Salam and Istisna: Islamic Forward Contracts for Financing and Trade

Salam and istisna are not legal devices or tricks to avoid interest. They are genuine contracts of sale that have been recognized by the Shari’ah since the time of the Prophet Muhammad (peace be upon him). They have their own rationale and benefits for both the seller and the buyer, as well as for the society at large.

Salam and istisna are both forward contracts, meaning that they involve the sale of goods that are not yet available or manufactured at the time of the contract. The seller undertakes to deliver the goods at a future date, while the buyer pays the full price in advance in salam, or partially or fully in istisna. 

The main purpose of these contracts is to provide liquidity and financing to the seller, who can use the funds to produce or acquire the goods. At the same time, they provide an opportunity for the buyer to purchase the goods at a lower price than the prevailing market price at the time of delivery.

There are several differences between salam and istisna contracts and interest-based loans. First, salam and istisna are based on a real sale of goods, not on a loan of money.  The subject matter of these contracts is not money, but commodities that have intrinsic utility and value.

Second, salam and istisna involve risk-sharing between the seller and the buyer. The seller bears the risk of producing or procuring the goods according to the specifications agreed upon in the contract. If he fails to do so, he is liable to compensate the buyer for any loss or damage. The buyer bears the risk of price fluctuations in the market. If the market price of the goods at the time of delivery is higher than the contracted price, he gains by paying less. If it is lower, he loses by paying more. 

Third, salam and istisna serve a social purpose by facilitating trade and commerce, especially in the agricultural and industrial sectors. They enable farmers and manufacturers to obtain funds for their production activities without resorting to interest-based loans. They also enable consumers and traders to secure their needs or profits by purchasing goods at a discounted price.

How do you ensure that the seller does not misuse or divert the funds received from the buyer? How do you prevent speculation and manipulation in these contracts? How do you deal with inflation and currency fluctuations that may affect these contracts?

The Islamic banks and financial institutions must ensure that they use salam and istisna funds only for purchasing or producing the goods specified in the contract, not for any other purpose. They must also ensure that they deliver the goods on time and according to quality standards agreed upon in the contract. They must also avoid engaging in speculative or manipulative transactions that may harm the interests of either party or create instability in the market. As for inflation and currency fluctuations, they can be addressed by using appropriate indices or benchmarks to adjust the price or quantity of goods in case of significant changes in the value of money or commodities.