Islamic Finance
Salam & Istisna'

It is one of the basic conditions for the validity of a sale in Shari’ah that the commodity (intended to be sold) must be in the physical or constructive possession of the seller. There are only two exceptions to this general principle in Shari’ah. One is Salam and the other is Istisna’. Both are sales of a special nature: Salam is used to finance agricultural like goods and Istisna’ is used to finance manufactured like goods.

Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The contract of Salam creates a moral obligation on the Salam seller to deliver the goods,. The Salam contract cannot be cancelled once signed.

s the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna’ comes into existence. 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, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. However after the manufacturer has started the work, the contract cannot be cancelled unilaterally.