ISLAMIC UNIVERSITY IN UGANDA KAMPALA CAMPUS

NAME : MOHAMED SAID OMAR

REG NUMBER : 220-035073-19357

COURSE : MIBF

COURSE UNIT : ACCOUNTING AND AUDITING ISLAMIC

FINANCIAL INSTITUTION

YEAR : TWO

QUARTER : TWO

SESSION : WEEKEND

LECTURE : DR. LUJJA SULIEMAN

Introduction

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a not-
for-profit organization that was established to maintain and promote Shari'ah standards for
Islamic financial institutions, participants, and the overall industry. The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) was created on February 26, 1990, to
ensure that participants conform to the regulations set out in Islamic finance.

The founding and associate members, as well as the regulatory and supervisory authorities of the
Accounting and Auditing Organization for Islamic Financial Institutions, define the acceptable
standards for various functions. This includes areas such as accounting, governance, ethics,
transactions, and investment.

One of the preconditions for a valid sale under Islamic law is the existence of subject matter at the
time of sale. However, there are two exceptions that allow the sale of non-existent objects. The
exceptional sale contracts in Shariah are Salam (forward sale) and Istisna’ (manufacturing
contract). Salam is a sale whereby the seller undertakes to supply some specified goods to the
buyer at a future date in exchange of an advanced price fully paid at the spot.

There are various definitions of Salam available in classical and contemporary literature. The
juristic views about Salam are divided into two. One is from the Maliki school, which allows Salam
contracts in a secondary market. The other view is from the other three Sunni schools, Shaafi,
Hanbali and Hanafi, which do not accept Salam as they object to resale or transfer of ownership
before the delivery has been made.

1
Salam and Parallel Salam

Salam is a sale contract whereby goods are delivered at a future date and sale price is paid in full
in advance. Goods must be defined and the date of delivery fixed. Ownership of the salam goods
is transferred immediately.

A Bai Salam financing, according to the AAOIFI FAS No. 7 (Salam and Parallel Salam), is a short-
term agreement in which an IFI makes full prepayments (spot payment) for future (deferred)
delivery of a specified quantity of goods on a specified date. In practice, farmers usually need
money to purchase seeds and fertilizers. An IFI and farmers in this case may engage in a Bai Salam
contract, in which farmers agree to sell their crops to the IFI prior to harvesting. Generally, the
agreed spot price is less than the future price of the commodities, in order for the IFI to make
profits. A Bai Salam should be classified as Loans, given that the produced crops are not for the
IFI’s own use.

Types of salam

1. Single salam: the total funds needed by the former will be disbursed/credited to the
former’s account in lump sum.
2. Multiple salam: the funds would be disbursed in tranche as and when needed by the former
by executing various and multiple salam. Salam depending upon his/her convivence and
preference
3. Parallel salam: Parallel salam is based on two independent salam contracts whereby the
financier will be both the seller and the buyer in this arrangement.

2
Legality of Salam

َ ‫ٰٰۤيـا َ ُّيهَا الَّذ ِۡينَ ٰا َمنُ ٰۡۤوا اِذَا تَدَا َي ۡنت ُمۡ ِبد َۡي ٍن ا ِٰلٰٓى اَ َج ٍل ُّم‬
 ‫س ًّمى َف ۡاكتُبُ ۡو ُه‬

 “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)

 ‫ فقال عليه‬،‫روى البخاري ومسلم عن ابن عباس أن رسول هللا ﷺ قدم المدينة والناس يسلفون في التمر السنتين والثالث‬
))‫ ((من أسلف في شيء فليسلم في كيل معلوم ووزن معلوم إلى أجل معلوم‬:‫الصالة والسالم‬

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

Elements of Salam Contract:

There are 4 key elements in this contract:

• Buyer (Al Muslam Fihi)

• Seller (Al Muslam Ileihi)

• Ras-almal: Price of commodity in cash, kind or benefit

• Purchased Commodity (Al Muslam).

Salam of contract

General framework for Salam contracts

1. It is permissible to initiate through negotiations several contracts (with different parties).

Each operation will end at its contracts (with different parties). Each operation will end at
its due date. It is also permissible to draw up a general framework due date. It is also
permissible to draw up a general framework or a master agreement that consists of an
understanding to or a master agreement that consists of an understanding to conclude
successive Salam contracts, each of which will take conclude successive Salam contracts,
each of which will take place at an appropriate time. In this latter case, the transaction place
at an appropriate time. In this latter case, the transaction involved shall be concluded on
the basis of a memorandum of involved shall be concluded on the basis of a memorandum
of understanding in which the contracting parties determine the understanding in which the

3
 contracting parties determine the framework of the contract and the intention of the parties
to framework of the contract and the intention of the parties to buy and sell. The parties
shall also determine the quantity and buy and sell. The parties shall also determine the
quantity and specifications of the goods, the manner of their delivery, the specifications of
the goods, the manner of their delivery, the basis for determining the price, and the manner
of payment. basis for determining the price, and the manner of payment. The types of
guarantees and other prospective arrangements the types of guarantees and other
prospective arrangements shall also be specified in the memorandum. The execution shall
also be specified in the memorandum. The execution of each Salam contract may then take
place separately at the of each Salam contract may then take place separately at the
appropriate date.
2. If the Salam contract is concluded on the basis of what was initially agreed in the
memorandum of understanding, the initially agreed in the memorandum of understanding,
the contents of the memorandum become part and parcel of the contents of the
memorandum become part and parcel of the contract. This will hold true unless the parties
agreed contract. This will hold true unless the parties agreed when the contract was
concluded to exempt themselves from some of the contract was concluded to exempt
themselves from some of the obligations referred to in the memorandum of understanding.

Form of a Salam contract:

Form of a Salam contract A contract of Salam may be concluded using the word Salam, or
Salaf, A contract of Salam may be concluded using the word Salam, or Salaf, or sale, or any
term that indicates sale of a prescribed commodity for or sale, or any term that indicates sale
of a prescribed commodity for deferred delivery in exchange for immediate payment of the
price.

Subject Matter of Salam

1. Capital of Salam contract and its conditions

1. It is permissible for the capital of Salam to be in the form of fungible goods (such as
wheat and other cereals) in which fungible goods (such as wheat and other cereals) in
which case the parties must make sure that they do not fall into case the parties must
make sure that they do not fall into Riba. The capital may also be items of material

4
 value (such as Riba. The capital may also be items of material value (such as livestock).
It is also permissible for it to be in the form of the livestock). It is also permissible for
it to be in the form of the general usufruct of a particular asset, such as living in a house
general usufruct of a particular asset, such as living in a house or having the use of an
aircraft or a ship for a certain period. or having the use of an aircraft or a ship for a
certain period. In such a case, when a party is granted access to the usufruct in such a
case, when a party is granted access to the usufruct through delivery of the asset, this
is regarded as immediate through delivery of the asset, this is regarded as immediate
receipt (possession) of the Salam capital.
2. The capital of Salam should be made known to the two parties in a manner that removes
all uncertainty and eliminates the in a manner that removes all uncertainty and
eliminates the possibility of dispute. In principle, the capital of Salam should possibility
of dispute. In principle, the capital of Salam should be in the form of cash. In this case,
the currency of payment, the be in the form of cash. In this case, the currency of
payment, the amount and the manner of payment shall be clearly defined. amount and
the manner of payment shall be clearly defined. If the capital of Salam is in the form
of fungibles, If the capital of Salam is in the form of fungibles, (1) then the then the
kind, type, specifications and quantity of these shall be clearly kind, type, specifications
and quantity of these shall be clearly defined
3. The capital in a Salam contract must be paid immediately at the place where the
contract is concluded. However, as a place where the contract is concluded. However,
as an exception to this ruling, payment may be delayed for two or three days at most.
Even if such a short delay has been stipulated earlier, this most. Even if such a short
delay has been stipulated earlier, this will not affect the Salam contract provided that
the period of will not affect the Salam contract provided that the period of delay is not
equal to or greater than the delivery period for al- delay is not equal to or greater than
the delivery period for al-Muslam Fihi.
4. It is not permitted that a debt be recognised as the capital of Salam, such as using as
the capital of Salam loans or debts Salam, such as using as the capital of Salam loans
or debts owed by the seller to the Institution as a result of previous owed by the seller
to the Institution as a result of previous transactions.

5
2. Al-Muslam Fihi and its conditions
1. Salam contracts are permitted for fungible goods, like those that may be weighed,
measured or counted, the articles of that may be weighed, measured or counted, the
articles of which do not differ in any significant manner, provided that which do not
differ in any significant manner, provided that no Riba ensues
2. Among the items for which variations in numbers make no difference are the products
of companies that manufacture difference are the products of companies that
manufacture goods in approximate units that are identified by trademarks, goods in
approximate units that are identified by trademarks, standardized specifications and are
regularly and commonly standardized specifications and are regularly and commonly
available at any time. However, this rule must be read together available at any time.
3. Salam is not permitted for anything specific like “this car”. Nor is it permitted for
anything for which the seller may not be is it permitted for anything for which the seller
may not be held responsible, like land, buildings or trees; or for articles held
responsible, like land, buildings or trees; or for articles whose values change according
to subjective assessment, like whose values change according to subjective assessment,
like jewellery and antiques. Also, it is not permissible to stipulate jewellery and
antiques. Also, it is not permissible to stipulate that al-Muslam Fihi must be from a
specific piece of land. that al-Muslam Fihi must be from a specific piece of land.
However, on the delivery date the seller may present the buyer However, on the
delivery date the seller may present the buyer with whatever items are available (and
meet the contract with whatever items are available (and meet the contract
specifications), irrespective of whether such items are from his specifications),
irrespective of whether such items are from his own fields or factories or elsewhere.
4. It is not permissible for al-Muslam Fihi to be an amount of currency, gold or silver, if
the capital of the Salam contract was currency, gold or silver, if the capital of the Salam
contract was paid in the form of currency, gold or silver.
5. Al-Muslam Fihi must be the kind of article for which a specification may be drawn up
so that the seller may be a specification may be drawn up so that the seller may be held
responsible for its conformity to the specification. It will hold responsible for its
conformity to the specification. It will be sufficient if the specification is explained in

6
 a manner that be sufficient if the specification is explained in a manner that removes
uncertainty, except for minor discrepancies that are removes uncertainty, except for
minor discrepancies that are customarily ignored, considered acceptable, and not
usually customarily ignored, considered acceptable, and not usually regarded as
grounds for dispute.
6. It is a requirement that al-Muslam Fihi be clearly known to the contracting parties in a
manner that eliminates any possibility contracting parties in a manner that eliminates
any possibility of uncertainty or ambiguity. The reference for determining of
uncertainty or ambiguity. The reference for determining descriptions that are used to
specify and identify al-Muslam descriptions that are used to specify and identify al-
Muslam Fihi is customary practice and the experience of experts.
7. It is a requirement that the parties know the quantity of al-Mus-lam Fihi. The quantity
of each item is determined according to lam Fihi. The quantity of each item is
determined according to its condition and nature with regard to weight, measurement,
its condition and nature with regard to weight, measurement, volume and number.
8. It is a requirement that al-Muslam Fihi be commonly available under normal
circumstances at the place where it should be on under normal circumstances at the
place where it should be on the delivery date, so that the commodity will be accessible
to the delivery date, so that the commodity will be accessible to the seller in order to
discharge his obligation by delivering it to the seller in order to discharge his obligation
by delivering it to the buyer.
9. It is a requirement that the date of delivery for al-Muslam Fihi be known in a manner
that eliminates any uncertainty or Fihi be known in a manner that eliminates any
uncertainty or ambiguity which may lead to a dispute. There is no Shari’ah ambiguity
which may lead to a dispute. There is no Shari’ah objection to the contracting parties
setting various dates objection to the contracting parties setting various dates on which
the delivery of al-Muslam Fihi may take place, in which the delivery of al-Muslam Fihi
may take place, in instalments, provided the capital of Salam was paid at the
instalments, provided the capital of Salam was paid at the time the contract was
originally concluded.

7
10. In principle, the parties may designate the place at which al-Muslam Fihi is to be
delivered. If the parties to the contract Muslam Fihi is to be delivered. If the parties to
the contract do not determine the place of delivery, then the place at which do not
determine the place of delivery, then the place at which the contract was concluded will
be regarded as the place of the contract was concluded will be regarded as the place of
delivery unless it turns out to be impossible to make delivery.
3. Security for al-Muslam Fihi

Al-Muslam Fihi may be secured by a mortgagee or a guarantee or any Al-Muslam Fihi

may be secured by a mortgagee or a guarantee or any other permissible means of securing
payment.

Changes to al-Muslam Fihi

1. Selling al-Muslam Fihi before taking possession

It is not permitted for the buyer to sell al-Muslam Fihi before taking It is not permitted
for the buyer to sell al-Muslam Fihi before taking possession of it.
2. Replacement of al-Muslam Fihi
It is permissible for the buyer to exchange al-Muslam Fihi for other It is permissible
for the buyer to exchange al-Muslam Fihi for other goods, except currency, after the
delivery date falls due, as long as goods, except currency, after the delivery date falls
due, as long as such a substitution was not stipulated in the contract. This rule applies
a substitution was not stipulated in the contract. This rule applies whether or not the
substitute is similar in kind to al-Muslam Fihi. whether or not the substitute is similar
in kind to al-Muslam Fihi. This is provided that the substitute is suitable for being
exchanged This is provided that the substitute is suitable for being exchanged as al-
Muslam Fihi for the capital of the Salam contract, and that the as al-Muslam Fihi for
the capital of the Salam contract, and that the market value of the substitute should not
be greater than the market value of the substitute should not be greater than the market
value of al-Muslam Fihi at the time of delivery.
3. Cancellation (Iqalah) of a Salam contract

It is permissible, when both parties agree, to cancel the entire Salam It is permissible, when
both parties agree, to cancel the entire Salam contract in return for repayment in full of the

8
amount of the capital contract in return for repayment in full of the amount of the capital
of Salam. Partial cancellation, that is, cancellation of the delivery of Salam. Partial
cancellation, that is, cancellation of the delivery of part of al-Muslam Fihi, in return for
repayment of a corresponding part of al-Muslam Fihi, in return for repayment of a
corresponding part of the capital of Salam, is also permissible.

Delivery of al-Muslam Fihi

1. The seller is under an obligation to deliver al-Muslam Fihi to the 5/1 The seller is under
an obligation to deliver al-Muslam Fihi to the buyer on the due date in accordance with
the terms of the contract, buyer on the due date in accordance with the terms of the
contract, such as agreed specifications and quantity. The buyer, on the other such as
agreed specifications and quantity. The buyer, on the other hand, must accept the goods
if they meet the specifications explained hand, must accept the goods if they meet the
specifications explained in the contract. If the buyer refuses to accept al-Muslam Fihi,
he shall in the contract. If the buyer refuses to accept al-Muslam Fihi, he shall be
compelled to do so.
2. If the seller offers delivered goods of a quality that is superior to that required by the
contractual specifications, the buyer must accept required by the contractual
specifications, the buyer must accept the goods, provided that the seller shall not seek
a higher price for the goods, provided that the seller shall not seek a higher price for
the better quality. This may be considered one of the ways in which the better quality.
This may be considered one of the ways in which a contract is ethically fulfilled.
However, this will apply only if a contract is ethically fulfilled. However, this will
apply only if the (inferior) description specified in the contract is not itself deemed
(inferior) description specified in the contract is not itself deemed vital.
3. If the quality of the delivered goods is inferior to that required by the contractual
specifications, the buyer is entitled either to reject or to contractual specifications, the
buyer is entitled either to reject or to accept the goods in that condition. If he accepts
the goods, his action accepts the goods in that condition. If he accepts the goods, his
action is considered as ethical acceptance. It is also permissible for the two is
considered as ethical acceptance. It is also permissible for the two parties to agree to a

9
 settlement on terms for acceptance of the goods parties to agree to a settlement on terms
for acceptance of the goods even at a discounted price.
4. It is not permitted for a seller to deliver al-Muslam Fihi in the form of a commodity
different from the one agreed upon if the commodity a commodity different from the one
agreed upon if the commodity is considered to belong to the same genus as al-Muslam Fihi
(e.g., is considered to belong to the same genus as al-Muslam Fihi (e.g., al-Muslam Fihi is
corn and the commodity that the seller wants to al-Muslam Fihi is corn and the commodity
that the seller wants to deliver is wheat). However, the delivery of al-Muslam Fihi in the
delivery is wheat). However, the delivery of al-Muslam Fihi in the form of a different type
of commodity from that agreed upon may form of a different type of commodity from that
agreed upon may take place only on the basis of the conditions for the replacement of take
place only on the basis of the conditions for the replacement of al-Muslam Fihi by other
goods.
5. Delivery of al-Muslam Fihi may take place before the due date, on condition that the goods
conform to the agreed specifications and condition that the goods conform to the agreed
specifications and quantities. If the buyer has a valid reason for rejecting the goods,
quantities. If the buyer has a valid reason for rejecting the goods, then he will not be
compelled to accept them. Otherwise, the buyer then he will not be compelled to accept
them. Otherwise, the buyer will be forced to accept the goods.
6. If the seller fails to perform his obligation, owing to insolvency, he should be granted an
extension of time for delivery. should be granted an extension of time for delivery.
7. It is not permitted to stipulate a penalty clause in respect of delay in the delivery of al-
Muslam Fihi. the delivery of al-Muslam Fihi.
8. In case all or part of al-Muslam Fihi is not available to the seller on the due date, the buyer
shall have the following options.
9. To wait until al-Muslam Fihi is available.
10. To cancel the contract and recover the paid capital. It is also permissible for the parties to
agree to replacement of It is also permissible for the parties to agree to replacement of al-
Muslam Fihi by other goods.

10
Parallel Salam

1. It is permissible for the seller to enter into a separate, independent Salam contract with a
third party in order to acquire goods of a similar Salam contract with a third party in order
to acquire goods of a similar specification to those specified in the first Salam contract, so
that the specification to those specified in the first Salam contract, so that the first Salam
obligation will be discharged by delivering these goods. first Salam obligation will be
discharged by delivering these goods. Hence, the seller in the first Salam contract becomes
the buyer in the Hence, the seller in the first Salam contract becomes the buyer in the second
Salam contract. second Salam contract.
2. It is permissible for the buyer to conclude a separate parallel Salam with a third party for
the purpose of selling, on the basis of Salam, with a third party for the purpose of selling,
on the basis of Salam, a commodity whose description corresponds to the description of a
commodity whose description corresponds to the description of the commodity to be
acquired through the first Salam contract. In the commodity to be acquired through the first
Salam contract. In this situation, the buyer in the first Salam contract becomes this
situation, the buyer in the first Salam contract becomes the seller in the second Salam
contract. seller in the second Salam contract.
3. In both the two situations mentioned in items 1 and 2, it is not permissible for the parties
to link the obligations under the two permissible for the parties to link the obligations under
the two Salam contracts together so that the execution of the obligations Salam contracts
together so that the execution of the obligations of one contract is contingent on the
outcome of the other. Hence, of one contract is contingent on the outcome of the other.
Hence, it is necessary that both the obligations and the rights under the it is necessary that
both the obligations and the rights under the two contracts stand alone in all respects.
Therefore, if one party two contracts stand alone in all respects. Therefore, if one party
breaches his obligation under the first Salam contract, the other breaches his obligation
under the first Salam contract, the other party (the injured party) has no right to relate this
damage or loss to party (the injured party) has no right to relate this damage or loss to the
party with whom he concluded a Parallel Salam. Consequently, the party with whom he
concluded a Parallel Salam. Consequently, he has no right on the basis of his loss or damage
under the first he has no right on the basis of his loss or damage under the first Salam

11
 contract to terminate the second Salam contract or to delay Salam contract to terminate the
second Salam contract or to delay in performing it.

Recognition of Salam & Parallel Salam transactions and journal entries

No Transactions /Events DR CR
1 Recognition of Salam on payment Salam Cash
(Being capital paid to almuslam ileihi) Financing
2 On receipt of payment from customer Cash Parallel salam
3 Reduction in value of al muslam fi hi Profit and Loss Provision in loss in value
yet to be delivered of al muslam Fihi
4 Normal contract conclusion Delivery Dr Inventory Salam Financing
of inventory to buyer Profit from sale (historical cost) Inventory Profit and Loss
When the inventory is delivered direct Parallel Salam
to the customer, a composite journal Parallel salam
entry can be made without going
through inventory
5 End of year inventory decline If at the Dr Profit and Inventory
end of the fiscal year, the cev of loss
inventory acquired through salam
financing is lower than the acquisition
cost
6 Termination of salam due to non- A/receivable Salam Financing
delivery and delivery date not extended
7 In case of sale of securities for less than Dr Cash Dr Salam Financing
salam contract value A/Receivable
with difference
between cash
proceeds and
contract value
8 In case of sale of securities for more Dr Cash Cr Salam financing
than salam contract value

12
 Cr accounts payable (with
excess of proceeds)

Salam Sukuk Issues

Salam Sukuk Issues It is not permitted to issue tradable Sukuk based on the debt from a Salam It
is not permitted to issue tradable Sukuk based on the debt from a Salam contract. Date of Issuance
of the Standard This Shari’ah Standard was issued on 29 Safar 1422 A.H., corresponding to 23
May 2001 A.D

Conclusion

A Bai Salam financing, according to the AAOIFI FAS No. 7 (Salam and Parallel Salam), is a short-
term agreement in which an IFI makes full prepayments (spot payment) for future (deferred)
delivery of a specified quantity of goods on a specified date. In practice, farmers usually need
money to purchase seeds and fertilizers. An IFI and farmers in this case may engage in a Bai Salam
contract, in which farmers agree to sell their crops to the IFI prior to harvesting. Generally, the
agreed spot price is less than the future price of the commodities, in order for the IFI to make
profits. A Bai Salam should be classified as Loans, given that the produced crops are not for the
IFI’s own use.

13
References
https://journal.wahedinvest.com/introduction-to-salam-or-forward-sale/

Ibrahim, S. H. (2007). Accounting and Auditing of islamic financial institution .

Shariaa-Standards-ENG.pdf

Merah, D. H. (2017). SHariah standard of AAOIFI. Manama, Kingdom of Bahrain.

Accounting_and_Auditing_for_Islamic_Fina.pdf

14