Islamic Finance follows a set of laws, Shariah, where specifics are put forth so that banking and financial transactions are completed in a fair and just way.
In terms of a Islamic Finance, Bai Salam is a contract transaction where an advance payment is made for particular goods or services that will be delivered at a later day. In modern banking term, this is essentially a prepaid transaction. The seller agrees to supply a specific product or service in exchange for a price (that is agreed upon and is just and fair) at the time of the contract signing.
In order to be Shariah-compliant, in Bai Salam the quality of such item must be explained in detail. This makes any dispute in the future null and void; only of course, if the seller was in fact honest in their explanation of the quality and condition of such item. In order for this Islamic finance transaction to occur, the item must be valuable and usable in terms of Shariah law. Also, the good in Bai Salam cannot involve currencies or metals such as gold or silver.
Some other specifics that are required in order for Bai Salam to be Shariah-compliant:
- Purchase price should be in cash and buying should occur at the time of sale. No partial payments are allowed.
- All specifics of the products or services must be discussed at the time of sale especially quality and quantity.
- The other things that can be sold using Bai Salam are items whose quality won’t change from time to time.
- Many Hanafi jurists believe the delivery time of items should not be less then one month’s time.
- The buyer cannot sell the item to someone else unless he accepts delivery from the seller him or herself.
In terms of financial transactions, Bai Salam seems to be difficult to be observed by most buyers and sellers. The transaction type started with agricultural farmers. However, if all the conditions set forth by Shariah law are followed, then other financial institutions can use this mode of finance as well.
In terms of mortgages, this transaction may not necessarily work effectively as the seller will have some inclination of the cost of the home. Thus, selling a home where you have an item of the price would not be Shariah-compliant in terms of a Bai Salam Islamic Finance banking transaction, however an Ijara wa-iqtina transaction would work best.