The possibility of application of salam in Malaysian Islamic banking system

Abstract

PurposeThis research aims to explore the theoretical nature of salam contract in depth, the extent of its use in the banking arena of Malaysia and to test the theoretical feasibility of its future application by the Islamic banks in Malaysia by suggesting an Islamic banking product structure based on salam contract.Design/methodology/approachThis is a legal exploratory study primarily focused on library research.FindingsSalam contract is more susceptible to risks than the rest of the Islamic commercial contracts used by the Islamic banks in Malaysia and none of the Islamic banks in the country utilize this type of contract as a mode of financing. However, the research indicates that a feasible banking product based on salam contract could be formulated to help poor farmers in the country. To prove this a new model product based on salam contract to help farmers is created by the authors and the pros and cons of the product with the risk mitigating ways are explored. It is found that theoretically, this product is workable.Originality/valueThis research will complement the knowledge based on practical applicability of salam and is targeted to the Islamic financial Institutions in Malaysia, who are the prospective beneficiaries.

The Potential of Bai Salam in Islamic Social Finance to Achieve United Nations’ Sustainable Development Goals

“…The proposed models aim to take benefit of the risk sharing nature of the contract, combined with the benevolence of the global social organizations to propose a sustainable solution to poverty. Like forward sale contract, Salam contract reduces the risk of future price volatility (Muneeza et. al., 2011) and enhance market liquidity (Kaleem and Ahmad, 2010).…”

“…Islamic financial instruments, such as Bai Salam and Qard Al-Hasan, are viable alternatives for the interest-based loans as envisaged by the Islamic finance ecosystem (Obaidullah, 2015). If implemented correctly, Salam contract can help to alleviate poverty and potentially end hunger (Muneeza et. al., 2011).…”

“…A number of Islamic scholars proposed the use of Salam in financing agricultural businesses with other Islamic financial instruments (Muneeza et. al., 2011) and financial technological such as crowdfunding platform (Saiti et al, 2018).…”

“…Another common risk mitigation technique is to adopt parallel Salam, where the financier enters two Salam contracts with a farmer and a third party simultaneously. Under this arrangement, the sale and delivery of the agricultural products will be done by the third party without intervention from the bank (Muneeza et. al., 2011).…”

The Role of Islamic Banks Managing Waqf Institutions to Promote the Indonesian Agriculture Sector

“…Then, bai salam (forward sale agreement) is defined as a contract of sale of goods where the good is given in the future and the price is fully paid in the beggining especially in agricaltural business (Muneeza, Yusuf, & Hassan, 2011). Bai salam is effective to be implemented in Indonesian agriculture sector.…”