Istisna' is an Islamic contract where one party contracts another to manufacture a specific good, with the price being paid in installments or upon delivery. It allows buyers to pay for custom goods over time rather than upfront. The document provides examples of istisna' being used to finance the manufacturing of agricultural equipment and greenhouses. It also outlines key differences between istisna' contracts and salam contracts, noting istisna' allows for deferred payment, unspecified delivery timelines, and early cancellation before production begins.

1. Istisna’
NIBAF, SBP – Islamabad
7 – 8 March, 2008
Al – Huda Training Programme
Muhammad Khaleequzzaman
Head Islamic banking Department
Int’l Islamic University Islamabad

2. Islamic Modes/Instruments - Sale Contracts:
Istisna’:Order to Manufacture
• Istisna’ is a sale transaction where one party buys
goods and the other undertakes to manufacture ie. The
commodity is transacted before it comes into existence.
• Allowed by Hanafi school, while other schools prefer
that raw material be provided through sale contract
and manufacturer should agree to produce the final
product on the basis of ijarah (contract of construction)
Uses: [To fill the technology gap]
– Manufacturing of implements (eg. Rice transpalnters/ rice
harvesters)
– Milk / vegetable / fruit processing plants
– Bulk purchases of tractors
– Greenhouse technology (low cost tunnels, automated green
houses)

3. Islamic Modes/Instruments - Sale Contracts:
Istisna’:Legitimacy
• The Prophet (PBUH) required that a pulpit (platform)
be built for preaching [Bukhari 2/908]
• The Prophet (PBUH) required that a finger ring be
manufactured for Him [Bukhari 5/220 and Muslim
3/1655]
Sale is the transfer of ownership of some lawful,
specific, known property for a fixed price which may be
money or other known property, both countervalues
present and delivered immediately.
Variations from this pattern, such as delay in payment
of a countervalue, are handled as special cases. Title of
both countervalues transfer immediately at the time of
sale, even if actual payment or delivery is delayed.
(Vogel p/103)

4. Islamic Modes/Instruments - Sale Contracts:
Istisna’: Conditions
• Subject matter has to be unique (substitute may or may
not exist) and manufactured goods
• The manufacturer uses his own material to
manufacture a good to differentiate from Ijarah
• Kind, Quality and Quantity of subject matter must be
known and agreed in absolute term
• If goods manufactured conform to the specifications
agreed upon, the purchaser cannot decline to accept
them unless there is defect in these goods [Option of
defect benefits the purchaser]
• Buyer can refuse to accept goods if delivery is not made
within agreed time period. A clause of variable price
can be inserted in contract to compensate the buyer

5. Islamic Modes/Instruments - Sale Contracts:
Istisna’: Conditions
• Purchasing subject matter from the manufacturer and
again selling to him equals bai Innah
• Price of good to be fixed in absolute and un-ambiguous
terms
• Price of Istisna may be spot or differed (installments)
through progress payments therefore Istisna is
applicable where Salam is not applicable.
• Price can also be usufruct of the related or not related
to subject matter [e. renting house or machinery to the
manufacturer (eg. BOT)]
• The contract of Istisna can be cancelled unilaterally
before the manufacturer starts the work. Once the
work has been started, Istisna cannot be cancelled
unilaterally.

6. Islamic Modes/Instruments - Sale Contracts:
Parallel Istisna’:
• Bank becomes purchase in one contract and
seller/supplier in other contract. Both the contract are
independent from each other
• Permissible only if the delivery date in the contract of
sale does not precede the delivery date in the contract
of purchase
• Prior to delivery to the customer, bank assumes all
responsibilities of ownership and maintenance
Some Stipulations:
• Urboun, Guarantee, mortgage or hypothecation
• in the case of default in delivery, the guarantor (third
party) is asked to deliver the same commodity.
• The buyer can sell the mortgaged property and use the
sale proceed to purchase the required good from the
market or to recover the price advanced by him.

7. FI Client
Payment of Istisna’ Price
Deferred Delivery of Manufactured Goods
Istisna’ Sale
Transaction

8. 1
Parallel Istisna’
Manufacturer/
Builder
[ISTISNA’]
Delivery of
Commodity
1 Aug 06
Bank
Purchaser/
Seller
Customer
[ISTISNA’]
Delivery of
Commodity
1 Aug 06 or
15 Aug 06
Istisna Sale Contract 1 June 062
3
5
4
6
Istisna Price Payment 1 June 06, 1 Jul 06, 1 Aug 06
Pays15May+15Aug–31Dec06
Istisna’Contract
15May06

9. Islamic Modes/Instruments - Sale Contracts:
Istisna’: Example of Agricultural Implements
• A customer wants to get an automated green house to
grow off season vegetables. At the same time, he prefers
not to pay full cost at the front end of an expensive
made to order product requiring relatively longer
manufacturing process.
• Customer approaches bank and the later enters into
back to back istisna’. Bank gets the project
manufactured [this project requires manufacturing]
• The other alternative is of getting the plant
manufactured and selling through Murabahah
• Still, …(next slide)

10. Islamic Modes/Instruments - Sale Contracts:
Istisna’: Example of Agricultural Implements
• Securitization of financing: Bank becomes arranger of
mudarabah fund and passive investors gathered,
investment certificates may or may not trade with the
fund or secondary market

11. Islamic Modes/Instruments - Sale Contracts:
Istisna’:
Some Difference Between Istisna’ & Salam
ISTISNA
• The subject of istisna is always a
thing to be manufactured.
• The price in istisna does not
necessarily need to be paid in full in
advance.
• Time of Delivery need not to be
fixed.
• The contract can be cancelled
before the manufacturer starts
working.
SALAM
• The subject can be any thing.
• The price has to be paid in full in
advance.
• Fixed time of delivery is an
essential part of the sale
• The contract cannot be cancelled
unilaterally.