Introduction

Istisna’ is a sale transaction where an item is transacted before it comes into existence. It is an order to a manufacturer/contractor to manufacture/construct a specific commodity/asset for the purchaser (borrower).

The manufacturer uses his own material to manufacture the required goods. In Istisna’, price must be fixed with the consent of all parties involved. All other necessary  specifications of the item must also be fully settled.

Cancellation of contract

After giving prior notice, either party can cancel the contract before the manufacturing party has begun its work. Once the work starts, the contract cannot be cancelled unilaterally

Difference between Istisna’ and Salam

Istisna Salam
The subject-matter must be an item that is to be manufactured. The subject-matter may be anything that may or may not need manufacturing.
The price does not necessarily have to be paid in advance and in full. It need not necessarily be paid in full at delivery either. It may be deferred to any mutually agreed date or even paid in installments. The price has to be paid in advance and in full.
The time of delivery does not have to be fixed. The time of delivery is an essential part of the contract.
The contract may be cancelled unilaterally before the manufacturer begins the work. The contract cannot be cancelled unilaterally.

Differences Between Istisna’ and Ijarah tul Ashkhaas

 

Istisna Ijarah tul Ashkhaas
The manufacturer uses his own material or obtains it to make the ordered goods. The customer provides the material and the manufacturer uses only his labor and skill, i.e. his services are hired for a specified fee.
The purchaser has a right to reject the goods upon inspection as Shariah permits the buyer who has not seen the goods to cancel the sale after seeing them. The right of rejection only exists if the goods do not conform to the specifications agreed between the parties at the time of the contract. The right to reject goods upon inspection does not exist.

 

Time of Delivery

 As pointed out earlier, it is not necessary in Istisna’ that the time of delivery is fixed. However, the purchaser may fix a maximum time for delivery which means that if the manufacturer delays the delivery after the appointed time, he will not be bound to accept the goods or to pay the price.

In order to ensure that the goods are delivered within the specified period, some modern agreements of this nature contain a penalty clause to the effect that in case the manufacturer delays the delivery after the appointed time, he shall be liable to pay a penalty which shall be calculated on a daily basis. Can such a penal clause be inserted in a contract of Istisna’ according to Shariah? Although the classical jurists seem to be silent about this question while they discuss the contract of Istisna’, yet they have allowed a similar condition in the case of Ijarah. They say that if a person hires the services of a person to stitch his clothes, the fee may be variable according to the time of delivery. The hirer may say that he will pay Kshs. 100/- in case the tailor stitches the clothes within one day and Kshs. 80/- in case he prepares them after two days. On the basis of the same analogy, the price in Istisna’ may be tied up with the time of delivery, and it will be permissible if it is agreed between the parties that in the case of delay in delivery, the price shall be reduced by a specified amount per day.

Istisna’ as a mode of Financing

 Istisna’ could be used as a mode of financing in the following ways:

House Financing or infrastructure Construction Project

Istisna’ may be used to provide financing for house financing/infrastructure construction project financing. Istisna’ may also be used for similar projects like installation of an air conditioning plant in the client’s factory, building a bridge or a highway etc.

If the borrower owns a piece of land and seeks financing for the construction of a house or a construction project, the financier may undertake to construct the house/construction project on the basis of an Istisna’.

The financier does not have to construct the house or carry out the infrastructure construction himself. He can either enter into a parallel Istisna’ with a third party or hire the services of a contractor do so on the financiers behalf. The financier then calculates his cost and fix the price of Istisna’ with his client that allows him to make a reasonable profit over his cost.

The payment of installments by the client may start right from the day when the contract of Istisna’ is signed by the parties. In order to secure the payment of installments, the title deeds of the house or land, or any other property of the borrower may be kept by the financier as security until the last installment is paid by the borrower.

The financier will be responsible to strictly conform to the specifications in the agreement for the construction of the house or infra-structure project. The cost of correcting any discrepancy would have to be borne by him.

BOT (Built, Operate and Transfer) agreements may be formalized through an Istisna’ agreement as well. So, if the government wants to build a highway, it may enter into an Istisna’ contract with the builder. The price of Istisna’ maybe the right of the builder to operate the highway and collect Toll Taxes for a specific period.

Istina for financing working capital of a manufacturer

Istisna’ can also be used for financing working capital requirements of a manufacturer. The bank will order the manufacturer to manufacture certain specified goods and pay the Istisna’ price to the customer. Upon manufacturing the goods, the customer will deliver the goods to the bank.

After taking possession of the goods, the buyer will sell the goods in the market at the same price and for this purpose, the bank may sell the goods directly or may appoint the same agent (including the customer) to sell their goods in the market.

Working Capital Financing Using Istisna

An Islamic Bank can also finance the Working Capital requirements of the Company through the mode of Istisna’ in the following manner.

  1. i) When a customer requires funds for fulfilling his working Capital requirements, then the Islamic Bank will place an order to manufacture with the customer to provide finished goods of certain specifications.
  2. ii) After placing the order, the bank may make the payment of the Istisna’ Price lump sum or in installments.

After the finished goods are ready for delivery, the bank would receive the goods from the customer. After receiving the goods the bank will sell the goods in the market, either directly or through some agent, to recover its cost price and earn its profit from the transaction.

Uses of Istisna’

  • Individual House financing
  • Financing of building/ factory / office/commercial building/residential building projects
  • BOT (build, operate, transfer) arrangements for public infrastructure like highways, water desalination plants, dams, sewerage disposal plants by Governments
  • Construction of buildings, factories and industrial plants

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