Bai Salam Financing is an advance payment against deferred delivery of goods. The
seller/customer undertakes to supply specific goods to the buyer/bank
at a future date in exchange of an advance price fully paid at spot,
but the supply of purchased goods is deferred to a fixed date. The
seller/customer gets in advance the money he/she/it wants in exchange
of his/her/its obligation to deliver the commodity later. The bank
buys the farm output to be produced in the future against the full
spot payment of the price which may be utilized by the farmer to meet
his/her/its financing needs. This finance is developed to meet
the need of farmers for working capital purposes to grow their crops up
to the time of harvest, it was beneficial to the bank also because
normally the price in Salam is lower than the price in spot sales.
Generally, this type of financing is used to meet short term working
capital requirements of farmers during farming process of both seasonal
crops and permanent plantations.
The major purposes of the financing includes purchase of seeds, fertilizers, pesticides, insecticides, herbicides, weedicides, manual sprayers, Maintenance of farm/plantation, machinery, and other working capital needs in terms of labor charges, water charges, utility charges, transport etc.The duration of Bai Salam transaction is usually a production cycle or eighteen months, whichever is shorter. The minimum/floor pricing of a specific financing product shall be set by the bank.
The major purposes of the financing includes purchase of seeds, fertilizers, pesticides, insecticides, herbicides, weedicides, manual sprayers, Maintenance of farm/plantation, machinery, and other working capital needs in terms of labor charges, water charges, utility charges, transport etc.The duration of Bai Salam transaction is usually a production cycle or eighteen months, whichever is shorter. The minimum/floor pricing of a specific financing product shall be set by the bank.
Possession of goods can be physical or constructive. If the bank has no expertise to sell the commodities received under Salam contract, then the bank can appoint the customer as its agent to sell the commodity in the market to the third party. A price must be determined in agency agreement on which the agent will sell the commodity but if the price is increased, the benefit can be given to the agent. Once agreed upon, a Salam contract cannot be revoked unilaterally by any party. But it can be cancelled or partially cancelled with mutual consent by returning the actual or proportionate amount of price paid.
In parallel Salam arrangement, there must be two different and independent contracts; one where the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on the other. Therefore, even if the farmer did not deliver the commodity on due date, the bank is duty bound to deliver the same. The bank can seek whatever recourse he has against the farmer, but he cannot rid himself from his liability to deliver the commodity parallel Selam contractors. If, due to any unforeseen reason, it is not possible to deliver the commodity on the due date, the bank and the customer could change the commodity with mutual consent.
In parallel Salam arrangement, there must be two different and independent contracts; one where the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on the other. Therefore, even if the farmer did not deliver the commodity on due date, the bank is duty bound to deliver the same. The bank can seek whatever recourse he has against the farmer, but he cannot rid himself from his liability to deliver the commodity parallel Selam contractors. If, due to any unforeseen reason, it is not possible to deliver the commodity on the due date, the bank and the customer could change the commodity with mutual consent.
Similarly, if seller/farmer has delivered defective goods, which do not conform to the agreed specifications, the bank is still obligated to deliver the goods to parallel Selam contractors according to the specifications agreed with them. A Salam arrangement cannot be used as a buy back facility where the seller in the first contract is also the purchaser in the second. Even if the purchaser in the second contract is a separate legal entity, but owned by the seller in the first contract; it would not tantamount to a valid parallel Salam agreement
Conditions for Bai Salam Financing
- It is necessary for the validity of Salam that the bank pays the price in full to the seller at the time of effecting the sale. The basic wisdom for allowing Salam is to fulfill the "instant working capital need" of the farmer. If it is not paid in full, the basic purpose will not be achieved.
- Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified.
- Salam cannot be effected on a particular commodity or on a product of a particular field or farm. E.g. Agreement to supply wheat of a particular field or the fruit of a particular tree is impermissible, since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain.
- All details in respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute.
- It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only, meaning what is normally weighed cannot be quantified and vice versa.
- The exact date and place of delivery must be specified in the contract.Salam cannot be effected in respect of things, which must be delivered at spot.The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. The period should be long enough to affect prices.
- Since price in Salam is generally lower than the price in spot sale; the difference in the two prices may be a valid profit for the Bank.
- The marketability and price stability of the agricultural crops to be financed should be identified at first hand.
- Before delivery, goods will remain at the risk of seller/customer and after delivery risk will be transferred to the purchaser/bank.
- The market value of substituted goods shall not be higher than the market value of the originally agreed commodity, at the time of delivery.
- If the customer offers better quality goods by his/her/its own consent, the bank shall preferably accept the same. However, in case of inferior quality of goods it has an option to accept or reject the goods.
- In case of default the customer shall pay an agreed amount of penalty.
- If the seller fails to perform his/her/its obligation, due to insolvency or genuine reasons, he/she/it shall be given an extension of a maximum days indicated in the bank policy. However, the bank may charge expenses incurred in relation with financing administration. and
- If the total or partial quantity is not available on due date, the bank has an option to wait until the time when the commodity becomes available or it could demand its money back.
- After purchasing a commodity by way of Salam, the bank can sell it through a parallel contract of Salam for the same date of delivery. The period of Salam in the second parallel contract is shorter and the price is higher than the first contract. The difference between the two prices shall be the profit earned by the Bank
- The bank can obtain a promise to purchase the yield from a third party. This promise should be unilateral from the expected buyer. The buyer does not have to pay the price in advance. When the bank receives the commodity, it can sell it at a pre-determined price to a third party according to the terms of the promise.
Specific Eligibility Criteria for Bai Salam Financing
- The applicant shall provide Land Holding Certificate and/or Land Lease Agreement, as the case may be,
- The applicant shall provide a supporting letter that confirms his organizing agency, or other appropriate government body as deemed necessary,
- The applicant shall provide its/his/her business plan.
- The applicant should have been in the business for at least one year and with a good business track record.
- Applicants shall provide provisional or audited financial statements (as the case may be)
- If the applicants are Associations, Cooperatives, Unions, or Commercial Farms, they shall provide a document that confirms acquiring or renting basic infrastructure, such as appropriate office and store (working premises).
- The Bank may financing both rain fed, semi-irrigated or irrigated farming.
- The bank shall demand a security in the form of a guarantee or mortgage in order to ensure that the seller/farmer delivers the products timely.
- The customer should buy crop insurance from appropriate insurance companies including fluctuation, and quality deterioration policies. (if the policy exists)
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