Literature Review of Sharia and Legal Issues in Salam Contract Bank

        According to Dchieche (2016), a type of contract in which advance payments and cash are delivered for goods to be sent at a date in the future is referred as Salam. An equitable sharing of both profits and risks between the parts is suggested by loss and profit sharing in a financial transaction. With such a principle, unknown loss and unlimited risk can be avoided from which are phasing through various conventional contracts. When it comes to financial transactions, there are always some risks present. In a way Salam Contract can be simplified as Salam means lending. Salam is actually made by lending a thing or two to somebody. A Salam transaction is called in such a way as the price must be paid when involved parties huddle together for concluding the contract.

        Salam is actually a contract where two parties are said to enter a sale of goods’ contract which will be offered in the future for which the price will be given the moment contract is made for the goods. It is actually a contract in which prices are given accordingly while the goods’ delivery is deferred. Sometimes, it is also referred as Bay Mafalis or Bay Salaf (Dchieche & Aboulaich, 2016).

        According to Hisham (2017), when it comes to Salam, a deferred sale is concerned and in other words is a financial contract which is compliant. In this contract, two parties determine a price and a date at the moment while it is made on that specific future data. The Salam price or predetermined price has to be given by the purchaser at the contract’s initiation. This is considered a main difference among futures contract and conventional forwards and Salam agreement. It is also believed to assist a small finance small businessman working on the capital.

        There are some similarities among forwards contract and conventional futures and Salam and due to it, a comparative study or research is carried out. Among Salam contract and futures synthetic contract, the pareto optimality has been observed. A risk model was proposed in a numerical way and while constructing the differential equation which was partial for describing the credit risk’s dynamic behavior and Salam contract value, the process of diffusion of assets of Salam writer and underlying assets are decreased to the neutral process of risk. The value was constructed on the basis of optimum market circumstances (Hisham, Jaffar, & Othman, 2017).

        According to Razak (2018), a universal dream is linked with nothing but Home and it is considered a basic need as well. Banks practice Home financing and it is an important issue when it comes to meeting the aims of Maqasid Al-Shariah. Home is dreamed and is simply recognized as a shelter that almost every person wants. Homeownership is significant for not only individuals but also families. It is known as a social status as it determines the life’s standard the decency of places and the people’s standards. Due to the rising gap concerning demand-supply in housing which is affordable, achieving a house of own is very difficult for people with low-income.

        In schemes of public housing, the middle-income and low-income applicants of households can get their houses which are subsidized only after financing up to almost 100 is secured from the banks. Islamic finance actually gets its power mainly from the underlying values and principles which focus upon transparency, fairness, and justice. In the process o doing such, Maysir, Gharar, and Riba are prohibited. Furthermore, profiteering and excessive speculation are also abhorred. Relying on different objectives and disciplines, economic functions are enhanced (Razak & Tazwar, 2018).

        According to Zaabi (2011), there are various financial tools being utilized in Islamic banks and they are properly understood. Different banks use different instruments with proper functioning and even their contracts are defined clearly. What complicates the whole process is all about the Salam product’s conditions and terms. Islamic banks also use these difficulties. In this contract, the payment is made before the delivery and the goods are delivered after a specific delay. Due to it, there are many problems and questions which arise in the framework of Shariah. In general terms, the contract allows an advance payment for the sale of a specific object or simply good to be sent later on at a fixed date.

Such a contract is among sales which are usually eliminated from prohibition when it comes to selling an object which is non-existent and the seller doesn’t has a hold on his position to use Salam as a word. Considering the fact that Salam is a kind of substitution or exchange that results in an owed debt by the seller, a transaction’s meaning is acquired which involved both lending and borrowing and buying and selling. Its connection with the debt raises several questions (Zaabi, 2011).

        According to Hisham (2017), if Islamic Finance wishes to stay competitive then it must develop a new compliance product. Such a product can be like Islamic derivative which can be utilized for managing the risk. But under regulations and principles of syariah, all financial tools must not collide with five elements of syariah which are jahl, maysir, gharar, rishwah, and riba. The issues concerning financial risk management have grown and they have become a subject that attracts the interest of not only the policy makers and industry players under the globalization’s increasing pressure. It is suggested that when a risk concerns the Islamic finance, it is very complex and difficult to manage compared to the conventional ones due to the nature and complications of principles associated with contracts.

        Regardless of the significant growth in the industry of Islamic Finance, lack of risk management instruments which comply with syariah such as derivates create a very large and strong hindrance for the banks to manage such a risk. In managing risks, derivatives are considered the most important and efficient financial instruments. However, they seem to initiate a strong controversial problem in terms of Islamic finance. Such a situation is created with different perceptions regarding syariah on derivatives (Hisham & Jaffar, 2017).

        According to Jaffar (2016), the issue of risk management has become very important in the difficult phase of worldwide financial crisis. There are many terms and conditions in the contracts of Islamic finance. Therefore, it is difficult to design a derivative and use it to minimize the risks. (Hisham & Jaffar, Salam contract with credit risk model by partial differential equation approach, 2016).

References of Sharia and Legal Issues in Salam Contract Bank

Hisham, A. F., & Jaffar, M. M. (2016). Salam contract with credit risk model by partial differential equation approach. Jurnal Teknologi, 78(11), 75-84.

Hisham, A. F., & Jaffar, M. M. (2017). Modeling commodity salam contract between two parties for discrete and continuous time series. AIP Conference Proceedings, 1870(1).

Hisham, A. F., Jaffar, M. M., & Othman, J. (2017). Deriving Partial Differential Equation for the Value of Salam Contract with Credit Risk. Pertanika Journal of Science & Technology, 25(3).

Razak, D. A., & Tazwar, F. (2018). Islamic Home Financing Practices In Selected Oic Countries: An Assessment In The Light Of Maqasid Al-Shariah. Journal of Islamic Management Studies, 1(2), 1-11.