Comparison between Salam and Istisna' Contract

Salam is used mostly in Agriculture

Salam and Istisna financing are both exception given to the general principle of syariah in muamalah at the time no physical goods or finish goods available in the time of sale and purchase transaction to avoid gharar.

Salam Financing

Bai’ as-Salam is the sale of a deferred item in exchange for an immediate forward price. A salam contract referred to a commodity for deferred delivery in exchange for an immediate cash payment. This concept has been used by banks to hedge against inflation on other receivables due (on other assets such as murabahah); the forward income on salam being worth more.

Salam was allowed by the Holy Prophet (SW) subject to certain conditions. The basic purpose of this sale was to meet the needs of small farmers who needed money to grow their crops and to feed their families up to 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. Salam was beneficial to both the seller and buyer, whereby the seller received the price in advance, and for the buyer, the price in salam used to be lower than the price in spot sales. Most of the time, salam is used in dealing with agriculture or commodities. However, not all commodities are tradable under salam. Only fungible types of commodities are allowed for salam contract.

Istisna’ Financing

‘Istisna’ is the second kind of sale where a commodity is transacted before it comes into existence usually in the manufacturing and construction activities. It means a contract with a skilled person to make something. The transaction of istisna’ comes into existence when the manufacturer undertakes to manufacture the goods for him with material from the manufacturer. 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.

Differences between Istisna’ and Salam:

There are several other points of difference between istisna’ and salam which are summarized below:

                                i.            The subject of istisna’ is always applicable to materials that require transformation by a manufacturing or construction process. On the other hand, salam is a contract of sale of specified goods, the validity of which is not attached to a condition that the goods must be manufactured or constructed. In addition, salam usually involves agriculture products.

                              ii.            It is necessary for salam that the price is paid in full in advance (according to some scholars). It is very important to release all capital during the critical stage of agriculture production as one of the objective to help the farmers.

However in istisna’ the price may be paid in cash or by instalments. With the parallel ‘istisna’ the main istisna’ contract between the bank and customer involve deferred repayments, and the bank subsequently enters onto parallel istisna with sub contractor for all or part of the project with cash released during construction period in staggered.

                            iii.            The contract of salam, once affected, cannot be cancelled unilaterally if the final product does not meet the predetermined specifications, while the contract of istisna’ can only be cancelled before the manufacturer starts the work.

                            iv.            The time of delivery is an essential part of the sale in salam and the deal can be cancelled if there is delay in delivery time, while it is not necessary in istisna’ that the time of delivery is fixed.