07 Lecture, EIF - Fall 2013.ppt

7/21/2019 07 Lecture, EIF - Fall 2013.ppt

http://slidepdf.com/reader/full/07-lecture-eif-fall-2013ppt 1/29

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1

Essentials of Islamic Banking and Finance

Talha Saleem Kapadia [email protected]

Salam and Istisnaa'Salam and Istisnaa'




SalamSalam




Scope ofScope ofpresentationpresentation

Introduction;Defnition o Salam; Conditions o Salam; Comparison with Murabahah;

Parallel Salam; Parallel Salam: important points; Application; and Risks and its mitiations!




IntroductionIntroduction

"asic principle or #alidit$ o a sale in Shari%ah is that: – The commodity must be existing;Non-existing goods are not eligible for sale;

– The seller must have ownership of the commodity;Short sale (selling of what is not owned by seller) is

not allowed;

– The commodity must be in the physical or constructivepossession of the seller;Selling of what is not possessed by seller is not

allowed; All sale transactions should conorm to these rules;

&here are onl$ two e'ceptions to these principles inShari%ah and the$ are: – Bai’ Salam ; and – Bai’ Istisna'; – Both these are sales of special nature and are exceptions to

the general rules of sale.





Salam is a t$pe o Sale in which: – the seller underta!es to supply some speci"c goods

to the buyer at a future date# against an agreed pricewhich is fully paid in advance and the delivery of thesold commodity is deferred;

So there are three distinuishin eatures oSalam: – The sub$ect matter %commodity to be purchased&sold

is delivered in future;

– The price is paid full in advance; – The goods for sale will be speci"c; – (nother name of Salam is Salaf)# meaning of both

are same;




*xplanation of*xplanation ofSalamSalam "eore prohibition o interest( armers in Madinah

Munawwarah used to obtain interest)based loans ortheir aricultural and routine lie needs;

Ater prohibition o interest( the armers aced hardship; Similarl$ trade cara#ans o Arabs used to et interest

based loans or purchasin the commodities or trade; Ater prohibition o interest( the traders ha#e also aced

di*culties; &o sol#e this problem o +mmat( ,ol$ Prophet - .

allowed "ai% Salam; &he purpose o this permission was to ease the fnancial

needs o small armers and traders; Salam transactions has been allowed b$ the ,ol$

Prophet - . with some conditions;


http://slidepdf.com/reader/full/07-lecture-eif-fall-2013ppt 7/29Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7

*xplanation of*xplanation ofSalamSalam

"$ the permissibilit$ o Salam it becomesbenefcial or both bu$er and seller;

It is benefcial to the seller because herecei#es the price in ad#ance and it isbenefcial to the bu$er because the ad#anceSalam price is usuall$ lower than the spotprice;

Since Salam is an e'ception to the eneralrules o sale and it is allowed beore e'istence

o oods( the element o /hare is ob#ioushere; &o minimi0e the element o /harar certain

conditions ha#e been laid down b$ Shari%ah; &he element o /harar or this special t$pe o

sale has been lowered down b$ imposin some



+onditions of+onditions of

SalamSalam Conditions or #alidit$ o Salam are:

► The Salam price must be paid in full at the time of e,ecting sale; – Because, in the absence of full payment it will be selling

debt (commodity whose delivery is deferred) against debt(price deferred) which is prohibited;

– lso this is against the basic wisdom behind permissibilityof Salam which is ful!lling the instant needs of thefarmers and traders;

– "f the price is not paid in advance this purpose can not beachieved;

► Salam can be e,ected only in those commodities that can beexactly speci"ed in -uantity and -uality;

– "t means only those goods can be sold under Salamtransaction which fall under the category of #$hawatul- mthal% ( !"$% &%'( );

– &he term #$hawatul-mthal% refers to such commodities,the units of which are homogeneous in characteristics;

– "t means the commodities which are traded by counting,measuring or weighing according to usage and customs oftrade;

–


http://slidepdf.com/reader/full/07-lecture-eif-fall-2013ppt 9/29Essentials of Islamic Finance – IU Gulshan Campus, Slide # )

+onditions of Salam+onditions of Salam

►+onditions for validity of Salam %contd. – n the other hand, Salam is not allowed in

heterogeneous % *+,-% &%'( ) goods;

– eterogeneous goods are those goods the units ofwhich are di*erent among each other incharacteristics+ eaning thereby each piece is

di*erent, in sie, weight and value;/or example animals and precious stones are not

possible to precisely de"ned beforehand.

►Sub$ect matter of Salam should be of commonnature;

– &herefore Salam cannot be e*ected on a particularcommodity of a particular !eld or farm;

– &he reason is that it is not necessary that the farmor the tree would be able to produce the re.uiredcommodity or fruit;

– lternatively, one can de!ne a particular type of thecommodity for which Salam is being done+



+onditions of+onditions of

SalamSalam► +onditions for validity of Salam %contd.

► Both the -uality and -uantity of the goods should be very clearlyagreed upon;

– ll the possible details in this respect must be expresslymentioned;

– 'or example if the commodity is .uanti!ed in weight inthe mar/et, its weight must be determined and if it is

.uanti!ed through measures, its exact measure should be/nown+ &herefore, if something is sold by measuring itcannot be sold by weighing in a Salam transaction;

► The exact date and place of delivery must be speci"ed in thecontract;

– &he date may be in range form (e+g+ from 01 to 02 on

3uly); – &he place should be speci!ed as per custom;

► Salam cannot be e,ected in respect of things which must bedelivered on spot;

– 4old with silver or wheat with barley are example of it+ ccording to Shari5ah delivery of these goods should besimultaneous;



+onditions of Salam+onditions of Salam► +onditions for validity of Salam %contd.

► The commodity which is the sub$ect of Salam contract is normallyavailable in the mar!ets at the time of delivery; – Salam of angoes in 3anuary is invalid Salam;

– $elivery of goods to buyer is mandatory;

► The seller should hand over commodities to buyer at the time ofdelivery. 1e can not give money bac! to the buyer on the basis of set2

o,; – Buyer can not contractually bind the seller to buy-bac/ the

sold commodity+ &his will be a case of implicit interest(eelah);

► Similarly the seller can not contractually bind the buyer to sell2bac!the sold commodity to seller# because it would be conditional sale;

1owever# after the delivery# both may enter in a transaction ofsale with mutual consent# independently from Salam sale.

► The buyer shall not sell or transfer ownership of the goods beforeta!ing possession %actual or constructive of these goods;

– &his would be case of short-selling;



+omparison with 3urabahah+omparison with 3urabahah

Salam

In Salam Price is paidat Spot;

In Salam deli#er$ osub1ect is deerred!

Murabahah

In Murabahah Price isdeerred;

&he deli#er$ osub1ect matter is atspot!



4(0(55*5 S(5(34(0(55*5 S(5(3



4arallel Salam4arallel Salam

Parallel Salam is not a kind o Salam; It is an arranement b$ bu$er to sell the

commodit$ he purchased rom some one; &he bu$er can not sell the commodit$ beore

he takes the possession rom seller in a Salam

contract as we discussed earlier; "ut the bu$er ma$ sell the commodit$ he

bouht it on Salm to another person on Salambasis;

&his arranement is called %Parallel Salam%;



4arallel Salam4arallel Salam

►5ets assume 3r. '(hmed' enters into a Salam+ontract with 3r. 'Basheer' to purchase onethousand bales of cotton at a price 677#777&8 perbale to be delivered on 97 (ugust; – "n this contract (6Salam 7)8 – r+ 5hmed5 is a 9urchaser:Buyer; and – r+ 5Basheer5 is a Seller;

►3r. '(hmed' can enter into another Salam with 3r.':halid' to sell the same cotton at a price of67#777&8 per bale on a 96 (ugust;

– "n this contract (6Salam B7)8 – r+ 55 is a Seller; and – r+ 5halid5 is a 9urchaser+

Mr Basheer

Salam 1Contract on 25 June

Delivery on 20 August

Mr KhalidMr Ahmed

Salam 2Contract on 05 July

Delivery on 23 August

A parallel Salam transaction



4arallel Salam important points4arallel Salam important points

Parallel Salam is allowed with a third part$onl$;

&he seller in the frst contract cannot be madepurchaser in the parallel contract o Salam;

It will be a bu$)back arranement( which is not

permissible;

I the purchaser in the second contract is aseparate leal entit$( then it is necessar$ thatit should not be a subsidar$ or sister concern

o the seller compan$ in the frst contract;&he arranement will not be allowed because

in practical sense it will be a %bu$)back%arranement!



IstisnIstisnaa%aa%



Scope of presentationScope of presentation

Introduction of Istisnaa';

<e"nition;

*xplanation of Istisnaa'# its rules and re-uirements;

+omparison with other modes;

4arallel Istisnaa';

(pplication of Istisnaa';

0is!s analysis and mitigations;

= > (.


http://slidepdf.com/reader/full/07-lecture-eif-fall-2013ppt 19/29Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1)


As we discussed earlier two t$pes o sales aree'ceptions rom eneral rules or sale;

Istisnaa% is the second e'ception where sale oa sub1ect matter which is not there at the timeo transaction( has been allowed;

In act permissibilit$ o Istisnaa% is #er$ loicaland understandable;

In routine lie an$ person ma$ need a thinwhich re2uires manuacturin;

&he manuacturer is not read$ to manuacturebeore commitment rom a bu$er to bu$;

3eepin this need in #iew Islam has permittedIstisnaa% transaction;



<e"nition<e"nition

Istisnaa% is %an order rom purchaser -bu$er. toa manuacturer -seller. to produce a specifcood or him -bu$er. aainst mutuall$ areedprice and period or manuacturin anddeli#er$%;

−So the main feature is manufacturing of the soldgood;

−Istisnaa' is only possible in goods which re-uiremanufacturing;

&here is 4e'ibilit$ in pa$ment o price;It is ma$ be paid accordin to an$ schedule b$mutual consent -In ad#ance( in tranches or atthe time o deli#er$ o the oods.;



/eatures of Istisnaa'/eatures of Istisnaa'

5ssential re2uirements or Istisnaa%:

−?oods & commodities should re-uire manufacturing;►anufacturing means8

/ (ny type of wor! that change the material signi"cantly;0 5i!e wor! of carpenter;

/ @alue addition in which material changes its values;0 5i!e powdering of li-uid mil!;

−3anufacturer %seller must use his own material;►"f the material is provided by the buyer then this

will be case of Services "<arah and not of "stisnaa5;

− The commodity must be !nown and speci"ed interms of !ind# type# -uality and -uantity;

► mbiguity in these elements lead to 4harar;



/eatures of Istisnaa'/eatures of Istisnaa' 5ssential re2uirements or Istisnaa% -contd.:

−Aature of price in Istisnaa'

► s other /ind of sales, price of goods sold under "stisnaa5could be anything i+ e+ money, commodity and usufruct(ana!5);

− 4rice of the goods in Istisnaa'

►9rice in "stisnaa5 should be preferably !xed;►9rice in "stisnaa5 may be tied up with the time of delivery;

►'or example the buyer may !x 5=5 price for delivery in 01days and 5>5 price (reduced price) if the manufacturerdelays delivery from the agreed time schedule;

►&he reason for this ?exibility is resemblance of "stisnaa5

with "<arah;− 4ayment of 4rice of Istisnaa'

►&he price can be paid immediately (spot); or

►@an be paid at delivery (deferred); or

►@ould be paid in installments+ &he installments may be

tied up with di*erent stages of manufacturing:pro<ects;



/eatures of Istisnaa'/eatures of Istisnaa'

5ssential re2uirements or Istisnaa%:

−?oods & commodities should re-uire manufacturing;►anufacturing means8

/ (ny type of wor! that change the material signi"cantly;0 5i!e wor! of carpenter;

/ @alue addition in which material changes its values;0 5i!e powdering of li-uid mil!;

−3anufacturer %seller must use his own material;►"f the material is provided by the buyer then this

will be case of Services "<arah and not of "stisnaa5;

− The commodity must be !nown and speci"ed interms of !ind# type# -uality and -uantity;

► mbiguity in these elements lead to 4harar;



Istisnaa' +omparisonIstisnaa' +omparison%Istisnaa' and Salam%Istisnaa' and Salam

Istisnaa'

− &he sub1ect matter o anIstisnaa% contract isalwa$s somethin whichre2uires manuacturin;

−Price ma$ be paid underan$ areed schedule;

− Contract ma$ be canceledunilaterall$ beore themanuacturer starts work;

−Ma$ chane with theconsent o thecontractors;

Salam

− Sub1ect o Salam could bean$thin which cansatis$ Salam conditionslaid down b$ Shari%ah!

−Price must be paid in ullin ad#ance;

− Salam contract( oncee6ected( cannot becanceled unilaterall$;

− Determinin the time odeli#er$ is an essentialpart in Salam;




Istisnaa' +omparison %Istisnaa' andIstisnaa' +omparison %Istisnaa' andI$arahI$arah

Istisnaa'

− In Istinsa% manuacturerarees to produce there2uired oods usin hisown material!

−&hereore( the material inIstisnaa% should bepro#ided b$ themanuacturer himsel!

I$arah

− In I1arah themanuacturer utili0es hislabour and skills!

− &hereore( i the raw

material is pro#ided b$the customer andmanuacturer uses hislabor and skills onl$( thetransaction would be oI1arah and not istisnaa%!




4(0(55*5 ISTISA(('4(0(55*5 ISTISA(('




4arallel Istisnaa'4arallel Istisnaa'

Parallel Istisnaa%:

−5i!e Salam parallel Istisnaa' is not a !ind of Istisnaa';

−It is parallel arrangement for an other Istisnaa'transaction that follows "rst Istisnaa';

− The second transaction is also an Istisnaa'

transaction in all manners and conditions;

− This arrangement of two transaction has beenintroduced to reduce the ris! of buyer %Ban! forholding the commodities&goods.

−In a 4arallel Istisnaa' contract# the buyer enters intoa 4arallel Istisnaa' contract in which he is a seller toa another buyer;

−(pplying to ban!ing# in one of these twotransactions# the Ban! is the buyer and in the

second it is the seller.




4arallel Istisnaa'4arallel Istisnaa'

Conditions or parallel Istisnaa%:

−*ach of the two contracts must be independent ofthe other;

− They cannot be tied up in a manner that the rightsand obligations of one contract are dependent on

the rights and obligations of the parallel contract;−Similar to 4arallel Salam# 4arallel Istisna is allowed

with a third party only;

− Therefore# 4arallel Istisnaa' to the same party %sellerin "rst Istisnaa' is not allowed.



=uestions=uestions

07 Lecture, EIF - Fall 2013.ppt

Documents

Transcript of 07 Lecture, EIF - Fall 2013.ppt