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Glossary

Bai’ Salam

Category — Islamic Finance
Bai’ Salam is a forward financing transaction with full advance payment for future delivery of goods of a specified quantity and quality. The exact date and place of delivery must also be specified in the contract.

Characteristics of the Bai’ Salam contract:

1. It is a purchase contract in which the payment is made now against the future delivery of an asset.

2. Bai’ Salam is a technique similar to Murabaha that can be used to provide working capital. The key difference to Murabaha is that the financier pays in full for the specified asset in advance, for supply on a pre-agreed future date.

3. In the classical context, Bai’ Salam contracts played an important role in agriculture. However, Islamic banks have not played a substantive role in support of this sector.

Advantages:

1. The seller is assured that the commodity is guaranteed to be sold as a result of the commitment of the second party to purchase it.

2. The producer gets financing without the need to borrow.

3. Utilizing the excess liquidity in Islamic banks to make a suitable profit instead of remaining stagnant.

4. Guarantee of getting the commodity when it is needed, at a predetermined price.

Disadvantages:

1. The risk of not submitting the subject of the contract when it is due.

2. The problem of determining the price of the object of the goods upon agreement, which may cause a loss if the market value of the goods decreases upon receipt.
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