Introduction 106. MINIMUM CAPITAL REQUIREMENTS FOR ISLAMIC FINANCING ASSETS

C.2 SALAM

1. Introduction 106.

This section sets out the minimum capital requirement to cover credit and market price risks arising from entering into contracts or transactions that are based on the Shar ī`ah rules and principles of Salam. The IIFS is exposed to the a credit counterparty risk of not receiving the purchased commodity after disbursing the purchase price to the seller, and b price risk that the IIFS incurs from the date of execution of a Salam contract, which is applicable throughout the period of the contract and beyond the maturity date of the contract as long as the commodity remains on the balance sheet of the IIFS. 107. This section is applicable to a Salam contracts that are executed without any Parallel Salam contracts and b Salam contracts that are backed by independently executed Parallel Salam contracts. 108. A Salam contract refers to an agreement to purchase, at a predetermined price, a specified kind of commodity 16 which is to be delivered on a specified future date in a specified quantity and quality. The IIFS as the buyer makes full payment of the purchase price upon execution of a Salam contract or within a subsequent period not exceeding two or three days as deemed permissible by its SSB. 109. In certain cases, an IIFS enters into a back-to-back contract, namely Parallel Salam, to sell a commodity with the same specification as the purchased commodity under a Salam contract to a party other than the original seller. The Parallel Salam allows the IIFS to sell the commodity for future delivery at a predetermined price thus hedging the price risk on the original Salam contract and protects the IIFS from having to take delivery of the commodity and warehousing it. 110. The non-delivery of commodity by a Salam customer i.e. counterparty risk does not discharge the IIFS’s obligations to deliver the commodity under a Parallel Salam contract, and thus exposes the IIFS to potential loss in obtaining the supply elsewhere. 111. The obligations of an IIFS under Salam and Parallel Salam are not inter-conditional or interdependent, which implies that there is no legal basis for offsetting credit exposures between the contracts. 112. In the absence of a Parallel Salam contract, an IIFS may sell the subject-matter of the original Salam contract in the spot market upon receipt, or, alternatively, the IIFS may hold the commodity in anticipation of selling it at a higher price. In the latter case, the IIFS is exposed to price risk on its position in the commodity until the latter is sold.

2. Credit