Research Review of the “Salam” Islamic Financing Method in Pakistani Islamic Banks: A Case Study of Bank of Khyber and Meezan Islamic Bank

Abstract

Salam, also known as Salaf, is a well-known Islamic term referring to a trade transaction wherein an individual commits to providing specific characteristics of an item to the buyer at a future date. This transaction, also termed "Bai Al-Salam," entails payment of the item's price in advance at the contract's initiation, with the item delivered later. Upon migrating to Madinah, Prophet Muhammad (peace be upon him) encountered such transactions. Rather than outright prohibition, he implemented fundamental reforms to ensure fairness. Certain farmers and manufacturers may lack the funds required to purchase seeds, fertilizers, tools, raw materials, or labor. Islam provides them the opportunity to sell their produce or goods before readiness, enabling them to acquire funds without resorting to borrowing. It's noteworthy that this permission constitutes an exception to the general rule prohibiting the sale of non-existent items, rooted in the Prophet's practice. An additional benefit of this permission is alleviating concerns about finding a buyer, as the sale concludes beforehand. This benefits both buyer and seller, with the agreed-upon Salam price typically lower than immediate-payment prices. Moreover, if the seller desires further sale, they can choose an opportune marketing time. This article also addresses the usage of Salam by some Islamic banks for financing small and medium enterprises. This application, termed "parallel Salam," involves the bank entering into a Salam contract with a third party, with repayment coinciding with the initial Salam contract. In parallel Salam, the shorter period results in a higher price, mutually benefiting both parties. Nonetheless, this method sees limited use in our country's Islamic banks. Instead, most sellers are designated as agents, a practice incompatible with Shariah principles