A Salam, (sometimes referred to as Salaf) is a short-term agreement in which a financial institution

makes full prepayments for future delivery of a specified quantity of goods on a specified date.

A Salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar
to a forward contract where delivery is in the future in exchange for spot payment. To mitigate the
asset risk, a financier can enter into a parallel salam.

The followings are the conditions governing the conduct of an Al-Salam contract:

(a) The price for the commodity that will be delivered as a repayment must be identified and known.

(b) The sold commodity must be known by detailed specifications of quantity and quality.

(c) Repayments must be in commodity and not in cash. The cash repayment is prohibited except for
the exact original loan without any added profit.

(d) The repayment must be postponed to a specified future date and a known place of delivery.

(e) The borrower is free with regard to the source of the commodity for repayment, whether from his
own farm production or bought from the market as long as it is typical to the specified descriptions.

This method of financing is found to be more flexible and preferred by the farmers because it enables
them to get cash lending and be free to do what they like with regard to the finance allocation. It is
also observed that the commodity repayments are usually done from the harvest of the crops
financed.

Istisna’a is a sale contract between the FHM as Al-Sani (the seller) and the customer as Al-Mustasni
(the ultimate purchaser) whereby the FHM.

It is defined as “a contract with a manufacturer to make something “ or “ a contract on a commodity

on liability with the provision of work.” A more complete and precise definition by Mustafa Ahmed
Zarqa” a contract of selling a manufacturable thing with an undertaking by the seller to present it
manufactured from his own material with specified description at a determined price.”
The person who manufactured the thing is called “Soni” and the person who ordered its manufacture

Steps of Istisna’a Transaction:

 based on the order from the customer

 undertakes to have manufactured or otherwise acquire the subject matter (Al-Masnoo) of
the contract
 according to specifications stipulated by the customer and
 sells it to the customer for an agreed upon price and method of settlement whether that be
in advance, by installments or deferred to a specific future date.

Parallel Istisna’a
Parallel istisna’a is the second sale contract entered into by the FHM with the subcontractor in order to
fulfill its contractual obligations in the first contract to the customer. It is assumed that the FHM will
always enter into a parallel istisna’a contract in order to satisfy its contractual obligations towards the
Istisna’a agreement with the customer. The subcontractor (seller or Al-Sani) in the parallel Istisna’a
contract has no direct legal relationship with the FHM’s customer in the Istisna’a contract. Parallel
Istisna’a is not a contingent transaction on the first Istisna’a contract.
This financing is based on the principle of Al-ljarah. By definition, Al-ljarah is a contract where the
benefits/use of an asset is transferred by the owner (lessor) to the lessee at an agreed price/rental
amount for an agreed period of time or Ijarah period. During the period the Ownership of the assets
remains with FHM.

The rules of Ijarah, in the sense of leasing, are very much analogous to the rules of sale, because in
both cases something is transferred to another person for a valuable consideration. The only
difference between Ijarah and sale is that in the latter case the corpus of the property is transferred to
the purchaser, while in the case of Ijarah, the corpus of the property remains in the ownership of the
transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee.

Basic Rules of Ijarah/Leasing

1. Ijarah/Leasing is a contract whereby the owner of something transfers its usufruct to another
person for an agreed period, at an agreed consideration.

2. The subject of Ijarah must have a valuable use. Therefore, things having no usufruct at all
cannot be given on Ijarah.

3. It is necessary for a valid contract of Ijarah that the corpus of the Ijarah property remains in
the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything
which cannot be used without consuming cannot be given on Ijarah basis. Therefore, the
Ijarah facility cannot be affected in respect of money, eatables, fuel and ammunition etc.
because their use is not possible unless they are consumed. If anything of this nature is given
on Ijarahd basis , it will be deemed to be a loan and all the rules concerning the transaction of
loan shall accordingly apply. Any rent charged on this invalid Ijarah transaction shall be an
interest charged on a loan.

4. As the corpus of the Ijarah Assets remains in the ownership of the lessor, all the liabilities
emerging from the ownership shall be borne by the lessor, but the liabilities referable to the
use of the property shall be borne by the lessee.

5. The period of Ijarah must be determined in clear terms.

6. Lessees cannot use the Ijarahd asset for any purpose other than the purpose specified in the
Ijarah agreement. If no such purpose is specified in the agreement, the lessee can use it for
whatever purpose it is used in the normal course. However if he wishes to use it for an
abnormal purpose, he cannot do so unless the lessor allows him in express terms.

7. The lessee is liable to compensate the lessor for every harm to the Ijarah asset caused by any
misuse or negligence on the part of the lessee.
 8. The Ijarah asset shall remain in the risk of the lessor throughout the Ijarah period in the sense
that any harm or loss caused by the factors beyond the control of the lessee shall be borne by
the lessor.

9. A property jointly owned by two or more persons can be given on Ijarah basis, and the rental
shall be distributed between all the joint owners according to the proportion of their respective
shares in the property.

10. A joint owner of an Asset can given on Ijarah basis his proportionate share to his co-sharer
only, and not to any other person.

11. It is necessary for a valid Ijarah that the Ijarah asset is fully identified by the parties.

FHM will provides customers with short to medium term financing by way of Ijarah/leasing and finally
acquiring items such as:

• Plant and machinery

• Property
• Computers and information technology equipment
• Motor vehicles and heavy machinery
• Other fixed assets.

Sale & Lease Back

In this case, the customer will first sell the asset to the FHM which constitutes the financing amount,
with the understanding that the FHM will given on Ijarah it back to the customer. This is also known as
Sale and Lease back transaction. However the FHM will not sell the assets back to Customer within
twelve months.