What Is Salam?
Salam (سلم) is one of Islam's oldest commercial contracts, specifically designed to solve a perennial problem in agricultural economies: farmers need capital to plant and cultivate their crops before harvest, but they have nothing to sell until the harvest arrives. The salam contract provides a solution: a buyer pays the full purchase price upfront for a precisely specified quantity of a commodity to be delivered at a future date, at a price below current market value. The discount compensates the buyer for the advance payment risk.
Key requirement: Full payment must be made upfront at contract signing. This is the defining feature that distinguishes salam from conventional forward contracts, in which both payment and delivery are deferred. The upfront payment requirement ensures the contract represents a genuine economic commitment and prevents the leveraged speculation inherent in conventional commodity futures.
How Salam Works
Buyer and Seller Agree on Specifications
The parties agree on the precise commodity specification: type, variety, quality grade, quantity, unit of measurement, and delivery location. The delivery date must be specified and at least one lunar month in the future under most schools.
Full Price Paid Upfront at Discount
The buyer pays the entire agreed price at contract signing — no partial or deferred payment is permitted. The price is below current market value to compensate the buyer for committing capital before the commodity exists.
Seller Produces or Sources the Commodity
The seller uses the advance payment to fund production, cultivation, or sourcing of the commodity. They bear all production risks: crop failure, price changes, and supply disruptions. The seller must deliver the specified quantity regardless of market conditions.
Delivery at the Agreed Date
On the agreed delivery date, the seller delivers the specified quantity of the commodity to the buyer. If the seller fails to deliver, the buyer may wait for delivery, cancel the contract and reclaim the payment, or accept a substitute commodity of equivalent value.
Salam Requirements
Precise Specification
The commodity must be specified by type, quality grade, quantity, and unit of measurement with enough precision that any dispute about conformity can be resolved objectively.
Full Upfront Payment
The entire agreed price must be paid at the time of contract signing. Partial or staged payment is not permitted in salam — this is the contract's defining characteristic.
Fixed Delivery Date
The delivery date must be specified and certain. Vague terms like 'after harvest' are not sufficient under most scholarly opinions. A specific calendar date or period is required.
Fungible Commodity
The commodity must be fungible — individual units must be interchangeable. Salam cannot be used for unique or non-standardised goods; those require an istisna contract instead.
Salam vs Conventional Forwards
Salam
- Full price paid upfront at signing
- Cannot be traded on secondary market
- Precise specification required
- Delivery obligation on the seller
- Supports real producer financing
Conventional Forwards
- Both payment and delivery deferred
- Can be traded, novated, or assigned
- Standardised exchange contracts
- Often cash-settled without delivery
- Primarily used for price speculation
“Whoever pays in advance for a thing must do so for a specified measure, a specified weight, and a specified time.”