 In this module, we shall look at risk management in the contract of Salam. We have studied Salam already and we defined it as a contract, as a sale contract in which the delivery of the commodity which is sold is actually on a future date. The price is paid upfront and the delivery of the commodity takes place on a future date maybe 30 days, 60 days, 90 days or more or less. In case of Salam, risk of inability to deliver the commodity on the future contracted date is a possibility. And because of that, there is a risk attached with the contract of the Salam. If the commodity is not available, the risk of loss of revenue income for seller is inevitable. How? If the commodity is not available and the seller has to deliver the commodity to the buyer, then he or she will have to find the commodity from somewhere and there is a possibility that the seller will have to buy the commodity for a higher price. If that does not happen, then the whole transaction would have to be cancelled and the seller who was looking for some kind of benefits from this transaction, those benefits would not accrue. In case there is a possibility of ending up with a loss. The solution to this in Islamic banking and finance is offered by a Salam parallel Salam structure. In this case, there is one Salam arrangement and in parallel to this one, there is another Salam transaction and both these Salam transactions together, they minimize the risk of doing business by the help of Salam. Let us look at the basic structure of a Salam transaction. We have already looked into it, but it is always a good idea to relook at the things because it helps us in learning and understanding the concept more effectively. So we have a Salam seller and we have a Salam buyer. Someone would like to buy a commodity for a variety of reasons. The buyers in this case, they are looking for a commodity in future, however, by way of Salam, they want to make sure that the commodity in future is available to them. So this Salam buyer pays the price of the commodity now at T1 and the Salam seller is actually required to deliver the commodity on a future date. In this case, we are saying T90, T90 means after roughly three months or 90 days. So this is a basic Salam structure. Now at T90, the commodity may not be readily available in the market and that is the basis of risk we have talked about. So what could be done? In that case, this party which was Salam seller, now we call it Salam seller 1. So this transaction between Salam buyer and Salam seller would be called Salam 1. So this Salam seller 1 would enter into another Salam transaction with a third party in such a way that in this second Salam, Salam seller 1 is actually Salam buyer 2 and the third party is Salam seller 2. In the first transaction, there was this price P1, which was the Salam price 1 in the second Salam between the Salam buyer 2 and Salam seller 2, the price is P2. In this way, the Salam seller 1 would be able to procure or would be able to at least ensure that the commodity is available at T90 for him to deliver it on to buyer 1. Now the difference between the two prices P1 and P2 would be actually the profit of this party. In this case, this Salam seller 1 or Salam buyer 1 or whatever we want to call it, we just call it party A just to explain the things and we call this party B and we call this party C. In this case, in this example, party A is actually a financial intermediary. It is earning a profit equal to P1 minus P2 just by way of entering into a Salam sale 1 and a Salam sale 2 and this is a risk management tool as well. The second leg, the second Salam is basically a risk management tool. Now in a Salam parallel Salam structure, the Salam seller 1 who happens to be Salam buyer 2 as well does not enjoy any liquidity benefits. If you remember, we said that the Salam seller enjoys liquidity benefits when it receives the price from the Salam buyer. In this case, what is happening? The Salam seller 1 or Salam buyer 2, we called it party A is receiving the price from the party B and then it is using part of this money to pay to the third party party C as price for Salam 2. So this party actually party A does not enjoy a lot of liquidity benefits. In order to enjoy risk management benefits, liquidity benefits and profit, this Salam seller i.e. party A may enter into a WAD based arrangement with a third party. So instead of using a parallel Salam, this party can enter into a WAD based arrangement so that it continues to benefit from liquidity. Of course, it has risk management benefit and it earns some profit as well. Just to clarify the point, I would like to reshare this structure once again which we studied in the context of Sukuk Salam. Remember we said that central bank of Bahrain on a regular basis issues Sukuk Salam. So this party issues Sukuk to the banks, receives money from them. This transaction is on a Salam basis, so gets the money from them and enters into a Salam sale. So this is basically this dollar comes from the Sukuk sale of Sukuk and then CBB enters into a Salam based arrangement whereby it buys certain commodities on a Salam basis from lead arranger and this lead arranger has to deliver the commodity to the central bank of Bahrain on a future date. In order to ensure that it actually delivers the commodity on a future date, this lead arranger enters into a WAD based arrangement with commodity broker. And of course, for this structure to work and we explained it previously, the issuer central bank of Bahrain will have to enter into a WAD based arrangement as well. If that is the case, then lead arranger would be able to benefit from risk management, would be able to benefit from liquidity and would earn some profit as well. Just to give you the comparison between Salam parallel Salam structure and Salam with WAD structure, we say that in case of Salam parallel Salam structure, liquidity benefits are minimized. They may be almost zero. However, this structure allows the central party, this party A in our example, it allows it to earn some profits. Of course, it has risk management benefits as well. Salam with WAD could be a preferred choice because it gives liquidity benefits. It offers an opportunity to earn profit and of course, it is a very good risk management tool.