3) T24 Islamic Banking - Bai Salam R16

In this learning unit, unit , we will understand understand the Bai Salam product & the workflow involved.

The Course Objective is to equip participants with adequate knowledge on the Bai Salam finance product.

Bai Salam is a contract in which advance payment is made for goods to be delivered at a future date. The seller undertakes to supply some specific goods to the buyer at a future against price fully paid in advance, at the start time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The term ‘Bai-Salam’ has been derived from Arabic words (Bai’un and Salamun). The word means ‘purchase and sale’. ‘Bai-Salam’ means advance purchase and sale. Generally, Agricultural products are purchased/ sold in advance under Bai-Salam mode of Investment to infuse finance so that production is not hindered due to shortage of fund/cash. Salam addresses two important aspects of liquidity for the producer and protection of the rig hts of the buyer.

This is one mode of investment allowed by Islamic Shari‘ah in which commodity is sold without existence or physical/constructive possession of the seller. If the commodity is ready for sale, Bai-Salam, cannot be the mode if investment. In such cases the sale may be either as Bai-Murabaha or Bai-Muajjal which is spot sale or deferred sale.

T24 Basic Set up Tables for Islamic Banking R14.1

Salam cannot be affected on a particular commodity or on a product of a particular field or farm. The exact date and place of delivery must be specified in the contract. Salam agreement covers the Quantity, Quality and Workmanship.

T24 Basic Set up Tables for Islamic Banking R14.1

Bai Salam workflow is described in this slide.

T24 Basic Set up Tables for Islamic Banking R14.1

In case the Bai Salam contract is required for a quantified assets (eg., agricultural produce etc.) the asset details can be specified straight away during the ‘Asset Request stage’ where the commodity can be selected from the dropdown (the values in this field are fetched from IS.COMMODITY table) The commodity details, with Units, unit price , quantity , customer, currency, vendor to be mentioned here. Status is shown as Advance.Purchase as per parameter setting (IS.PARAMETER).

T24 Basic Set up Tables for Islamic Banking R14.1

Additional cost if any can be included to the contract. Cost Payment type can either be contract or vendor, which means that the cost payment is to be paid by the client or the bank. (Cost cannot be added to finance, as the product needs to be tracked for delivery of asset which can be in full or partial). Action tasks if any can be maintained.

T24 Basic Set up Tables for Islamic Banking R14.1

Accounting entries are generated at Advance.Purchase status as shown here.

T24 Basic Set up Tables for Islamic Banking R14.1

Having entered into a Bai Salam agreement and the details of the Asset/commodity specified, the next step is to make payment to the vendor who is the producer of the commodity. Generally, Adhoc payment to vendor or FT payments or cash payments ( TT payments ) are done. The producer upon receipt of finance shall get started with the production of the asset. The retention percentage is ideally set to zero or null.

T24 Basic Set up Tables for Islamic Banking R14.1

Accounting entry is raised by debiting Multisupplier account & crediting the vendor account.

T24 Basic Set up Tables for Islamic Banking R14.1

The producer of the commodity shall deliver on the stipulated date which is captured as ‘Delivery of asset’ where the delivered quantity is captured. The delivered quantity can be in full or can be delivered in parts. The delivered quantity units is recorded with the delivery date. The details of the asset requested , delivered and Sold is maintained as part of Inventory management.

T24 Basic Set up Tables for Islamic Banking R14.1

If quantity is delivered in parts, delivery tracking of assets will show the quantity delivered & quantity that is pending delivery. Below Accounting entries are generated during Commodity delivery : DR Purchase Order Bai Salam CR Goods in Transit Bai Salam

T24 Basic Set up Tables for Islamic Banking R14.1

Once the asset is in possession, the next step is the sale of the asset. The asset held by the bank can be sold to different customers, hence the commodity sale details are captured before the actual sale of asset using AA. Details such as purchase reference, sale unit price & sale quantity are to be input. The net profit/loss amount is calculated and accounted by the system based on the purchase price & sale price.

T24 Basic Set up Tables for Islamic Banking R14.1

Sale of asset to customer’s are done in AA . The details such as customer , currency , IS.Product & the IS.CONTRACT.REF are to be input. Commodity Sale ref. to be included which will default the commitment amount. Details such as Term or maturity date, Profit amt. or percentage, payment schedules are defined here for the sale.

T24 Basic Set up Tables for Islamic Banking R14.1

In this workshop, we will open a Bai Salam contract with the details as per slide.

T24 Basic Set up Tables for Islamic Banking R14.1

Asset details are captured in the asset request stage as Rice is a quantifiable asset. Customer id, account number, IS Product, dates, commodity, units, unit price, purchase quantity, vendor details are to be input here.

T24 Basic Set up Tables for Islamic Banking R14.1

This slide shows the steps to authorise the captured/requested asset.

T24 Basic Set up Tables for Islamic Banking R14.1

Next step is to make payment to vendor.

T24 Basic Set up Tables for Islamic Banking R14.1

Vendor payment to be authorised as shown.

T24 Basic Set up Tables for Islamic Banking R14.1

Next step is delivery of commodity to bank. As per workshop, we have 2 commodity deliveries for 100 units & 250 units individually. In this slide the 1 st 100 units delivered is captured & authorised.

T24 Basic Set up Tables for Islamic Banking R14.1

Here, the next 250 units of asset delivered is recorded & authorised.

T24 Basic Set up Tables for Islamic Banking R14.1

The next step is asset sale request. The received units of 350 is now ready to be sold to another customer 98765, which is initially recorded. As per workshop, sale quantity is 350 with unit price 170.00 . Hence the net profit is 7000.

T24 Basic Set up Tables for Islamic Banking R14.1

Authorisation of Commodity sale request is shown in this slide.

T24 Basic Set up Tables for Islamic Banking R14.1

Sale of asset to customer is done in AA. The following slides explain the navigation in AA. Sale to customer 98765 is made for the 350 units. Customer, Commodity Sale ref. ,currency, date and IS.Product to be input.

T24 Basic Set up Tables for Islamic Banking R14.1

Commitment amount is defaulted by the system (based on commodity sale request), other details like maturity date or term needs to input here. The profit percentage or amount is also to be specified. System shows the AA account number created under Account tab.

T24 Basic Set up Tables for Islamic Banking R14.1

As per workshop, a Linear payment schedule is defined here.

T24 Basic Set up Tables for Islamic Banking R14.1

Navigation to authorise the Sale is shown here.

T24 Basic Set up Tables for Islamic Banking R14.1

Upon authorisation, the status of the finance would show ‘Current’

T24 Basic Set up Tables for Islamic Banking R14.1

This slide shows the Linear Payment schedule generated & accounting entries at Advance.Purchase status and commodity delivery stage.

T24 Basic Set up Tables for Islamic Banking R14.1

Accounting entries for Sale.

T24 Basic Set up Tables for Islamic Banking R14.1

In the learning unit, we understood the Bai Salam finance product & its workflow.