimated between (0-1) amounts of raisins.
Despite this presentation of various finance vehicles, it is important to remember that the general rule for all transactions is that they are permissible until a source for their invalidity is found (riba, gharar, sale of prohibited substance, invalid condition). If these are not found, or cannot be conclusively proven, then the transaction is valid.