Bai Salam In The Light of Contemporary Application: Issues, Challenges and Recommendation

Abstract

Islamic finance has come a long a way in the last three decades as an alternative finance. However, there are issues with Islamic finance products and one of the products in the spotlight is Bai Salam which is considered as a concession by Shariah. This study looks at the application of Bai Salam as a product in contemporary Islamic finance, issues, challenges, and recommendation.

Full text

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Bai Salam In The Light of Contemporary Application: Issues, Challenges and Recommendation
Alagabi Abdghaffar Adedapo, Abubakar Tabiu, Ladan Sahnun, Hamid Mohsin Jadah,
Ehsan Saeed Yaqoot, Hadiza Garba Isah & Alagabi Modinat Remi
Abstract
Islamic finance has come a long a way in the last three decades as an alternative finance. However, there are
issues with Islamic finance products and one of the products in the spotlight is Bai Salam which is considered as
a concession by Shariah. This study looks at the application of Bai Salam as a product in contemporary Islamic
finance, issues, challenges, and recommendation.
Keywords: Bai Salam, parallel Salam, corporate social responsibility
1. Introduction
In the past three decades, the Islamic resurgence which started in the early 20th century began to bear
fruits, especially in the realm of Islamic finance. Islamic financial institutions have brought to the Global financial
market a robust and stable alternative to conventional finance (Siddiqi, 2000). The alternative finance presented
by Islam, though criticized in many climes as copycat (Ghoul, 2011) has come with unique and reliable products
and services that are only derivable from the provisions, authority and objectives of Shari’ah (Maqasid-Al-
Shari’ah). The fact that Islamic finance and its products have been bought into by conventional banks in various
corners of the globe- from Africa to Australia- lays credence to the acceptance and viability of the Islamic finance
and its products (Al Omar & Iqbal, 2011).
It is noteworthy that products and services in Islamic finance must be Shari’ah compliant and must be geared
towards achieving the purpose of Shari’ah. Hence, for Islamic finance to remain credible it must be seen to
represent the goals of Islam and Muslims; products and services offered must not only remain Shari’ah compliant
but also translate into achieving the objectives of Shari’ah. Therefore, even though Islamic finance and its
products has witnessed enviable growth and development (Hanif, 2011), the Islamic finance industry and its
products must be continuously checked to maintain balance, as provided by Shari’ah, between its application and
the provisions of Shari’ah (Myers & Hassanzadeh, 2013). This is to ensure that the fears expressed by Islamic
scholars on possible deviation (OBaidullah, 2002; Al-Saati, 2002) are addressed at all times to remain acceptable,
relevant and sustainable among Muslims who constitutes the larger part of the market (Hanif, 2011) of which the
industry is serving. Thus, there must be convergence between its application and conceptual roots. It is against
this backdrop; we discuss below one of the product of Islamic banking (Bai Salam) which is regarded as an
exceptional and a not fairly understood Islamic finance instrument(Al-Zaabi, 2010); its application, issues,
challenges and recommendations in the contemporary Islamic finance world.
The article is organized as follows; firstly, we present an overview of Bai Salam in Shari’ah. Secondly,
we present a review of past literature on the application of Bai Salam in contemporary Islamic finance. Thirdly,
we examine the challenges of the application of Bai Salam in contemporary Islamic finance. Finally, we conclude
with recommendations on how Bai Salam could be viably deployed by modern Islamic finance institutions.
2. Literature Review: the Islamic View on Contemporary Application of Bai Salam
In this section the researchers through reviews of available printed documents on relevant Islamic literature on
the subject try to highlight the Islamic stand on modern day Bai Salam contract.
Fundamentally, in Shari’ah law of contracts of sale or exchange; one of the basic conditions of contract is that
the object of sale or exchange must be physically or constructively in the possession of the seller (Mansoori,
2009). This condition legally implies according to Maulana Taqi-Usmani(n.d) that:

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 The commodity must exist; a commodity that did not exist at the time of sale cannot be sold.
 The ownership of the commodity is with the seller; if the commodity exists, but the seller does not own
it, the seller cannot sell it to anybody.
 Mere ownership does not suffice. The commodity must be in the possession of the seller, either
physically or constructively. If the commodity is not yet delivered to the seller or the agent appointed
by the seller, he cannot sell it even though it is legally owned by the seller.
There are only two exceptions to this rule and one of them is Bai Salam (Khan, 1992).
2.1 Meaning of Bai Salam
The term Bai Salam is a synonmn of Salaf which literally means lending.Bai Salam is to give or lend
something by one party to another. This is so, because the price or principal of Bai Salam is to be paid in advance
of the delivery of the subject on the spot at the time of conclusion of the contact. Salaf is the principal paid in the
Bai Salam contract. Therefore, the term Bai Salam and Salaf are used interchangeably. Bai Salaf is commonly
used by the people of Iraq while Bai Salam is used by the people of hijaz(Al Shibirini as cited in Umar, 1995).
Technical meaning in fiqh:
According to the Shafii School: Sale of a well defined commodity to be delivered by the seller in a
specified date(Umar, 1995).
According to the Hanbali School: payment at present of a price for a well specified commodity of which
its liability remains on its seller until he delivers it at a specified future time (Ibn Qudamah, 1972).
According to the Hanafi School: Sale of a deferred commodity for a current price, or purchase of a
deferred commodity for a current price (Ibn Abidin, 1966).
According to the Maliki School: “An exchange contract according to which one of the two parties
becomes indebted to the other, while his indebtedness is neither linked to a good that exists at present nor to a
usufruct, and the contract involves exchange of two dissimilar commodities"(Hattab, 2003).
From the various definitions it could be deduced that all the four Sunni school of thoughts are in agreement
on the permissibility of Bai Salam as a contract that entails payment of price for a commodity of which the
delivery is deferred in specified time period in the future. However, the only area of divergence is the restrictions
espoused in the definitions (Umar, 1995).
2.2 Justification of Bai Salam
Bai Salam’s legitimacy is sourced from the Holy Quran and Sunnah, the precedence of the illustrious
companions and consensus of the jurists of the Ummah.
Justification from the Quran: Allah Almighty says:
“ But God hath permitted trade and forbidden usury” (Q:2: 275)
“0 Believers! When you contract a debt for a fixed term you should put it in writing”. (Q:2: 282).
Ibn-Abbas the greatest scholar of Tafsir in Islam, interprets this contract as a contract of Bai Salam (in which the
payment of the price is prompt but the delivery of goods is deferred).
Justification from the Sunnah: In Sunnah, it is reported from the Holy Prophet (S.A.W):“That the Apostle of Allah
(S.A.W) has forbidden the sale of everything which is not in the possession of the vendor, but he made an exception
in the case of Bai Salam” (Bukhari).
According to a tradition recorded in Tirmidhi, the Holy Prophet (S.A.W) said:
“When a man makes prompt payment for goods to be delivered later, the parties should settle the weight and
measure and the date of delivery of the goods”.
The following tradition describes the practice of the illustrious companions:
Abdullah bin Abi Uffi (RA) related that: “ in the time of the Holy Prophet (S.A.W) and Abu Bakr, we used
to sell wheat, barley, dried dates and dried grapes on Salf (another name for Bai Salam).

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Justification in Ijma': It is stated in all books of fiqh that there is consensus on permissibility of Bai Salam.
In this respect Ibn Qudamah says "As for Ijma' Ibn al Monzer said: all the fuqaha' from whom we learnt
unanimously considered Bai Salam as permissible". Some would indicate that no one had opposed this consensus
except Ibn al Musayib.
2.3 Objectives of Bai Salam
Bai Salam was allowed by the Holy Prophet Muhammad (S.A.W). Subject to certain conditions:
i. Bai Salam cannot be effected on a particular commodity or on a product of a particular field or farm.
For instance, if the seller undertakes to supply the barley of a particular field, or the fruit of a particular
tree, the Bai Salam will not be valid. This is 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. (Usmani, n.d).
ii. It is necessary that the quality of the object of sale is fully specified leaving no ambiguity which may
lead to a dispute. All the possible details in this respect must be expressly mentioned. Also, the exact
date and place of delivery must be specified in the contract .
iii. Bai Salam can be effected on those commodities of which 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 Bai Salam. For example, precious stones the quality of which is not
homogenous.
iv. It is necessary for the validity of Bai Salam that the buyer pays the price in full to the seller at the time
of effecting the sale 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 (S.A.W).
v. Bai Salam cannot be effected in respect of things, which must be delivered at the spot. For instance, if
wheat is purchased in exchange of barley, it is necessary that the delivery of both is simultaneous
(according to Shari’ah) (Usmani, n.d), and It is necessary that the quantity of the object of sale is agreed
upon in unequivocal terms.
2.5 Features of Bai Salam in Contemporary Application
Bai Salam on Produce/Products: Bai Salam on a particular commodity cannot be effected on the produce of a
particular field or farm. For example, if the seller undertakes to supply wheat of a particular field, or the fruit of
a particular tree, the Bai Salam will not be valid, because there is a possibility that the produce of that particular
field or the fruit of that tree is destroyed before the delivery, and in the presence of this possibility the delivery
remains uncertain. The same rule is applicable to every commodity whose supply is not certain.
Collateral security: is allowed to be obtained from seller/client to secure the investment from any hazards such
as non-supply/partial supply of commodity (ies)/product(s), supply of low quality commodity (ies)/Product(s)
etc.
Caveat: If the commodity (ies)/ product(s) is/are in existence and the seller has physical/ constructive
possession and legal ownership of the commodity: Bai Salam is not allowed in Shari’ah.

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Mortgage and/or Personal Guarantee: It is also allowed to obtain a mortgage or personal guarantee from a
third party as security before the Agreement is signed or at the time of signing the Agreement.
Seller Cannot Act As Agent: Except a separate agency agreement is made between the Bank and the seller
(manufacturer/producer), the seller cannot act as agent of the Bank to sell the goods delivered to the bank in the
Bai Salam contract.
2.6 The Flow of Bai Salam
FIGURE: The flow of Bai Salam transaction
Source: (Nurrachmi, Fathia, Mad-ahdin, Radenarmad, & Akhtar, 2012)
According to Nurachmi et al. (2012) the following parties are involved in the Bai Salam contract flow: Output
market, Islamic Bank and Client / Producer. With reference to the figure above the flow is explained as follows:
1. Islamic Bank will give financing to producer to cover his expenses and enter Bai Salam contract with
the promise to get the good later.
2. Producer will deliver the goods to Islamic Bank.
3. Islamic Bank will deliver and sell goods at output market.
4. Islamic Bank will then get the sale proceed.
2.7 Parallel Bai Salam
Since the Bai Salam Contract involves transacting in the underlying asset and financial institutions may not
want to be transacting in the underlying asset, there are a number of alternatives available. These can take the
form of parallel Bai Salam Contracts. However, there is no consensus of jurist on its permissibility.
After entering into the original Bai Salam Contract, the bank can get into a parallel Bai Salam sale to sell the
underlying commodity after a time lapse for the same maturity date.
The resale price would be higher and considered justifiable since there has been a time lapse. The divergence
between the prices would constitute the bank’s earnings. The shorter the time left to maturity, the higher would
be the price. Both transactions are independent of each other. The original transaction should not have been
priced with the intention to do a subsequent parallel Bai Salam (Bacha, 2013).
3. Methodology
survey of existing literature on Bai Salam and its application in contemporary Islamic finance was carried out. By
adopting snow-ball approach (Lecy & Beatty,2012), we conducted a search of some relevant key words such as
Bai Salam, Parallel Bai Salam , CSR of Islamic Finance firms etc and other synonyms related to our topic of
interest through detailed examination of the list of references provided in relevant studies that we collected. Our
online search relied heavily on Google scholar ™ search, www.4search.com, Munich Personal RePEc Archive,
and ProQuest Journals. The collected information covers 1966 to April 2013. As we conducted the detailed search,
one article search leads to the other through the list of provided references. By doing this, we located more than
200 hundred studies related to Bai Salam and Islamic CSR but we only extracted 31 that we found relevant which
fall within the range of years needed and we disregarded other studies that are not relevant.

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4. Discussions:
In the course of our search we discovered that there are issues and challenges in the deployment of Bai Salam in
its contemporary application by modern Islamic firms. We also try to make recommendations for effective
application of the instruments.
4.1 Issues and Challenges in Contemporary Application of Bai Salam
1. Fixing of the Price: In contemporary application, at the time of effecting sale, the buyer/Bank pays less than
the current market price to the seller. Therefore, the seller is not granted any right to negotiate the price as it suits
him/her. This is akin to taking interest on loan in disguise or compensating for the time value of money (Siddiqi,
1983). This is a subject of controversy because there is no single Shari’ah provision that takes a firm stand on
giving less than the current market cost for advance payment.
2. Parallel Bai Salam: The issue of Parallel Bai Salam also begs for deeper reflections. The sale of a thing whose
price has been paid, but which has not hitherto come into the possession of the vendor, is basically unlawful.
Though done in the case of Parallel Bai Salam, it could contribute to the controversy if the vendor of the initial
Bai Salam could not pitch as at when promised. The initial buyer/bank would be unable to deliver in the Parallel
Bai Salam and as a consequence it could contribute to dispute and legal logjam.
3. Also, as Parallel Bai Salam becomes entrenched in Islamic finance it could be easily turned to a debt certificate
that originated in a single transaction but traded in different contracts by different parties. As a result of this
situation, the initial seller for which this facility is meant to aid receives the short end of the financial stick because
the initial price would have to be set lower for it to be tradable and profitable in the subsequent parallel transaction.
Hence, the parallel transaction would lead to the exploitation of the initial seller and the intent of Shari’ah as
regards Bai Salam would have been defeated.
4. Contemporary finance may not be adequately equipped to market commodities; thus in the case of Bai Salam
the financiers are inexperienced and at a disadvantage because they would have to compete in the market with
more experienced middle men and possibly the producers in the sale of the commodity. Albeit, commodities in
contemporary age have a standardized market; these are very few and limited or sometimes non existent in most
Islamic countries. Therefore, the sale, pricing and marketability of the commodities in Bai Salam contract may
not be standardized (Monzer Kahf & M. Fahim Khan, 1992).
Avoidance of complacency and culpability: Bai Salam as it has been rightly explained is a concession in
Shari’ah in favour of poor farmers as well as Small and medium scale producers to enable them meet up with
their economic and social needs during the course of production in the economy. Their protection is so imperative
because they make up the engine of growth of the economic (Aris, 2007) albeit, vulnerable. Hence, the intent of
Shari’ah, or Maqasid Shari’ah should not be ignored in utilizing this product by Islamic financial industry.
The Islamic finance industry should wake up to the reality of the crux of their legitimacy in the eyes of the
community which they are meant to serve. It is no gainsaying the fact that fiat money and its entrapment in modern
finance is not only alien to Islam, but also antithetical to the principles of Shari’ah and by extension Islamic
finance (Shapiee & Zahid, 2010). Islamic finance is structured on asset and commodity;conventional Islamic
finance must be more innovative in structuring more asset and commodity based product and service. Islam has
provided a robust avenue for innovation in product and services in Islamic finance (Muhammad, 2001), hence,
contemporary Islamic finance should rather not exploit classical products like Bai Salam but use them as a guide
and be more proactive in creating new products and services (Uberoi & Evans, 2008; Munawar & Khan, 2005)
for them not be caught in the web of circumventing and exploiting Shari’ah provisions and intents (Khalaf, 2013)
at the expense of their legitimacy in the global Muslim community.
Bai Salam as a Corporate social responsibility product: Bai Salam should be used as a strategic product
for Corporate social responsibility in the light of global overwhelming clamor for greater social responsibility of
businesses in the past three decades. The social responsibility of business is a framework through which the role
of business in the society, set standard of behavior for business to be productive and as well as having a positive
impact on the society, the environment are calibrated (Dusuki, 2006), and Islamic finance is no exception. Islamic
finance by virtue of its position and source of legitimacy (Shari’ah) is expected to be driven by Islamic worldview
and epistemology which encompass social justice and equity as well as environmental protection/sustainability
(Dusuki,

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2006). Therefore, Islamic finance firms derive their corporate social obligation from the divine in contrast to the
conventional finance which is driven by transitory secularist morality. Thus, the responsibility of the Islamic
finance industry is of higher calling not just to the society and the environment but also the creator of all, Allah.
Allah stated in the Quran:
“Give full measure when ye measure, and weigh with a balance that is straight: that is the most
fitting and the most advantageous in the final determination” (Q: 17: 35)
Moreover, Islam caters for profit maximization of businesses with a moral compass that ensures justice and
fairness to ensure sustainability in the economy and the society. This shows that the onus is on Islamic finance
to ensure a fair and balanced society. In this, the protection of the vulnerable members of the society is cogent.
And this has been exemplified in the concession of Shari’ah on Bai Salam to protect the poor and vulnerable
farmers and Small and medium scale producers in order to ensure sane, balanced and fair distribution of wealth.
Allah said in the Quran:
“So fear Allah as much as ye can; listen and obey and spend in charity for the benefit of your own soul
and those saved from the covetousness of their own souls,- they are the ones that achieve prosperity" (Q:
64: 16)
Thus, social welfare is highly encouraged in Islam. The Islamic finance industry should take heed of this and be
at the vanguard of social responsibility by creating products that reflect that, because it is a worthwhile venture
and profitable. As Allah said in the Quran:
Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multiply many
times? It is Allah that giveth (you) Want or plenty, and to Him shall be your return (Q: 2: 245).
Therefore, Islamic ethos supports the business case of corporate social responsibility as cited above. There are
empirical evidences that support this by showing a correlation with Corporate social responsibility and Corporate
financial performance across industry (Orlitzky, Schmidt, Rynes, 2003). Therefore, the Islamic finance industry
could present Bai Salam as a CSR product to small and medium scale farmers and producers. This should be
structured in such a manner that the prevailing market price or fair and just pricing is employed in the contract to
ensure this vulnerable group is easily taken care of and the intent of Shari’ah on this laudable concession is
achieved. This definitely will improve the economic condition of the initial seller in the Bai Salam which in turn
could lead to customer loyalty among participants, corporate reputation, corporate legitimacy and in the short or
long run lead to more sustainable profit (Lantos 2001; Porter & Kramer, 2002; Johnson, 2003; Snider, Hill, &
Martin, 2003).
5. Conclusion
Bai Salam as an exception is evidently allowed from the foregoing discussion to fulfill the needs of farmers and
small and medium scale producers as a special facility to cater for their needs. This mode of financing can be
used by modern banks and financial institution, especially to finance the agricultural sector and small and medium
scale producers. As pointed out earlier, the price in Bai Salam may be fixed at a lower rate than the price of those
commodities delivered at the spot, however, this must not be fixed without the active participation of the seller.
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 deliver the commodity on the agreed date, they also can ask him to furnish a security,
which may be in the form of a guarantee or in the form of mortgage or collateral. In case of default in delivery,
the guarantor may be asked to deliver the same commodity by purchasing it from the market, or to recover the
price advanced by him. However, this facility is prone to misuse if it is not properly regulated and tailored, the
purpose of this special facility could be defeated. Albeit, this article may not shed light on the subject extensively,
it has modestly made a salient contribution in the body of literature.
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