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Salam

Salam is deferred delivery contract. It is essentially a forward agreement where delivery occurs at a future date in exchange for spot payment of price. Unlike earlier mechanism of murabaha and ijara, Salam was originally designed as a financing mechanism for small farmers and traders. Under a Salam agreement, a trader in need of short- term funds sells merchandize to the bank on deferred delivery basis. It receives full price of the merchandize on the spot that serves its financing need at present. At a pre- agreed future date, it delivers the merchandize to the institution. The institution sells the merchandize in the market at the prevailing price. Since the spot price that the institution pays is pegged lower than the expected future price, the transaction should result in a profit for the institution.