2. 2
Istisna ( Manufacturing Contract)
The word Istisna is a derivative from the root word
‘Sana’a, which means to manufacture or to construct
something.
Istisna is a contract of sale of specified items to be
manufactured or constructed with an obligation on the
part of the seller to deliver them to the purchaser upon
completion.
3. 3
Important Principles
a. Contracting Parties:
The conditions for the contracting parties for Istisna
are the same as those of a regular sale contract.
The contracting parties must be competent by having
legal capacity, i.e. they must be adults, mature and
sane.
Under this contract the Seller is called “San’e” while
the buyer is described as “Mustasne”.
4. Important Principles
b. The subject matter:
The subject matter of a contract of this type includes the object and
the price.
i) Object:
The object must be identified raw materials that can be transformed
from their natural state by a manufacturing or construction process
involving labour with unique descriptions.
Cannot be an identified existing capital asset or goods.
The Istisna goods can be produced by the seller using its own
resources or resources of the other manufacturer or producer, but
according to the specifications and within the period agreed upon
with the Mustasene (purchaser).
Can be drawn for real estate development on designated land owned
either by one of the two contracting parties or by both. 4
5. Important Principles
ii) Price: The price must be known at the conclusion of the
contract.
The price could be in cash or tangible goods or the usufruct of an
asset for a particular duration.
Even the usufruct of Istisna goods themselves could be the price of
the contract.
Moreover, the price may be deferred or paid in installments within a
certain period of time according to phases or stages of completion
of work.
The seller (San’e) can demand Urboun and guarantee from the
purchaser (Mustasne) against its fulfillment of the payment
obligations.
In turn, the purchase (Mustasne) may demand from the seller
(San’e) to provide with the performance guarantee, or the advance
payment guarantee if any amount of Istisna’a price is paid in
advance.
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6. Important Principles
c. Conclusion of contract: An Istisna contract can be concluded by offer
and acceptance between the seller (San’e) and a purchaser (mustasne)
Since a contract of Istisna is binding, the parties to the contract are
inevitably bound by all obligations and consequences flowing from their
agreement and the contract can only be terminated by mutual agreement
of the parties.
If the Istisna work, however, has not commenced, either party may
terminate the Istisn’a contract unilaterally. The seller (San’e) cannot
stipulate in the contract that it is not liable for defects.
After the conclusion of an Istisna contract, the seller (San’e) and the
purchaser (mustasne) can mutually agree on amending and introducing
new specifications and the Istisna’a price previously agreed upon.
A contract of Istisna, by mutual consent of the parties, can include a clause
to the effect that if any additional conditions are inserted into the contract
at a later date, the extra expenses will be borne by the purchaser
(mustasne).
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7. Important Principles
d. Supervision of the execution of contract:
A technically experienced consulting firm can be
appointed by the purchase (mustasne) for ensuring
whether the Istisna goods conform to the contractual
specifications. The additional costs of supervision can be
borne by either party as mutually agreed.
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8. Important Principles
e. Delivery and disposal:
Delivery of Istisna goods can take place before the due
date or on the due date, or may take place through
constructive possession by enabling the purchaser
(mustasne) to take control over the subject matter after
the completion of the production process.
If the Istisna goods do not conform to the contractual
specifications at the time of delivery, the purchase
(mustasne) has the right to reject them.
The seller (San’e) is discharged from liability once the
Istisna goods are delivered.
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10. Mechanism of Istisna Contract
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Mechanism of an Istisna Transaction:
1. A customer wants to purchase certain assets to be
manufactured or constrcuted and approaches the Islamic Bank
(san’e).
2. The Islamic Bank as seller (san’e) and the customer as
purchaser (mustasne) execute an Istisna contract.
3. After completion of the manufacturing process, the Islamic
Bank (san’e) delivers the assets to the customer (mustasne) on
agreed upon delivery date.The customer (mustasne) makes the
payment to the seller (san’e) pursuant to the terms agreed upon
in the Istisna contract either in various installments or, as the case
may be, at the delivery of the asset.
11. 3. Application of Istasna contract
Istisna is widely used by Islamic banks and financial
institutions to finance the construction of real estate such
as buildings, warehouses, showrooms, shopping malls,
residential towers and villas, as well as manufacturing
activities involved in the construction of like aircrafts, ships,
machines and equipment, etc.
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