Islamic Economics Institute

Wednesday Academic Dialogue

                                                

Salam-based System of Finance

Using Salam contract to manage liquidity, assets, and liabilities

Sami Ibrahim Al-Swailim
Islamic Financial Product Development Center
Islamic Development Bank, Jeddah, Saudi Arabia
 

Abstract. Islamic financial institutions are finding difficulties in balancing objectives and values of Islamic economics and demands of the financial markets. This tension arises most clearly from the wide spread use of commodity-murabaha transactions, which are forms of organized tawarruq and reverse tawarruq, despite the fact that the main two Fiqh academies in the Muslim world, the OIC and MWL academies, have ruled that such transactions are not Shari’ah compliant. While the industry is growing and breaking new grounds in markets and investors, ground-breaking growth in products and systems is still lagging behind. An important feature of Islamic finance is its global view. Finance is integrated with real activities, assets are linked with liabilities, and sources of funds are connected with its uses. Trying to find a solution for one piece of the “puzzle” will give a short-term solution that may not be sustainable. The objective of this proposal is to explore a system-level solution based on the well-known salam contract. In the following pages, the salam contract is introduced, followed by the proposed system-level application. Issues and challenges are presented throughout with suggested solutions. 

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Last Update 5/28/2014 10:56:16 AM