 In this module, we shall be looking at applications of the contract of Salem and applications of Islamic mode of finance of Salem, as we have been emphasizing that there are differences between Islamic contracts and Islamic modes of financing. Islamic contracts are just one contract at a time. So, when we refer to the contract of Salem, we refer to the Salem sale as a contract. When we refer to Salem as a mode of finance, then we are referring to an arrangement which comprises Salem as a main component. However, there are some other arrangements and contracts and agreements around it. Let us look at Salem and its applications in Islamic banking and finance. Salem can be used in a number of situations and in a number of markets. The classical use of Salem is in agriculture financing. In fact, this was the earliest intention of the acceptance of Salem as a contract in Islam. Salem has also been used as a liquidity management tool, especially for allowing Islamic banks to manage their liquidity. And in Islamic capital market, we find quite a few Sukuk based on Salem. All these applications of Sukuk in Islamic banking and finance would be discussed in due course. But let us start with a recap on Sukuk. What is a recap on Salem? What is Salem? Salem is a sale contract in which one party buys a commodity and of course, the other party sells it. The seller receives the price upfront to deliver the commodity on a certain date in future. So, it is a deferred delivery sale contract. Salem seller here receives the price, Salem price PS now to deliver the commodity X on a future date T1 to the Salem buyer. So, this is the basic structure of a Salem contract. Although this wasn't an intention of the Salem contract, however, when we look at the contract of Salem in some detail, we find that there is an element of optionality built in it. Let us look at this diagram. Here on the horizontal axis we have time and on the vertical axis we have price. PS is the Salem price and PM0 is the market price at the time of execution of Salem contract. Salem price is normally less than the prevailing market price. It is not necessarily the case, but it is quite understandable if the Salem price is less than the prevailing market price at the time of the execution of the Salem contract because this is paid upfront. So, there is a difference between the prevailing market price and the Salem price. Now, the Salem price which is paid upfront, this could be seen as a liquidity benefit. The Salem seller has to deliver the commodity in future, but it receives the money, the price now. This is actually a cash benefit which the Salem seller receives at the time of executing the Salem sale contract. What is the price of this liquidity? The price of liquidity is the difference between the market price and the Salem price because Salem price is lower than the market price. In order to receive this liquidity benefit, the Salem seller actually gets a price which is less than the market price. The difference between the two could be considered as the price of liquidity. Now, the actual price of the liquidity is determined in future when the commodity is going to be delivered. If at that time the market price of the commodity delivered at T1 is this PM1, then the actual price of the liquidity would be the difference between PM1 and PS. So, that is a kind of loss which the Salem seller incurs when this happens. Now, there is a definite incentive for Salem seller to default on delivery at T1, the future date of delivery if the price of the commodity has gone up significantly. And this is what we mean by optionality. If the price of the commodity has gone up significantly, then it makes sense for the Salem seller not to deliver the commodity i.e. default. If this was possible, Salem was a very good option contract. However, it is not allowed in a Salem contract to default. If someone defaults on the delivery of the commodity at T1, the Salem buyer can always take the Salem seller to the court and the court would decide in favor of Salem buyer. Salem buyer would in most cases get the benefit of the opportunity cost of the delivery i.e. if Salem seller does not deliver the commodity at T1, then the court may say, may ask the Salem seller to compensate the Salem buyer for the loss. Because of this possibility of court case, the Salem seller is not in opposition or the Salem seller cannot renege on the contract i.e. he or she would not be able to breach the contract. If this was possible to default, then Salem is definitely a very good example of commodity options. Salem can not be used for buying and selling of shares of listed companies because this is not allowed as per the Sharia standards of accounting and auditing organization for Islamic financial institution. Salem can be used for purchase and sale of commodities and some other assets which are eligible for this kind of trade. So, this is a kind of introduction to Salem. After this, we would be looking into different structures which use Salem as an Islamic mode of finance.