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Risk Management Through the Salam Contract in Islamic Finance

Posted on 22nd December 2010 by Camille Paldi,

 

 

 

 

Paldi continued on to discuss the concept of salam and parallel salam through which farmers can obtain financing for crops without taking an interest loan.  For example, a bank will provide funds to a farmer in advance for future delivery of the crop.  This allows the bank to lock in a lower price i.e. the price at the time of future delivery may be higher than the price at the time of finalizing the salam contract.  The farmer also receives the financing necessary to grow his/her crops.  The crops must be fungible, interchangeable, and readily available in the market as the famer must replace the crops with the crops readily available in the market in case of crop failure.  The bank contracts with an end-buyer, who pays the bank a higher price for delivery of the crop through a parallel salam.  Once the bank receives the delivery of the crops from the first farmer, the bank then passes the crops on to the end-buyer at a higher price and the difference between the two prices is the profit for the bank. 

 

(AMANIE)

Salam and Risk Management in Salam

http://www.financialislam.com/salam.html

Derivative Instruments and Islamic Finance

http://www.islamic-world.net/economics/derivative_instruments.htm

Futures, Forwards, and Islamic Law

http://hubpages.com/hub/Futures-Forwards-and-Islamic-Law

On the Pareto-Optimality of Futures Contracts over Islamic Forward Contracts: Implications for the Emerging Muslim Economies

http://web.cenet.org.cn/upfile/68807.pdf

Muw’adah  Valid for Forward Forex Contracts

http://www.arabianbusiness.com/muwa-adah-valid-for-forward-forex-contracts-scholar-342721.html

http://www.financialislam.com/2/post/2010/8/muwaadah-valid-for-forward-forex-contracts.html


Posted on 22nd December 2010 by Camille Paldi


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