Salam Agreement (Malaysia)

A Salam Agreement in Malaysia records the terms the parties accept and the commitments each makes to the other.

Salam financing in Malaysia is regulated under the Islamic Financial Services Act 2013 (IFSA 2013) and BNM Policy Documents issued pursuant to Section 33 of IFSA 2013. Bank Negara Malaysia's Shariah Advisory Council (SAC) has issued resolutions affirming the permissibility of Salam under Malaysian Islamic finance practice, in line with AAOIFI Shariah Standard No. 10 on Salam and Parallel Salam. Islamic banks in Malaysia — including Bank Islam Malaysia Berhad, Hong Leong Islamic Bank, and AmBank Islamic — use Salam-based products for commodity financing, particularly using crude palm oil (CPO), crude oil, or standardised commodities traded on Bursa Malaysia Derivatives exchange.

The parallel Salam structure involves the Islamic bank entering into two separate Salam contracts: in the first, the bank buys commodities from a seller (typically through a commodity broker on Bursa Malaysia) with full advance payment; in the second, the bank sells the same quantity and type of commodity to the customer at a higher price, with the customer paying in instalments. This structure enables the bank to provide the customer with cash (proceeds of selling commodities in the market) while earning a return through the price differential — the Salam equivalent of an interest-bearing working capital loan in conventional banking.

Salam differs fundamentally from Istisna' in that Salam requires full advance payment by the buyer at contract formation, whereas Istisna' permits deferred or staged payment. Salam is restricted to fungible, standardised commodities (grains, metals, agricultural produce) that can be described with precision, while Istisna' is for manufactured or constructed goods requiring human skill. Salam also differs from spot sale (bay' al-mutlaq) in that delivery is necessarily deferred — a Salam contract with immediate delivery would simply be a spot sale.

Under BNM's SAC resolutions and AAOIFI Standard No. 10, the Salam contract must specify the commodity (type and grade), quantity (by weight, volume, or count), quality specifications, delivery date, and delivery location with certainty. Failure to specify any of these elements renders the Salam contract void under Shariah. The buyer in a Salam contract cannot require the same commodity supplied by the seller to be used for repayment, as this would constitute a prohibited riba transaction; delivery must be of the commodity itself or a market substitute of identical specifications.

A Salam Agreement in Malaysia is needed whenever a party requires Shariah-compliant advance payment financing for the future delivery of commodities or standardised goods.

A Salam Agreement is required when an agricultural producer — such as a palm oil plantation in Sabah or Sarawak, a rice farmer in Kedah, or a rubber estate in Negeri Sembilan — needs advance working capital before harvest. An Islamic bank provides cash by purchasing the future commodity under a Salam contract, with the farmer delivering the specified commodity at harvest time.

A Salam Agreement is needed when a Malaysian Islamic bank structures a Tawarruq (commodity Murabahah) working capital facility for a corporate customer. The bank enters into back-to-back Salam contracts using commodities on Bursa Malaysia Derivatives — purchasing CPO or other commodities from a broker and selling them to the customer under a Salam arrangement, then the customer authorises the bank to sell the commodity in the spot market, resulting in cash proceeds disbursed to the customer.

A Salam Agreement is required when a commodities trading company in Malaysia seeks Islamic trade finance from a bank to fund the purchase of goods for export. The bank provides financing through a Salam structure, advancing payment for the goods in exchange for future delivery, then disposing of the commodity through a parallel Salam with the end buyer.

A Salam Agreement is needed when a manufacturing company requires raw material procurement financing from an Islamic financial institution. The bank purchases the specified raw materials (metals, chemicals, agricultural inputs) under a Salam contract with the supplier, with full advance payment, and arranges for future delivery to the manufacturer.

A Salam Agreement is required in any transaction where Bank Negara Malaysia's licensing and product approval requirements under IFSA 2013 mandate that a Shariah-approved commodity financing product be documented as a formal Salam contract, with all essential elements (commodity description, quantity, delivery date, full advance payment) meeting BNM's SAC Shariah standards.

A valid Salam Agreement in Malaysia must contain the following essential elements under Shariah principles and IFSA 2013 regulatory requirements.

Identification of Parties: The agreement must state the full legal names, SSM registration numbers, and addresses of the buyer (al-muslim, typically the Islamic bank) and the seller (al-muslam ilayh, the commodity seller or customer). For corporate parties, Companies Act 2016 registration details are required.

Commodity Description: BNM's SAC and AAOIFI Standard No. 10 require that the Salam commodity be described with complete certainty — commodity type (e.g., crude palm oil, refined sugar, steel billet), grade or quality standard (e.g., CPO Grade A, MPOB specification), and any other characteristics that distinguish the commodity in the market.

Quantity: The quantity of the commodity must be precisely stated in the appropriate unit of measurement — metric tonnes for agricultural commodities, barrels for petroleum products, or pieces/units for standardised manufactured goods. Ambiguous or approximate quantities render the Salam contract void under Shariah.

Full Advance Payment: A defining element of Salam is the requirement that the full purchase price be paid by the buyer (bank) to the seller at contract formation. BNM's SAC resolutions do not permit partial advance payment in a Salam transaction. The payment amount must be stated in Malaysian Ringgit (RM) and the payment date (which must be the contract date or within three days under classical Hanafi Fiqh) must be specified.

Delivery Date and Location: The future date on which the seller must deliver the commodity to the buyer must be fixed and certain — a specific calendar date (DD/MM/YYYY) or a defined harvest or production period. The delivery location (warehouse, port, or delivery point) must also be specified. BNM's SAC permits delivery in tranches over a defined period for agricultural commodities subject to seasonal production.

Price Certainty: The Salam price paid in advance must be fixed and certain at contract formation. For parallel Salam structures, the two Salam contracts (bank-seller and bank-customer) must have independently determined prices — the customer's deferred payment price may be higher than the advance price paid to the supplier, reflecting the bank's profit margin.

Default Provisions: The agreement must specify the seller's obligations upon failure to deliver (compensation for loss, replacement delivery, or Salam price refund) and the buyer's rights under the Contracts Act 1950. For financial Salam products regulated by IFSA 2013, BNM's Policy Document on Salam sets out additional requirements for default management.

Additional compliance elements for a Salam Agreement (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.