CHAPTER 11

ACCOUNTING ISSUES ON SALAM AND

PARALLEL SALAM FINANCING

Definition of Salam & Parallel

Salam
Illustration of Salam Contracts
Comparative Contractual
Analysis
Accounting Treatment for
Salam Financing

Purchase of a commodity for deferred

delivery in exchange for immediate payment
according to specified conditions or,
Sale of a commodity for deferred delivery in
exchange for immediate payment.

Al Muslam Fihi : The commodity to be

delivered
Al Muslam Ileihi : The seller
Al Muslam : The purchaser
Ras-almal : Price of commodity in
cash, kind or benefit

Legality of Salam

O you who believe! When you deal with each other in transactions
involving future obligations in a fixed period of time, put them in
writing (Al-Baqarah:282)

Whoever participates in a forward sale, let him buy a known volume, or
known weight for a known term of deferment (Hadith)

Conditions of Salam

Price must be paid in full at spot

Deferment of payment will entail sale of debt for debt
(bay al-kali bil kali)
Purpose of salam is to fulfill financing need of seller
Imam Malik allows seller to voluntarily give
concession of 2 or 3 days to make payment
Salam commodity must be capable of being specified
exactly in quantity and quality
Salam is concluded over fungible goods that are readily
available in the locality. Hence, Salam cannot be for a
specific commodity with specified origin
E.g. product of a particular farm or field
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Conditions of Salam

fungible
describes commodities that can be traded or substituted
for an equal amount of a like commodity, usually to
satisfy a contract

Conditions of Salam

The following must be unambiguously and fully specified

and agreed upon
Quality and quantity of commodity
Exact date, place and mode of delivery
Salam cannot be applied to ribawi items which must be
exchanged at spot
E.g. exchange of gold and silver

 A Salam contract whereby al muslam

ileihi (seller) depends, for executing his
obligation, on receiving what is due to
him in his capacity as a muslam
(purchaser) from a sale in a previous
Salam contract.
Buys and sells on Salam contracts

Al Muslam
(Purchaser)

IMPORTER

Al Muslam Ileihi
(Seller)

2
IFI

EXPORTER

Al Muslam
(Purchaser)

Al Muslam Ileihi
(Seller)

Where is the Parallel Salam?

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A enters into Salam contract with B, a

joint stock company. B has a subsidiary
C, who is a separate legal entity but is
fully owned by B. Is it possible for A to
enter into Parallel Salam with C??

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Spot
Contract

Forward
Contract

Murabaha
(Deferred)

Salam
Contract

Payment

Immediate

Deferred

Deferred

Immediate

Delivery

Immediate

Deferred

Immediate

Deferred

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Quality mismatch and substitutions of

goods

Delayed or Earlier delivery of goods

Sale of muslam fihi prior to receipt

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 Salam Financing transaction shall be

presented as assets in the financial
statement as Salam Financing
Salam Deposits from Customers based on
parallel Salam transactions are presented
as Parallel Salam

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 Recognise Salam financing capital when it

is paid or made available (as a facility)
Parallel Salam transaction is recognized
when the Islamic bank receives the capital
of Salam (cash, kind or benefit)

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 Measurement of capital at time of contract is

by amount paid or fair value of capital in
kind or benefit.
Measurement of capital at end of financial
period is similar to at time of contract.
However if a decline in value of muslam fihi
(commodity) is anticipated, a provision for
the estimated deficit is made (due to non
delivery in full or part of muslam fihi).
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Received in accordance
to contract?

Asset reported at historical cost

Received in different quality

or substitute at lower quality

Asset reported at lower of

cost or market value

Delayed but extended

delivery date

Asset reported at
historical cost

Cancelled Salam contract

Asset to be reported as
receivable
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