 In this module, we would be looking at a Salem structure which is quite popular in Islamic banking and finance. This is known as Salem, parallel Salem structure. As the name suggests, it involves a Salem contract and another Salem contract. So it has two Salem contracts which are used in such a way that there is a risk management benefit for at least one of the parties involved. So banks offering Salem-based financing would like to limit their exposure to the commodity price. For example, if National Bank of Pakistan is buying a commodity on a Salem basis from farmers, for example wheat, then the bank pays the price now which could be deemed as financing and the farmers would be delivering the commodity say after three months. Now after three months, the price of that commodity may change significantly and in some cases to the disadvantage of the bank. So the bank would like to limit its exposure to the commodity prices. This can be done by way of entering into a parallel Salem contract with a third party such that in the second Salem contract, the bank is Salem seller and the third party is the Salem buyer. So in the first Salem, the bank was Salem buyer and the farmers were Salem sellers. In the second structure, the bank is actually Salem seller and the third party is Salem buyer. Let us explain this further with the help of some diagrams. This diagram was used in the previous module. This is a simple Salem contract between Salem seller and Salem buyer. Salem seller in this case is customer, farmers or anyone else who is selling the commodity and the bank is Salem buyer who is actually the financier. The price is paid by the Salem buyer upfront by in this case say National Bank of Pakistan to the farmers which would be deemed as a financing facility and the commodity is going to be delivered by the farmers at a later date say T1. Now in order to limit its exposure to the commodity price, the bank may enter into another Salem contract with a third party. First went to this Salem sale contract number 2. The bank would be selling the Salem commodity to the Salem buyer 2 and the Salem buyer would be paying the price at that time to the Salem buyer, the bank and the bank would be delivering the commodity on a future date. How would this happen? Basically on a future date when the farmers deliver the commodity to the bank, bank would then deliver it on to the third party. In this whole process, the price is paid by this third party and by the bank. So the money is going in this direction. Why would this make sense for the bank? If the bank is paying receiving a price and then paying it to the Salem seller, what is Salem seller 1? What is the benefit for the bank in it? Of course, the bank would be benefiting if there is a price differential between the two Salem prices. If the Salem price paid to the farmers is less than the Salem price paid by the third party to the bank, then of course, this would make sense for the bank because the bank would be making a profit equal to P s prime minus P s. Now the question arises in this case, bank is doing nothing. In a way it is buying a commodity on a Salem basis and then selling it on to a third party without necessarily having to do anything substantial. Is it Sharia compliant? Of course, this is Sharia compliant. This is called trade. In all trades, some people they buy the traders, they buy for a lower price and they sell for a higher price. This is exactly what the bank is doing in this case. This is Sharia compliant. Now, because this involves two Salem contracts, it is important that the bank is not selling the receivable from Salem sale one. You know, Salem sale one pursuant to it, farmers would be delivering the commodity on a future date to the bank. Bank cannot specifically sell that commodity, i.e. the receivable. Why? Because in Sharia, in Islamic law, receivables are deemed as debt and debt cannot be bought and sold either on a discount or for a premium. This is a very, very important consideration which must be taken into account when structuring a deal based on Salem and parallel Salem. In actual practice, the second Salem may take place at any time between the execution of the first Salem and the delivery of the Salem commodity. So, this is important. It is not necessarily the case that the bank enters into Salem one with farmers and at the same time enters into a Salem two with another third party. It can take some time before finding the right third party for the execution of Salem two. Also, the delivery date in case of the second Salem could be after the delivery date of the first Salem. So, basically the time of the second Salem could be any time between T naught and T 1 and the delivery of the second Salem could be after T 1 as well. In this case, P s is the price in Salem one and P s prime is the price in Salem two. The difference between the two is bank's profit and this is what the bank is looking for anyway.