Sunday, October 10, 2021

What is Salam Financing



Salam (Advance Payment against Deferred Delivery of Goods) Salam (also referred to as Bai Salam, Al-Salam, Bai al-Salam) is an ancient form of forward contract wherein the price is paid in advance at the time of making a contract of sale for goods to be delivered at a future date.

What is given in exchange for the advance payment of the price should not in itself be in the nature of money. For the payment in advance, the contracting parties stipulate a future date for the supply of goods of specified quantity and quality Salam may be considered as a kind of debt, because the object of the salam contract is the liability of the seller, up to the agreed future date, to deliver the object for which advanced payment of the price has already been made. 

There is consensus among Muslim jurists on the permissibility of salam, because the object of the contract is that the goods are a recompense for the price paid in advance, just as the price is recompense paid for getting the goods in advance. Salam is permitted, notwithstanding the general principle of the Shari´ah that does not permit the sale of a commodity which is not in the possession of the seller. When Prophet Muhammad (pbuh) came to Madinah (the second holiest city in Islam, after Makkah), the people used to pay in advance the price of fruits (or dates) to be delivered within one, two or three years. But such a sale was carried out without specifying the measure, weight and the time of delivery. Prophet Muhammad (pbuh) said: "He who sells on Salam (money in advance) must sell a specific volume and a specific weight to a specific due date (to be delivered later)". The practice of salam, as ordained by the Prophet Muhammad (pbuh), continued during his life time and also in later periods. The list of items covered by salam suggests that it benefited the owners of farms and orchards. Barring a few exceptions, the Muslim jurists have now expanded the list of items which can be sold under salam to cover all homogeneous commodities that can be precisely determined in terms of quality and quantity.

Rules for a Valid Salam Contract

Only those fungible (mithli) things which can be precisely determined in terms of quantity and quality can be contracted in salam. Besides, salam cannot take place between identical goods, e.g., wheat for wheat, Dollar for Dollar and potato for potato. All goods that can be categorized as belonging to the same species can be the subject of salam.

 For example, wheat, rice, barley or other grains of this type, motor cars of any trade mark, oil, iron and copper can all be sold through salam. Similarly, electricity measured in kilowatts can be considered a fungible commodity.  In salam, it is necessary to fix precisely the time of delivery of the goods. The buyer must unambiguously specify the quality and the quantity of the goods and the specifications must be applicable to the generally available items of the goods of the contract. The specification of goods should particularly cover all those characteristics which could cause variation in price. Thus the general terms and conditions of salam should be binding in nature and Q2P2T be followed. The first Q stands for the quantity of the commodity to be supplied. The second Q stands for the quality or variety of the commodity. The first P stands for the price to be paid in advance by the buyer and the second P stands for place of delivery. Finally, T stands for the time of delivery.

The buyer in salam should advance the price of the commodity at the time of making the contract

Risks in Salam-based Financing

Islamic banks may face the following risks in salam-based financing:

a) Counter-party Risk (the client may default after taking the payment in advance.)

b) Commodity Price Risk (at the time the goods are received the price may be lower than the price that was originally expected).

c) Quality Risk/ Low investment Return or Loss (goods received might not be of desired quality – unacceptable for the potential buyer)

d) Asset-Holding Risk / possibility of extra expenses on storage and takaful (the bank might not be able to market the goods in time, resulting in possible asset loss for the unsold goods and locking funds in the goods until they are sold)

e) Asset-Replacement Risk (in case the bank has to purchase goods from the market in parallel salam where the third party fails to supply the specified goods under the parallel contract.

f) Fiduciary Risk in the case of parallel salam (original salam seller might not deliver).

Islamic banks need to take proper measures for mitigation of the above risks. They should purchase only those goods which have good marketing potential; take proper security and a performance bond; insert a penalty clause in the contract as a deterrent against late delivery; obtain a binding promise from the prospective buyers along with a sufficient amount of earnest money in deposit; and fulfil the responsibility of parallel salam-purchase similar goods from the market on spot to supply these to the buyer and recover the loss, if any, from the seller in the original salam.

Parallel Salam and Disposal of Salam Goods – to manage and mitigate risk

For the disposal of goods purchased under salam, Islamic banks have a number of options, including:

i) to enter into a parallel salam contract where the bank is involved as a buyer on one side and as a seller on another side,

ii) an agency agreement with any third party or with the client (seller) to sell the goods on behalf of the bank and / or

iii) a sale in the open market the bank itself by entering into a promise with any third party or direct selling upon taking the delivery.

Where the bank (as buyer) enters into a parallel salam contract there cannot be any condition or linkage to the first salam contract. (Parallel Salam is allowed with a third party only. The seller in the first contract cannot be made purchaser in the parallel contract of salam, because it will be a buy-back contract, which is not permissible in the Shari’ah). Each one of the two contracts entered into by a bank should be independent of the other, but the bank (as seller) can sell the goods on parallel salam on similar conditions and specifications as previously purchased on the first salam contract without making one contract dependent on the other. This arrangement cannot be tied up in such a manner that the rights and obligations of one contract are dependant on the rights and obligations of the parallel contract. The period of parallel contract in the second transaction is usually shorter and the price may be a higher than the price of the first salam transaction. The difference between the two prices is the bank’s profit

The parallel contract arrangement may not be an attractive mode of disposal of goods for banks, as the amount invested by the bank (the advance payment of the price in the first salam) would be disinvested when the buyer in the parallel contract made the advance payment to the bank for the purchase of the goods under the parallel contract. Under an agency agreement, the Islamic bank may appoint the seller its agent to sell the salam goods on its behalf at a given price which would include the bank’s profit. Some Islamic banks are, therefore, using salam for purchasing goods and appointing the sellers as their agent for subsequently marketing the goods at a price with a suitable profit margin for the bank. In the case of an agency, the salam contract and the agency agreement should be separate and independent of each other. The purchased goods cannot be sold back to the salam seller, hence a parallel salam cannot be entered into with the original seller in the salam contract as it would be considered as being a ‘buy-back’, which is prohibited under the Shari’ah rules.

In the third option, the Islamic bank (as buyer under salam) may obtain a binding promise from a third party to purchase the goods from the bank. This promise should be unilateral from the prospective buyer. The bank (as buyer) will not have to pay the price in advance, as the prospective buyer is merely making a promise and it is not an actual sale. However, the bank can ask for earnest money (a security deposit as an act of good faith). As soon as the bank purchases the goods, they will be sold to the third party at the pre-agreed price, according to the terms of the promise. Banks may also wait until receipt of the goods and sell them in the open market, but they will be taking the asset-risk for the period the goods remain in the bank’s inventory. It is important to note again that the salam goods cannot be sold back to the original seller owing to the prohibition of the ‘buy-back’ arrangement.



Sunday, October 3, 2021

Premium Branding for New and Innovative Products


Premium Pricing Strategy

Pricing is a major element of marketing any product, and it is vitally important to set the right price. A price that is too high or too low for the target market can seriously affect sales. Premium pricing can use for several purposes. A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume. Premium pricing can also be used to improve brand identity in a particular market. This is called price-quality signaling, because the high price signals to consumers that the product is high in quality. Competition


Some brands can continue to charge a premium price because their entire brand image is based around premium. Unique products usually have the best chance of commanding premium prices.

The first step is to understand that in the so-called luxury market, there are three possible strategies, which I named in my book as luxury, fashion and premium. The difference between these three strategies is huge. It does not change much in the eyes of most basic consumers, at least in the short-term. But when one has to manage a brand, the difference is pivotal. In fact, if you decide to implement a fashion or a premium strategy, the classical marketing styles works pretty well. But if you decide to implement a luxury strategy, you need to reconsider all the aspects of your marketing management.

The luxury strategy aims at creating the highest brand value and pricing power by leveraging all intangible elements of singularity- i.e. time, heritage, country of origin, craftsmanship, manmade, small series, prestigious clients, etc. The premium strategy can be summarized as “pay more, get more.” Here the goal is to prove -through comparisons and benchmarking- that this is the best value within its category. Quality/price ratio is the motto. This strategy is, by essence, comparative.

Here are six factors that will influence your ability to establish and maintain premium price position and reap the rewards:

Become a Premium Provider. Identify the features that would be considered high-end on the value scale, and then highlight those crucial elements in your marketing. Resist the urge to offer a basic service level or baseline product. Stick with the premium level of service if you plan to maintain your premium pricing strategy.

Define Your Value. Help your customers understand why your prices are higher. If you know how competitors are undercutting your prices, and you feel the competitors' lower cost equates to poorer quality or service, explain this difference. In other words, don't hide your price; instead, explain your value to the customer, and be prepared to demonstrate the ROI associated with your service or product.

Go the Extra Mile. You'd be surprised how many business owners declare they offer superior service simply because their people are friendly. Successful companies have more than friendly employees.

Don't Sacrifice Price, Even When Times are Tough. Just explain why your product or service is worth the investment, but be a little flexible for long-time customers.

Don't Play the Lowest Price Game. Weaker competitors are quick to cut prices to earn business. Don't play their game.

Project Financial Stability. A colleague told me about his expensive dilemma. He needed to replace his entire home air conditioning system. He asked two local companies for estimates.

Challenging a Timeless Tradition

Ending prices with the number nine is one of the oldest methods in the book, but does it actually work? The answer is a resounding yes, according to research from the journal Quantitative Marketing and Economics. Prices ending in nine were able to outsell even lower prices for the same product.

Time Spent vs. Money Saved

Stanford University’s Jennifer Aaker argues that in many product categories, customers recall more positive memories when asked to remember time spent with the product over the money


Different Levels of Pricing

Test #1

Four out of five people chose the more popular premium option.

Test #2

The cheap option was ignored and it upended the ratio of standard to premium purchases.


These examples show just how important it is to test out different pricing brackets, especially if you believe you may be undercharging. Some customers are always going to want the most

expensive option. Get smart with your pricing strategy. Great products and services are priced on purpose. They have prices that develop over time and are guided by debate, scrutiny, and, most importantly, feedback from paying customers.

Strategies that help grow premium perceptions

Commenting on a recent survey that found 88 percent of U.S. consumers love store brands, Pat Conroy, vice chairman at Deloitte LLP and U.S. Consumer Products leader, stated that many name brands suffer "from a crisis of the similar," giving consumers no compelling reason to choose their product instead of a store brand. He is right.


Build perceptions of product superiority

Innovation, the type that produces a step change in product performance, is still the most effective way to build competitive advantage. Tide Pods and Singapore Airlines are good examples of brands that have used product innovation to improve premium perceptions and justify prices. P&G's commitment to innovation paid off in the U.S. with the introduction of Tide Pods—a three-in-one liquid tablet that allowed the new product to gain market share at a significant price premium.

Build perceptions of value

By framing perceptions of value premium, brands can gain competitive advantage over cheaper brands provided the claim is defensible and not undermined by consumer experience.

Build premium credibility

Irrespective of how the redesign impacts flyers in-flight experience, Singapore Airlines sends a clear signal that they perceive themselves as a luxury brand by teaming up with BMW. In China, Häagen-Dazs presents a unique, indulgent, and adult ice cream experience, primarily through its retail stores. It justifies a significant price premium through locating those stores in upmarket areas, offering unique desserts, and selling wedding cakes designed to appeal to wealthy celebrities. For Johnnie Walker, special blends and gift packs offer the chance to ask a higher price for their well-known brand. Mechanisms like these are designed to build credibility around a brand's premium positioning, making it easier for consumers to justify why they are paying a higher price for the brand.

Advantages of Premium Pricing

The following are advantages of using the premium pricing method:

Entry barrier. If a company invests heavily in its premium brands, it can be extremely difficult for a competitor to offer a competing product at the same price point without also investing a large amount in marketing.

High profit margin. There can be an unusually high gross margin associated with premium pricing. However, a company engaging in this strategy must attain sufficient volume to offset the hefty marketing costs associated with it.