bai al-salam

International, USA

bai al salam, Also known as salam

An Islamic finance technique used to provide working capital to parties on terms compliant with Sharia. In a bai al salam transaction, a lender (Al-muslam) buys an asset from a party seeking financing (the seller or Al-muslam Ileihi), pays the purchase price of the asset in advance and agrees to take delivery of the asset at a later date. Usually, the lender receives a discount (often calculated by reference to a benchmark such as LIBOR) on the asset's purchase price in consideration for the advance payment. As a result, the seller receives the funds needed to manufacture the asset or meet its other financing needs. The lender can enter into a parallel bai al salam transaction with a third party or the seller for the sale of the asset or wait until delivery to sell the item. In either case, the asset is usually sold at a higher price. For a transaction to qualify as bai al salam, the:

• Lender must pay the purchase price in full.

• Asset subject to the transaction must be describable and described with specificity.

• Quantity of the asset must be describable and described with specificity.

• Delivery of the asset must be for a date certain.

• Asset cannot be unique (for example, precious stones that are each considered different).

Although similar to a forward contract, there are two crucial differences in bai al salam transactions:

• Unlike a conventional forward contract where the payment and goods are both delivered on a future date, payment is made in full in advance.

• The purchase price of the asset only takes into account the risk to the lender (or buyer) who has paid in full but may not receive the asset. By contrast, conventional forward transactions take into account the benefits and disadvantages to both parties of deferring payment and delivery.