Salam and Parallel Salam

Salam and Parallel Salam:
“Salam” refers to a type of contract where a buyer pays upfront for goods to be delivered at a
later date. For example, a farmer might sell a portion of their harvest in advance and deliver it
later after it's grown.
"Parallel Salam" in Islamic finance involves two Salam contracts linked together. Let's say
there's a farmer, Ali, who needs money to buy seeds for his crops. He enters into a Salam
contract with Buyer A, agreeing to deliver a specific amount of crops at a future date in exchange
for money upfront.
At the same time, Buyer A doesn't actually need the crops but wants to make a profit by selling
them later. Buyer A then enters into a Parallel Salam contract with Buyer B, selling the same
quantity of crops at a higher price than the initial Salam contract with Ali. This allows Buyer A
to profit without physically handling the goods.
Accounting Treatment of Salam Financing and Parallel

Salam Transactions:
Recognition of Transactions:
When an Islamic bank pays money or provides a benefit to someone, that's when they officially
recognize a Salam financing transaction.
Example: If the bank gives money upfront to a farmer for crops to be delivered later, that's
recognized as a Salam financing deal.
For Parallel Salam transactions, the bank recognizes the deal when it receives money or a benefit
from someone else.
Example: If the bank gets paid by another party for the same future delivery of crops, that's
recognized as a Parallel Salam deal.
At the Start of the Deal:

Whatever money is paid becomes the capital for the transaction. If goods or benefits are given
instead of money, their value becomes the capital.
Example: If $10,000 is paid or goods worth $10,000 are provided, that's the capital.
At the End of a Financial Period:

The bank rechecks the value. If there's a chance that the buyer won't deliver the goods or their
value might drop, the bank sets aside an estimated amount for potential losses.
Example: If there's a risk the crops won't be delivered, the bank sets money aside for potential
losses.
Salam financing deals are listed in the bank's records as "Salam Financing."
Parallel Salam deals are marked as a liability under "Parallel Salam."
Example: Salam financing is recorded as money given out, while Parallel Salam is noted as
money owed to others.
Receipt of Goods:
Goods received are recorded based on what they originally cost.
Example: If crops cost $9,000, that's what's recorded in the bank's records when they receive
them.
If the received goods are of different quality but the same value, they're recorded at their original
cost.
Example: If the quality of delivered crops is slightly different but still worth $9,000, that's
what's recorded.
If the received goods are worth less than what was expected, the bank records them at their
current value, and the difference counts as a loss.
Example: If the expected $10,000 worth of crops is delivered but is only worth $8,000, the bank
records a $2,000 loss.
Delayed Goods:
If the bank doesn’t get the goods on time and the delivery date is extended, the recorded value of
the goods remains the same.
Example: If crops are delayed but still expected, their value stays as initially recorded until they
arrive.
Example:
Salam Transaction with Ali:
IBank enters into a Salam contract with Ali, providing $10,000 upfront for 1,000 kilograms of
wheat to be delivered in three months.
IBank records this as Salam Financing in its financial statements.
Parallel Salam Transaction with Buyer A:

Buyer A, not needing the wheat, enters into a Parallel Salam contract with IBank to buy the same
1,000 kilograms of wheat for $11,000 to be delivered in three months.
Receipt of Goods from Ali:

After three months, Ali delivers the 1,000 kilograms of wheat to IBank as per the Salam
agreement.
Delivery to Buyer A:
IBank, having received the wheat from Ali, delivers it to Buyer A as agreed in the Parallel Salam
contract.
Accounting Entries:
IBank records the wheat received from Ali at its historical cost, say $9,000, in its financial
statements under Salam Financing.
Simultaneously, IBank records the wheat delivered to Buyer A in the Parallel Salam contract at
its contracted value, $11,000, as a liability under Parallel Salam in its financial records.
Profit from Parallel Salam:

IBank's profit from the Parallel Salam transaction is the difference between what it paid Ali
($9,000) and what it received from Buyer A ($11,000), which amounts to $2,000.

Salam and Parallel Salam

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Salam and Parallel Salam:

Accounting Treatment of Salam Financing and Parallel

At the Start of the Deal:

At the End of a Financial Period:

Parallel Salam Transaction with Buyer A:

Receipt of Goods from Ali:

Profit from Parallel Salam:

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