Bay al-salam is a contract for deferred delivery. It was originally ordained during the time of the Prophet Muhammad to enable the trading activities of farmers who were awaiting the harvest of crops, as after the prohibition of riba, they could not take loans including interest. In more modern times it has also been applied to the production of raw materials. It is a forward financing transaction, where the buyer pays in advance for identified goods, which the seller will supply on a pre-agreed date. The contracting parties stipulate the specified quantity and quality of the assets.
The balance of scholarly consensus forms the view that salam represents a sale contract and is seen as such by the followers of Hanbali, Hanafi, and Maliki schools of thought and by some Shafi scholars.
Evidence for this can be seen in the Hadith of the Prophet Muhammad narrated from Ibn ‘Abbas: “When God’s Messenger came to Madinah, the people were paying one and two years in advance for fruits, so he said: ‘Those who pay in advance for anything must do so for a specified weight and for a definite time.”
A more detailed explanation of this tradition is given in another recording by Muhammad ibn al-Majalid: Abdullah bin Shaddad and Abu-Burdah sent me to Abdullah bin Abi Awfa and told me to ask him whether the people in the lifetime of the Prophet used to pay in advance for wheat to be delivered later. Abdullah replied, “We used to pay in advance to the peasants of Sham for wheat, barley and olive oil of a known specified measure to be delivered in a specified period.” I asked: “Was the price paid [in advance] to those who [already] had [possession of] the things to be delivered later?” Abdullah ibn Abi Awfa replied, “We did not use to ask them about that.” Then they sent me to Abd al-Rahman ibn Abza and I asked him. He replied, “The Companions of the Prophet used to practice salam in the lifetime of the Prophet; and we did not use to ask the people whether they had standing crops or not.”
The salam contract also conforms to the Quranic instruction to write down any debt owed: “O you who believe! When you contract a debt for a fixed period, write it down” (Qur’an, 2:282).
Because the Salam contract deals with the delivery of an asset that is not in existence, an exception to the general principle, various conditions are imposed upon this transaction in order to abide by the Sharia legislation. This also ensures that the rights of all parties are protected.
The location and time of delivery of the goods must be fully specified. The quality of the items in the transaction must be defined, and if goods are being exchanged, they must be identical in nature. There must be no ambiguity that could lead to a dispute. If the quality of the items upon delivery is found to be different to what was specified, the buyer has the right of refusal.
The agreed price must be decided at the time of the contract, otherwise the contact would sanction the trading on a debt.
Rights of the buyer and seller include that the buyer does not enjoy ownership of the goods until delivery has taken place. The buyer has the right to take surety from the seller as a form of performance bond. Where the seller is unable to produce the contracted items on the delivery date, the buyer may nullify the contract and exercise the performance bond.
The salam contract can be used by institutions to generate short-term profit. After purchasing assets by way of salam, it may be sold through a parallel contact for the same delivery date. The period of salam in the second transaction may increase the price in comparison to the first. In this way, the institutions
may earn an income through the sale.