Definition and Key Distinction from Conventional Forwards
Salam (سلم) is the sale of a specified commodity for deferred delivery in exchange for IMMEDIATE payment of the full price. In Murabahah, goods are delivered now and payment is deferred; in Salam, payment is made now and goods are delivered later. Critical distinction from conventional forwards: in Salam, the FULL price must be paid upfront (not just a margin deposit); the commodity must be precisely specified; and it cannot be from a specific field or farm — must be defined generically.
Conditions for a Valid Salam Contract
Capital (price) conditions:
- capital must be paid immediately at the place of contract
- a delay of 2–3 days maximum is tolerated only if the delay period is shorter than the delivery period
- capital may be cash, fungible goods, or usufruct
- a pre-existing debt cannot be used as Salam capital because that would risk disguised riba
Subject matter (Al-Muslam Fihi) conditions:
- the subject matter must be fungible goods that are weighed, measured, or counted
- factory products with standardized specifications are permissible, while precious stones with significant individual variation are not suitable
- type, kind, quality, and quantity must be precisely specified
- delivery date and place must be determined
- the commodity must be available in the market at the time of delivery
- the commodity cannot be tied to a specific identified source
- the subject matter must not be gold, silver, or currencies when the capital is also monetary
Parallel Salam
Parallel Salam allows the institution to hedge its delivery risk by entering a SEPARATE Salam contract with a different party. The TWO contracts must be completely INDEPENDENT — they cannot be linked or conditional on each other. The institution cannot use the same seller in both contracts. If the seller in Salam #1 fails to deliver, this does NOT discharge the institution's obligation under Salam #2.
Delivery and Default
Non-delivery: If the seller fails to deliver, the buyer has three remedies:
- wait for delivery
- cancel and recover the full capital
- accept substitute goods by mutual agreement
If the buyer cancels, the full capital must be returned and the buyer cannot claim additional compensation for opportunity loss. The buyer also cannot sell the Salam commodity before receiving it, because that is selling what the buyer does not possess.