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In Islam, there exists a notion of a Salam sale (بيع السلم), or (advance sale). These are sales contracts in which the price is paid for goods to be delivered a

by apta_ 6y ago

In Islam, there exists a notion of a Salam sale (بيع السلم), or (advance sale). These are sales contracts in which the price is paid for goods to be delivered at a later time. > The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period." Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)? Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.

kasey_junk 6y ago
Yes that sounds like a classic futures contract to me. I'd never heard that usury rules applied to financial contracts before. Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
- apta_ 6y ago
  Short selling has several issues. Brokers usually charge a fee for the borrowed asset (stock), this fee is clearly usury/interest. Also, it creates risk with the hope of gaining money, without any corresponding value being created. Shorting exposes three parties to the risk of a stock or asset (the shorter, the original owner, and the new owner), compared to a regular trade where risk is transferred from one party to another, and no new risk is created. I found this article[0] that goes into details about the dangers of short selling (see the sections on margins and overshooting specifically). Salam sales do not have those issues. Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited). As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled? Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition: > The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location. > Apologies for all the questions this is fascinating No problem! I'll do my best to answer what I know. [0] https://practicalislamicfinance.com/2020/02/17/short-selling-halal-or-haram/ https://practicalislamicfinance.com/2020/02/17/short-selling...
- apta_ 6y ago
  One important thing to note is that Islam also prohibits chaining together permitted contracts, with the intention being trying to circumvent or dance around the prohibition. For example, you and I can engage in the following set of transactions: I can sell you my phone for a certain price in installments (say $120 over 12 months, and $120 is the fair market value). Then, I go back and buy back my phone from you for $100 cash. The net result is that I paid you $100 and you owe me $120 over the course of the year. This is clearly usury, and placing an item in between is just kidding ourselves. The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
- apta_ 6y ago
  > I'd never heard that usury rules applied to financial contracts before. Islam prohibits something called Riba. Interest and usury fall under it, but Riba encompasses more than just loans. The example about purchasing gold on credit falls under riba for instance.

by apta_ 6y ago

kasey_junk 6y ago

Yes that sounds like a classic futures contract to me. I'd never heard that usury rules applied to financial contracts before. Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.

apta_ 6y ago
Short selling has several issues. Brokers usually charge a fee for the borrowed asset (stock), this fee is clearly usury/interest. Also, it creates risk with the hope of gaining money, without any corresponding value being created. Shorting exposes three parties to the risk of a stock or asset (the shorter, the original owner, and the new owner), compared to a regular trade where risk is transferred from one party to another, and no new risk is created. I found this article[0] that goes into details about the dangers of short selling (see the sections on margins and overshooting specifically). Salam sales do not have those issues. Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited). As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled? Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition: > The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location. > Apologies for all the questions this is fascinating No problem! I'll do my best to answer what I know. [0] https://practicalislamicfinance.com/2020/02/17/short-selling-halal-or-haram/ https://practicalislamicfinance.com/2020/02/17/short-selling...
apta_ 6y ago
One important thing to note is that Islam also prohibits chaining together permitted contracts, with the intention being trying to circumvent or dance around the prohibition. For example, you and I can engage in the following set of transactions: I can sell you my phone for a certain price in installments (say $120 over 12 months, and $120 is the fair market value). Then, I go back and buy back my phone from you for $100 cash. The net result is that I paid you $100 and you owe me $120 over the course of the year. This is clearly usury, and placing an item in between is just kidding ourselves. The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
apta_ 6y ago
> I'd never heard that usury rules applied to financial contracts before. Islam prohibits something called Riba. Interest and usury fall under it, but Riba encompasses more than just loans. The example about purchasing gold on credit falls under riba for instance.