UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for Sukuk al Salam

Sukuk Al Salam

 

 

SUKUK AL-SALAM

  1. This is a treasury facility equivalent to a ‘government treasury bill,’ but compliant to Sharia’h principles managed by the Central Bank of Bahrain.
  2. A Special Purpose Vehicle (SPV) will initially issue Sukuk al-Salam to International Financial Institutions (IFI’s), which are looking for short- term investments.  The Sukuk are subscribed to on a cash basis to form the capital/purchase price for the salam commodity.
  3. The Sukuk al-Salam represents the rights of investors/salam purchasers.  IFI’s receive the salam commodity for example after two months pursuant to the execution of the salam contract.  (Pay now, receive the commodities at an agreed upon date in the future).
  4. To mitigate the risk to the investors/IFI’s (market risk) and to effect the fixed income feature of the ‘government treasury bill,’ a third party who is the ultimate commodity purchaser will undertake under wa’d* principle to purchase the  salam commodity from the investors upon the delivery of the commodity to them.
  5. The promised price to be paid by this third party will comprise the principal and profit for the Sukuk Al-Salam investors.

*Wa’d is an undertaking or promise given by the promisor in favor of the promisee.  The wa’d would bind the promisor and not the promisee.  If the promisor were to breach the undertaking, he or she is to compensate the promisee of all the actual damages arising from the breach of the promise.

The Concept of Wa’d in Islamic Finance  http://www.kantakji.com/fiqh/Files/Finance/N418.pdf

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

 Basic features and conditions of Salam

  1. “The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Shari’ah. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Muslim jurists are unanimous in their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer for two or three days, but this delay should not form part of the agreement.
  2. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
  3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
  4. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
  5. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
  6. The exact date and place of delivery must be specified in the contract.
  7. Salam cannot be effected in respect of things, which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari’ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.”
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