Describe the DIFFERENCE BETWEEN SALAM AND ISTASNA.

Salam and Istisna financing are both exception given to the general principle
of syariah in muamalah at the time no physical goods or finish goods available in
the time of sale and purchase transaction to avoid gharar.

Salam Financing
Bai’ as-Salam is the sale of a deferred item in exchange for an immediate forward
price. A salam contract referred to a commodity for deferred delivery in exchange
for an immediate cash payment. This concept has been used by banks to hedge
against inflation on other receivables due (on other assets such as murabahah); the
forward income on salam being worth more.

Salam was allowed by the Holy Prophet (SW) subject to certain conditions. The
basic purpose of this sale was to meet the needs of small farmers who needed
money to grow their crops and to feed their families up to the time of harvest. After
the prohibition of riba, they could not take usurious loans. Therefore, it was
allowed for them to sell the agricultural products in advance. Salam was beneficial
to both the seller and buyer, whereby the seller received the price in advance, and
for the buyer, the price in salam used to be lower than the price in spot sales. Most
of the time, salam is used in dealing with agriculture or commodities. However,
not all commodities are tradable under salam. Only fungible types of commodities
are allowed for salam contract.

Istisna’ Financing
‘Istisna’ is the second kind of sale where a commodity is transacted before it
comes into existence usually in the manufacturing and construction activities. It
means a contract with a skilled person to make something. The transaction of
istisna’ comes into existence when the manufacturer undertakes to manufacture the
goods for him with material from the manufacturer. But it is necessary for the
validity of istisna’ that the price is fixed with the consent of the parties and that
necessary specification of the commodity (intended to be manufactured) is fully
settled between them. The contract of istisna’ creates a moral obligation on the
manufacturer to manufacture the goods.
Differences between Istisna’ and Salam:
There are several other points of difference between istisna’ and salam which are
summarized below:
i. The subject of istisna’ is always applicable to materials that require
transformation by a manufacturing or construction process. On the other
hand, salam is a contract of sale of specified goods, the validity of which is not
attached to a condition that the goods must be manufactured or constructed. In
addition, salam usually involves agriculture products.
ii. It is necessary for salam that the price is paid in full in advance
(according to some scholars). It is very important to release all capital during the
critical stage of agriculture production as one of the objective to help the farmers.
However in istisna’ the price may be paid in cash or by instalments. With the
parallel ‘istisna’ the main istisna’ contract between the bank and customer involve
deferred repayments, and the bank subsequently enters onto parallel istisna with
sub contractor for all or part of the project with cash released during construction
period in staggered.
iii. The contract of salam, once affected, cannot be cancelled
unilaterally if the final product does not meet the predetermined specifications,
while the contract of istisna’ can only be cancelled before the manufacturer starts
the work.
iv. The time of delivery is an essential part of the sale in salamand the
deal can be cancelled if there is delay in delivery time, while it is not necessary
in istisna’ that the time of delivery is fixed.

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QUESTION NO# 2