Bai’-Salam may be defined as advance purchase of a commodity / product making advance payment by the Bank on execution of a written contract wherein it is clearly mentioned that the commodity will be delivered as per specification, size, quality, quantity at a fixed future time in a particular place. The burden of cost of transportation and storage is also specially mentioned in the contract to avoid confusion. Laterally ‘Bai-Salam’ means advance purchase and sale. It can also be defined as a sale where the seller undertakes to supply some specific Commodities / Products to the buyer at a future time in exchange of an advanced price paid on the spot. Here the price is paid in cash, but the delivery of the goods is deferred.
Features of Bai’ Salam
- There must be a written contract between the Bank and the Client which shall be the principal instrument to govern the advance buying and selling. The name and description of the commodity, specification, quantity, quality, size, date, time and place of delivery, transportation cost & godown rent if any, must be mentioned clearly in the contract.
- Purchase price, shall be paid in advance as mentioned in the contract immediately after signing the agreement. If mentioned in the contract delivery of the commodity/product can be taken in installments also.
- If the client fails to deliver the commodity in time as per specification as well as in specified quantity, the client shall be bound to repay the price received earlier in advance against the product along with compensation for delayed period. On the other hand, if the Bank receives less than the quantity contracted for the client must pay back the value of product supplied less than the quantity contracted for.
- It is not necessary to mention cost of product and profit separately in the contract. Only purchase price of the product may be mentioned.
- After taking delivery of the goods, Bank shall be the owner & shall bear all risk till delivery of the same to the purchaser.
- Bai’-Salam is mainly used for Export Financing.
- In this Mode of Investment the goods to be sold are initially not ready. These goods are needed to be produced / manufactured, they have no existence initially and the goods are not under physical possession of the seller. Initially if the commodities / products are already available for sale, Bai-Salam will not be applicable.
- Generally, Industrial and Agricultural products are purchased/ sold in advance under this mode of Investment to infuse finance so that production of goods to deliver is not delayed due to shortage of fund/cash.