|
Islamic Finance - Musharakah & Mudarabah
By Mufti Muhammad Taqi
Usmani
Salam and
Istisna
1) Introduction
2) Meaning of Salam
3) Conditions of Salam
4) Salam as a mode of Financing
5) Some Rules of Parallel Salam
6) Istisna
7) Difference between Istisna‘ and Salam
8) Difference between Istisna‘ and Ijarah
9) Time of Delivery
10) Istisna‘ as a mode of financing
Introduction
It is one of
the basic conditions for the validity of a sale in Shariah that
the commodity (intended to be sold) must be in the physical or
constructive possession of the seller. This condition has three
ingredients:
Firstly, the commodity must be existing; therefore, a
commodity which does not exist at the time of sale cannot be
sold.
Secondly, the seller should have acquired the ownership of
that commodity. Therefore, if the commodity is existing, but the
seller does not own it, he cannot sell it to anybody.
Thirdly, mere ownership is not enough. It should have come
in to the possession of the seller, either physically or
constructively. If the seller owns a commodity, but he has not
taken its delivery himself or through an agent, he cannot sell
it.
There are only two exceptions to this general principle in
Shari‘ah. One is Salam and the other is Istisna‘. Both are
sales of a special nature, and in the present chapter the
concept of these two kinds of sale and the extent to which they
can be used for the purpose of financing will be explained.
Meaning of Salam
Salam is a sale
whereby the seller undertakes to supply some specific goods to
the buyer at a future date in exchange of an advanced price
fully paid at spot.
Here the price is cash, but the supply of the purchased goods is
deferred. The buyer is called "rabb-us-salam", the
seller is "muslam ilaih", the cash price is "ra’s-ul-mal"
and the purchased commodity is termed as "muslam fih",
but for the purpose of simplicity, I shall use the English
synonyms of these terms.
Salam was allowed by the Holy Prophet ’ subject
to certain conditions. The basic purpose of this sale was to
meet the needs of the small farmers who needed money to grow
their crops and to feed their family upto the time of harvest.
After the prohibition of riba they could not take usurious
loans. Therefore, it was allowed for them to sell the
agricultural products in advance.
Similarly, the traders of Arabia used to export goods to other
places and to import some other goods to their homeland. They
needed money to undertake this type of business. They could not
borrow from the usurers after the prohibition of riba. It was,
therefore, allowed for them that they sell the goods in advance.
After receiving their cash price, they could easily undertake
the aforesaid business.
Salam was beneficial to the seller, because he received the
price in advance, and it was beneficial to the buyer also,
because normally, the price in salam used to be lower than the
price in spot sales. The permissibility of salam was an
exception to the general rule that prohibits the forward sales,
and therefore, it was subjected to some strict conditions. These
conditions are summarized below:
Conditions of Salam
1. First
of all, it is necessary for the validity of Salam that the buyer
pays the price in full to the seller at the time of effecting
the sale. It is necessary because in the absence of full payment
by the buyer, it will be tantamount to sale of a debt against a
debt, which is expressly prohibited by the Holy Prophet Moreover,
the basic wisdom behind the permissibility of salam is to
fulfill the instant needs of the seller. If the price is not
paid to him in full, the basic purpose of the transaction will
be defeated. Therefore, all the Muslim jurists are unanimous on
the point that full payment of the price is necessary in Salam.
However, Imam Malik is of the view that the seller may give a
concession of two or three days to the buyers, but this
concession should not form part of the agreement.
2. Salam can be effected in those commodities only the
quality and quantity of which can be specified exactly. The
things whose quality or quantity is not determined by
specification cannot be sold through the contract of salam. For
example, precious stones cannot be sold on the basis of salam,
because every piece of precious stones is normally different
from the other either in its quality or in its size or weight
and their exact specification is not generally possible.
3. Salam cannot be effected on a particular commodity or on
a product of a particular field or farm. For example, if the
seller undertakes to supply the wheat of a particular field, or
the fruit of a particular tree, the salam will not be valid,
because there is a possibility that the crop of that particular
field or the fruit of that tree is destroyed before delivery,
and, given such possibility, the delivery remains uncertain. The
same rule is applicable to every commodity the supply of which
is not certain.
4. It is necessary that the quality of the commodity
(intended to be purchased through salam) is fully specified
leaving no ambiguity which may lead to a dispute. All the
possible details in this respect must be expressly mentioned.
5. It is also necessary that the quantity of the commodity
is agreed upon in unequivocal terms. If the commodity is
quantified in weights according to the usage of its traders, its
weight must be determined, and if it is quantified through
measures, its exact measure should be known. What is normally
weighed cannot be quantified in measures and vice versa.
6. The exact date and place of delivery must be specified in
the contract.
7. Salam cannot be effected in respect of things which must
be delivered at spot. For example, if gold is purchased in
exchange of silver, it is necessary, according to Shari‘ah,
that the delivery of both be simultaneous. Here, salam cannot
work. Similarly, if wheat is bartered for barley, the
simultaneous delivery of both is necessary for the validity of
sale. Therefore the contract of salam in this case is not
allowed. All the Muslim jurists are unanimous on the principle
that salam will not be valid unless all these conditions are
fully observed, because they are based on the express ahadith of
the Holy Prophet
The most famous hadith in this context is the one in which the
Holy Prophet has
said:
"Whoever
wishes to enter into a contract of salam, he must effect the
Salam according to the specified measure and the specified
weight and the specified date of delivery".
However, there
are certain other conditions which have been a point of
difference between the different schools of the Islamic
jurisprudence. Some of these conditions are discussed below:
(1) It is necessary, according to the Hanafi school, that
the commodity (for which salam is effected) remains available in
the market right from the day of contract upto the date of
delivery. Therefore, if a commodity is not available in the
market at the time of the contract, salam cannot be effected in
respect of that commodity, even though it is expected that it
will be available in the markets at the date of delivery.
However, the other three schools of Fiqh (i.e. Shafi‘i, Maliki,
and Hanbali) are of the view that the availability of the
commodity at the time of the contract is not a condition for the
validity of salam. What is necessary, according to them, is that
it should be available at the time of delivery. This view can be
adopted in the present circumstances.
(2) It is necessary, according to the Hanafi and Hanbali
schools that the time of delivery is, at least, one month from
the date of agreement. If the time of delivery is fixed earlier
than one month, salam is not valid. Their argument is that salam
has been allowed for the needs of small farmers and traders and
therefore, they should be given enough opportunity to acquire
the commodity. They may not be able to supply the commodity
before one month. Moreover, the price in salam is normally lower
than the price in spot sales. This concession in the price may
be justified only when the commodities are delivered after a
period which has a reasonable bearing on the prices. A period of
less than one month does not normally affect the prices.
Therefore, the minimum time of delivery should not be less than
one month. Imam Malik supports the view that there should be a
minimum period for the contract of salam. However, he is of the
opinion that it should not be less than fifteen days, because
the rates of the market may change within a fortnight. This view
is, however, opposed by some other jurists, like Imam Shafi‘i
and some Hanafi jurists also. They say that the Holy Prophet has
not specified a minimum period for the validity of salam. The
only condition, according to the Hadith, is that the time of
delivery must be clearly defined. Therefore, no minimum period
can be prescribed. The parties may fix any date for delivery
with mutual consent. This view seems to be preferable in the
present circumstances, because the Holy Prophet has
not prescribed a minimum period. The jurists have prescribed
different periods which range between one day to one month. It
is obvious that they have done so on the basis of expedience and
keeping in view the interest of the poor sellers. But the
expediency may differ from time to time and from place to place.
Likewise, sometimes it is more in the interest of the seller to
fix an earlier date. As far as the price is concerned, it is not
a necessary ingredient of salam that the price is always lower
than the market price on that day. The seller himself is the
best judge of his interest, and if he accepts an earlier date of
delivery with his free will and consent, there is no reason why
he should be forbidden from doing so. Certain contemporary
jurists have adopted this view being more suitable for the
modern transactions.
Salam as a mode of Financing
It is evident
from the foregoing discussion that salam was allowed by
Shari‘ah to fulfill the needs of farmers and traders.
Therefore, it is basically a mode of financing for small farmers
and traders. This mode of financing can be used by the modern
banks and financial institutions, especially to finance the
agricultural sector. As pointed out earlier, the price in salam
may be fixed at a lower rate than the price of those commodities
delivered at spot. In this way, the difference between the two
prices may be a valid profit for the banks or financial
institutions. In order to ensure that the seller shall deliver
the commodity on the agreed date, they can also ask him to
furnish a security, which may be in the form of a guarantee or
in the form of mortgage or hypothecation. In the case of default
in delivery, the guarantor may be asked to deliver the same
commodity, and if there is a mortgage, the buyer / the financier
can sell the mortgaged property and the sale proceeds can be
used either to realize the required commodity by purchasing it
from the market, or to recover the price advanced by him.
The only problem in salam which may agitate the modern banks and
financial institutions is that they will receive certain
commodities from their clients, and will not receive money.
Being conversant with dealing in money only, it seems to be
cumbersome for them to receive different commodities from
different clients and to sell them in the market. They cannot
sell those commodities before they are actually delivered to
them, because it is prohibited in Shari‘ah.
But whenever we talk about the Islamic modes of financing, one
basic point should never be ignored. The point is that the
concept of the financial institutions dealing in money only is
foreign to Islamic Shari‘ah. If these institutions want to
earn a halal profit, they shall have to deal in commodities in
one way or the other, because no profit is allowed in Shari‘ah
on advancing loans only. Therefore, the establishment of an
Islamic economy requires a basic change in the approach and in
the outlook of the financial institutions. They shall have to
establish a special cell for dealing in commodities. If such a
special cell is established, it should not be difficult to
purchase commodities through salam and to sell them in the spot
markets.
However, there are two other ways of benefiting from the
contract of Salam.
Firstly, after purchasing a commodity by way of salam, the
financial institutions may sell it through a parallel contract
of salam for the same date of delivery. The period of salam in
the second (parallel) transaction being shorter, the price may
be a little higher than the price of the first transaction, and
the difference between the two prices shall be the profit earned
by the institution. The shorter the period of salam, the higher
the price, and the greater the profit. In this way the
institutions may manage their short term financing portfolios.
Secondly, if a parallel contract of salam is not feasible
for one reason or another, they can obtain a promise to purchase
from a third party. This promise shoud be unilateral from the
expected buyer. Being merely a promise, and not the actual sale,
their buyers will not have to pay the price in advance.
Therefore, a higher price may be fixed and as soon as the
commodity is received by the institution, it will be sold to the
third party at a pre-agreed price, according to the terms of the
promise.
A third option is sometimes proposed that, at the date of
delivery, the commodity is sold back to the seller at a higher
price. But this suggestion is not in line with the dictates of
Shari‘ah. It is never permitted by the Shari‘ah that the
purchased commodity is sold back to the seller before the buyer
takes its delivery, and if it is done at a higher price it will
be tantamount to riba which is totally prohibited. Even if it is
sold back to the seller after taking delivery from him, it
cannot be pre-arranged at the time of original sale. Therefore,
this proposal is not acceptable at all.
Some Rules of Parallel Salam
Since the
modern Islamic Banks and Financial Institutions are using the
instrument of parallel Salam, some rules for the validity of
this arrangement are necessary to observe:
1. In an arrangement of parallel salam, the bank enters into
two different contracts. In one of them, the bank is the buyer
and in the second one the bank is the seller. Each one of these
contracts must be independent of the other. They cannot be tied
up in a manner that the rights and obligations of one contract
are dependant on the rights and obligations of the parallel
contract. Each contract should have its own force and its
performance should not be contingent on the other.
For example, if A has purchased from B 1000 bags of wheat by
way of Salam to be delivered on 31 December, A can contract a
parallel Salam with C to deliver to him 1000 bags of wheat on 31
December. But while contracting Parallel Salam with C, the
delivery of wheat to C cannot be conditioned with taking
delivery from B. Therefore, even if B did not deliver wheat on
31 December, A is duty bound to deliver 1000 bags of wheat to C.
He can seek whatever recourse he has against B, but he cannot
rid himself from his liability to deliver wheat to C.
Similarly, if B has delivered defective goods which do not
conform with the agreed specifications, A is still obligated to
deliver the goods to C according to the specifications agreed
with him.
2. Parallel Salam is allowed with a third party only. The
seller in the first contract cannot be made purchaser in the
parallel contract of salam, because it will be a buy-back
contract, which is not permissible in Shari‘ah. Even if the
purchaser in the second contract is a separate legl entity, but
it is fully owned by the seller in the first contract the
arrangement will not be allowed, because in practical terms it
will amount to 'buy-back' arrangement. For example A has
purchased 1000 bags of wheat by way of Salam from B, a joint
stock company. B has a subsidiary C, which is a separate legal
entity but is fully owned by B. A cannot contract the parallel
salam with C. However, if C is not wholly owned by B, A can
contract parallel salam with it, even if some share-holders are
common between B and C.
ISTISNA‘
'Istisna‘' is
the second kind of sale where a commodity is transacted before
it comes into existence. It means to order a manufacturer to
manufacture a specific commodity for the purchaser. If the
manufacturer undertakes to manufacture the goods for him with
material from the manufacturer, the transaction of istisna‘
comes into existence. But it is necessary for the validity of
istisna‘ that the price is fixed with the consent of the
parties and that necessary specification of the commodity
(intended to be manufactured) is fully settled between them.
The contract of istisna‘ creates a moral obligation on the
manufacturer to manufacture the goods, but before he starts the
work, any one of the parties may cancel the contract after
giving a notice to the other . However after the manufacturer
has started the work, the contract cannot be cancelled
unilaterally.
Difference between Istisna‘ and Salam
Keeping in view
this nature of istisna‘ there are several points of difference
between istisna‘ and salam which are summarized below:
(i) The subject of istisna‘ is always a thing which needs
manufacturing, while salam can be effected on any thing, no
matter whether it needs manufacturing or not.
(ii) It is necessary for salam that the price is paid in
full in advance, while it is not necessary in istisna‘.
(iii) The contract of salam, once effected, cannot be
cancelled unilaterally, while the contract of istisna‘ can be
cancelled before the manufacturer starts the work.
(iv) The time of delivery is an essential part of the sale
in salam while it is not necessary in istisna‘ that the time
of delivery is fixed.
Difference between Istisna‘ and Ijarah (
It should also
be kept in mind that the manufacturer, in istisna‘, undertakes
to make the required goods with his own material. Therefore,
this transaction implies that the manufacturer shall obtain the
material, if it is not already with him, and shall undertake the
work required for making the ordered goods with it. If the
material is provided by the customer, and the manufacturer is
required to use his labor and skill only, the transaction is not
istisna‘. In this case it will be a transaction of ijarah
whereby the services of a person are hired for a specified fee
paid to him.
When the required goods have been manufactured by the seller, he
should present them to the purchaser. But there is a difference
of opinion among the Muslim jurists whether or not the purchaser
has a right to reject the goods at this stage. Imam Abu Hanifah
is of the view that he can exercise his 'option of seeing' (Khiyar-ur-ru’yah)
after seeing the goods, because istisna‘ is a sale and if
somebody purchases a thing which is not seen by him, he has the
option to cancel the sale after seeing it. The same principle is
also applicable to istisna‘.
However, Imam Abu Yousuf says that if the commodity conforms to
the specifications agreed upon between the parties at the time
of the contract, the purchaser is bound to accept the goods and
he cannot exercise the option of seeing. This view has been
preferred by the jurists of the Ottoman Empire, and the Hanafi
law has been codified according to this view, because it is
damaging in the context of modern trade and industry that after
the manufacturer has used all his resources to prepare the
required goods, the purchaser cancels the sale without assigning
any reason, even though the goods are in full conformity with
the required specifications.
Time of Delivery
As pointed out
earlier, it is not necessary in istisna‘ that the time of
delivery is fixed. However, the purchaser may fix a maximum time
for delivery which means that if the manufacturer delays the
delivery after the appointed time, he will not be bound to
accept the goods and to pay the price. In order to ensure that
the goods will be delivered within the specified period, some
modern agreements of this nature contain a penal clause to the
effect that in case the manufacturer delays the delivery after
the appointed time, he shall be liable to a penalty which shall
be calculated on daily basis. Can such a penal clause be
inserted in a contract of istisna‘ according to Shari‘ah?
Although the classical jurists seem to be silent about this
question while they discuss the contract of istisna‘, yet they
have allowed a similar condition in the case of ijarah. They say
that if a person hires the services of a person to tailor his
clothes, the fee may be variable according to the time of
delivery. The hirer may say that he will pay Rs. 100/- in case
the tailor prepares the clothes within one day and Rs. 80/- in
case he prepares them after two days. On the same analogy, the
price in istisna‘ may be tied up with the time of delivery,
and it will be permissible if it is agreed between the parties
that in the case of delay in delivery, the price shall be
reduced by a specified amount per day.
Istisna‘ as a mode of financing
Istisna‘ can
be used for providing the facility of financing in certain
transactions, especially in the house finance sector. If the
client has his own land and he seeks financing for the
construction of a house, the financier may undertake to
construct the house at that open land, on the basis of istisna‘,
and if the client has no land and he wants to purchase the land
also, the financier may undertake to provide him a constructed
house on a specified piece of land.
Since it is not necessary in istisna‘ that the price is paid
in advance, nor is it necessary that it is paid at the time of
delivery, (it may be deferred to any time according to the
agreement of the parties,1), therefore, the time of payment may
be fixed in whatever manner they wish. The payment may also be
in installments. On the other hand, it is not necessary that the
financier himself constructs the house. He can enter into a
parallel contract of istisna‘ with a third party, or may hire
the services of a contractor (other than the client). In both
cases, he can calculate his cost and fix the price of istisna‘
with his client in a manner which may give him a reasonable
profit over his cost. The payment of installments by the client
may start, in this case, right from the day when the contract of
istisna‘ is signed by the parties, and may continue during the
construction of the house and after it is handed over to the
client. In order to secure the payment of the installments, the
title deeds of the house or land, or any other property of the
client may be kept by the financier as a security, until the
last installment is paid by the client.
The financier, in this case, will be responsible for the
construction of the house in full conformity with the
specifications detailed in the agreement. In the case of any
discrepancy, the financier will undertake such alteration at his
own cost as may be necessary for bringing it in harmony with the
terms of the contract.
The instrument of istisna‘ may also be used for project
financing on similar lines. If a client wants to install an
air-conditioning plant in his factory, and the plant needs to be
manufactured, the financier may undertake to prepare the plant
through the contract of istisna‘ according to the aforesaid
procedure. Similarly, the contract of istisna‘ can be used for
building a bridge or a highway.
The modern BOT (Buy, Operate and Transfer) agreements may also
be formalized on the basis of istisna‘. If a government wants
to construct a highway, it may enter into a contract of istisna‘
with a builder. The price of istisna‘, in this case, may be
the right of the builder to operate the highway and collect
tolls for a specified period.
|
Ayah/Hadith
of the Moment