Bai Salam (Advance Purchase) and Parallel Salam in Islamic Finance

UAE Laws and Islamic Finance

Bai salam

Bai salam is an Islamic finance tool used to generate working capital and consists of a contractual sale in which advance payment is made by the buyer to the seller for the deferred supply of goods at a specified date pre-determined in the contract.  Thus, it is a sale and purchase transaction whereby the payment is made in cash at the point of contract, but the delivery of the asset purchased will be deferred to a pre-determined date…The price paid today represents a discount on the price, typically calculated by reference to a benchmark, such as LIBOR, plus a margin, that would have been paid if it were a cash sale at the time of the delivery.  The implied cost of capital to the Salam seller is the difference between the present value of the future market price of the good and the price that one would receive…

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