This document provides an overview of Istisna, an Islamic financing structure. It defines Istisna as a contract for the manufacture of an asset at a predetermined price for future delivery. The document outlines the key concepts, including the parties involved, requirements for the subject matter and price, and conditions for a valid Istisna contract. It also discusses issues like penalties for delay, binding nature of the contract, and post-execution scenarios.
This document discusses the Islamic financing contract of Istisna. It begins by defining Istisna as an agreement for the sale of goods to be manufactured or constructed at a future date, with an agreed upon price.
It outlines the key parties and conditions of an Istisna contract, including specifying the subject matter to be manufactured, stating the price and delivery terms. It also discusses penalties for late delivery and payment terms.
The document compares Istisna to other Islamic contracts such as Salam and Ijarah, highlighting the differences. It then explores some potential applications of Istisna contracts in Islamic banking such as financing construction projects.
In closing, it argues that I
The document discusses the concept of Istisna' in Islamic finance. Istisna' is a contract where a buyer requests a seller to manufacture a specific asset. Some key points:
- Istisna' allows a manufacturer to produce an asset for a buyer according to agreed specifications, with payment made in installments or upon delivery.
- It differs from Salam in that the asset in an Istisna' contract does not yet exist. The manufacturer produces the asset from raw materials.
- Istisna' contracts can be used to finance projects like home construction or infrastructure development, with payments made during and after production.
- Risks include non-delivery by
This document provides an overview of Salam and Istisna contracts in Islamic finance. It defines Salam as a sale where the price is paid in full at the time of contract for goods to be delivered in the future. Istisna is defined as a sale of goods to be manufactured, where the price is not necessarily paid in full up front. The document outlines the conditions for each contract and differences between them, such as payment terms and ability to cancel. It also discusses how Istisna can be used to structure financing agreements, such as for construction projects.
The document discusses Salam, an Islamic financing contract where payment is made upfront for goods to be delivered later. It defines Salam, provides perspectives from Islamic law schools, and outlines conditions like precisely specifying the commodity, quality, quantity and delivery timeframe. Salam can finance farmers, traders and industrialists by providing upfront capital. Risks are transferred between buyer and seller, and parallel Salam contracts allow immediate resale of goods.
This document defines and discusses the Islamic financing contract of istisna'. It begins by defining istisna' literally and technically. It then outlines the pillars (parties and elements) of an istisna' contract and compares it to salam. Finally, it discusses examples of modern applications of istisna' contracts like parallel istisna' and sukuk istisna'.
1. Bai As-Salam refers to a contract where advance cash payment is made for goods to be delivered later. The seller undertakes to supply specific goods to the buyer at a future date in exchange for the advanced price paid in full.
2. Salam transactions require full payment of the purchase price at the time of sale. This ensures the seller has the liquidity expected and the basic purpose of the transaction is not defeated.
3. Parallel or back-to-back salam involves three parties, where one party enters into two consecutive salam contracts to manage risks from price fluctuations between the contracts.
The document summarizes several key Islamic financing modes:
1) Murabahah is a cost-plus sale where the bank discloses costs and sells an asset to a customer on a deferred payment plan at a markup. Salam and istisna'a are used for agriculture and project financing respectively, allowing for advanced payment in exchange for future delivery of goods or projects.
2) Ijarah is an Islamic lease where the bank owns an asset and leases it to a customer for rental payments over a set period, after which the asset is either returned or sold to the lessee.
3) Each contract has specific steps and conditions to ensure compliance with Sharia principles like prohibition of interest and uncertainty
This document discusses the Islamic financing contract of Istisna. It begins by defining Istisna as an agreement for the sale of goods to be manufactured or constructed at a future date, with an agreed upon price.
It outlines the key parties and conditions of an Istisna contract, including specifying the subject matter to be manufactured, stating the price and delivery terms. It also discusses penalties for late delivery and payment terms.
The document compares Istisna to other Islamic contracts such as Salam and Ijarah, highlighting the differences. It then explores some potential applications of Istisna contracts in Islamic banking such as financing construction projects.
In closing, it argues that I
The document discusses the concept of Istisna' in Islamic finance. Istisna' is a contract where a buyer requests a seller to manufacture a specific asset. Some key points:
- Istisna' allows a manufacturer to produce an asset for a buyer according to agreed specifications, with payment made in installments or upon delivery.
- It differs from Salam in that the asset in an Istisna' contract does not yet exist. The manufacturer produces the asset from raw materials.
- Istisna' contracts can be used to finance projects like home construction or infrastructure development, with payments made during and after production.
- Risks include non-delivery by
This document provides an overview of Salam and Istisna contracts in Islamic finance. It defines Salam as a sale where the price is paid in full at the time of contract for goods to be delivered in the future. Istisna is defined as a sale of goods to be manufactured, where the price is not necessarily paid in full up front. The document outlines the conditions for each contract and differences between them, such as payment terms and ability to cancel. It also discusses how Istisna can be used to structure financing agreements, such as for construction projects.
The document discusses Salam, an Islamic financing contract where payment is made upfront for goods to be delivered later. It defines Salam, provides perspectives from Islamic law schools, and outlines conditions like precisely specifying the commodity, quality, quantity and delivery timeframe. Salam can finance farmers, traders and industrialists by providing upfront capital. Risks are transferred between buyer and seller, and parallel Salam contracts allow immediate resale of goods.
This document defines and discusses the Islamic financing contract of istisna'. It begins by defining istisna' literally and technically. It then outlines the pillars (parties and elements) of an istisna' contract and compares it to salam. Finally, it discusses examples of modern applications of istisna' contracts like parallel istisna' and sukuk istisna'.
1. Bai As-Salam refers to a contract where advance cash payment is made for goods to be delivered later. The seller undertakes to supply specific goods to the buyer at a future date in exchange for the advanced price paid in full.
2. Salam transactions require full payment of the purchase price at the time of sale. This ensures the seller has the liquidity expected and the basic purpose of the transaction is not defeated.
3. Parallel or back-to-back salam involves three parties, where one party enters into two consecutive salam contracts to manage risks from price fluctuations between the contracts.
The document summarizes several key Islamic financing modes:
1) Murabahah is a cost-plus sale where the bank discloses costs and sells an asset to a customer on a deferred payment plan at a markup. Salam and istisna'a are used for agriculture and project financing respectively, allowing for advanced payment in exchange for future delivery of goods or projects.
2) Ijarah is an Islamic lease where the bank owns an asset and leases it to a customer for rental payments over a set period, after which the asset is either returned or sold to the lessee.
3) Each contract has specific steps and conditions to ensure compliance with Sharia principles like prohibition of interest and uncertainty
This document defines and discusses the Islamic financing contract of bay' al-istisna'. It begins by defining istisna' as a contractual agreement with a manufacturer to produce specified goods at an agreed upon price using their own materials and labor. The document then covers evidence for its legitimacy, the key pillars of an istisna' contract, different types including classical and parallel istisna', conditions, differences from salam contracts, and modern applications for istisna' financing such as for industrial production or real estate development.
The document discusses the concept of Istisna, which is a contract of sale for goods that are to be manufactured or constructed in the future. Some key points:
- Istisna allows the sale of goods before they are delivered, as long as they involve a manufacturing or construction process. The goods must not already exist.
- The contract specifies details of the goods like type, quality and quantity. The manufacturer is then obligated to deliver the goods.
- Various terms like price, delivery timeline and payment schedules can be negotiated between parties. The price can vary depending on delivery date or contingencies.
- The document outlines sample legal documentation and structures for Istisna contracts,
The document discusses the Islamic financing contracts of Salam and Istisna. Salam allows payment in advance in exchange for deferred delivery of goods, while Istisna is used for manufacturing goods where the price is paid in installments over time or on delivery. Both contracts aim to fulfill financing needs and provide alternatives to interest-based loans. Key conditions and differences between the two contracts are outlined.
Istisna'a is a contract for the sale of goods that will be manufactured or constructed in the future. It allows a sale to take place without immediate delivery. The contract must be for goods requiring labor to produce, not existing assets. Once work begins, neither party can unilaterally terminate the contract. The buyer does not own raw materials until delivery. Payment can be made in advance, installments, or after delivery. The price can change if delivery is delayed or contingencies occur. Istisna'a can finance production overheads in addition to raw materials. It is well-suited for manufacturing financing needs and short-term liquidity management.
The document discusses Islamic banking, its products and services, and how it differs from conventional banking. Islamic banking adheres to Sharia law which prohibits interest and gambling. Its main products include deposit accounts, investment accounts based on profit/loss sharing, and financing through leasing or partnership models. Investments in Islamic banks are not guaranteed and based on shared risk. Oversight of Islamic scholars ensures operations comply with Sharia. The relationship with customers is a partnership rather than debtor-creditor.
This document discusses the concept of al-Tawarruq, an Islamic financing structure. It begins with an overview of Bank Islam Malaysia and its Shariah governance bodies. It then defines al-Tawarruq as the buying of a commodity on deferred payment and selling it for cash to a third party. The document outlines arguments for both prohibiting and permitting al-Tawarruq, and discusses issues around its operationalization. It concludes with trends showing growing use of al-Tawarruq products in Malaysian Islamic banks.
Murabaha is an Islamic financing structure where a financial institution purchases an asset for a customer and sells it to them at an agreed upon markup. The document defines Murabaha, provides examples of how it works, and answers common questions about the process. Key points include:
- In Murabaha, the cost of the asset and the pre-agreed profit amount must be disclosed to the customer.
- The financial institution purchases the asset then sells it to the customer for a higher price paid in installments or all at once.
- The customer can be appointed as an agent to select the asset on behalf of the bank.
BBA is a contract where goods are delivered immediately but payment is deferred to a future date. It involves the prompt delivery of goods to the buyer while postponing payment until a later specified date or through installments. Hadith provide evidence that deferred payment contracts were permitted by the Prophet Muhammad, including instances where he engaged in such contracts and where the payment terms included profit for the seller in addition to the price. For BBA contracts, there must be an offer (sighah), an asset or goods, and an agreed upon price between the buyer and seller. BBA is commonly used in Malaysia for medium to long-term financing of goods like property, vehicles, education costs, and other assets.
The document defines Istisna as an agreement for the sale of an asset that is to be manufactured or constructed in the future at an agreed price. There are two parties in an Istisna contract: the manufacturer (Sani) and the purchaser (Mustani) of the asset (Masnu) to be produced. The contract must specify details like price, quality, quantity, delivery timeframe and location. Risks include delayed delivery, defective goods, increased production costs, and storage risks for parallel Istisna contracts. Scholars differ on obligations if the goods are found defective after delivery or if one party passes away before completion.
The document discusses Salam, a type of Islamic financing contract. Some key points:
1. In a Salam contract, the seller undertakes to supply specific goods to the buyer at a future date in exchange for full payment of the price at the time of the contract.
2. Several conditions must be met for a Salam contract to be valid, including full advance payment, precise specification of goods, and setting an exact date and place of delivery.
3. Salam can help finance agricultural sectors by allowing farmers to receive funds upfront before harvest in exchange for committing to future delivery of crops. Banks can use parallel Salam contracts to mitigate delivery risk.
This document discusses Bay' Bi-Thaman Ajil (BBA), which is an Islamic financing structure that involves the deferred payment of goods. It defines BBA, provides evidence from Islamic sources, discusses its objectives including providing financing flexibility. It covers pricing considerations for BBA, conditions like clearly stating durations, and applications like using BBA for property and vehicle financing. BBA allows the delivery of goods upfront with payment deferred to a later date through installments, at a higher price to compensate for the deferred payment.
Bay al-dayn refers to the sale of debt in Islamic finance. It involves the sale and purchase of a quality debt, either to the debtor or a third party. There are differing views among Islamic scholars on whether debt can be sold to a third party. Proponents argue it can be allowed subject to certain conditions to avoid risks like gharar. Critics argue the sale of debt to non-debtors is prohibited due to issues like selling something one does not possess.
1) Diminishing musharakah is an Islamic financing structure where the bank and customer are partners in purchasing an asset like a home, with the bank paying most of the purchase price initially.
2) Over time, the customer makes regular payments to purchase shares of the bank's ownership stake in the home, thereby gradually acquiring more ownership until they own the home outright.
3) This structure links financing to the real asset sector and involves risk and reward sharing between bank and customer as co-owners, unlike conventional mortgages where only the customer bears risk.
This clause makes the Ijarah contract invalid because selling of the asset cannot be contingent upon fulfilling the terms of the Ijarah contract. Under Islamic finance principles, the lease and sale contracts must be separate, with the sale not being an automatic outcome of fulfilling the lease terms.
Bai muajjal bai salam and istisna in islamic banking pakistanFaria Fary
Bai muajjal bai salam and istisna in islamic banking pakistan. The explanation behind this paper is to aggregate up the report on the thoughts and use of Bai Muajjal Bai Salam and Istisna in Islamic Banking System.
Ijarah is an Islamic financing method where a lessor leases an asset to a lessee for an agreed upon rental payment. There are three key points:
1) Ijarah allows the use of an asset but ownership remains with the lessor, who bears risks related to ownership. The lessee bears risks related to use of the asset.
2) Rental payments and sale of the asset must be structured separately to avoid making the lease contingent on sale.
3) Rules governing ijarah require the asset to be identified and the lease period determined. Rent can be set ahead of time but not increased unilaterally. The lessee bears costs of use while the lessor
This document defines and discusses the concept of bay' al-sarf (money exchange) under Islamic law. It provides definitions, evidence from hadith, and discusses the pillars, conditions, scholars' opinions, and applications of bay' al-sarf, including its use in modern foreign exchange markets through spot transactions or structures using promises or murabahah contracts.
Al Bai Bithaman Ajil - Syariah and legal issues - the Malaysian ExperienceFaizal Ahamad
This document discusses the Shariah and legal issues regarding the application of Al-Bai Bithaman Ajil (BBA) as a financing facility in Malaysia. It begins with defining BBA as a sale contract where payment is deferred to a future date. It then examines the legal evidence for BBA from the Quran and hadiths. It outlines the objectives, pillars, and typical transaction process for BBA. Several Shariah issues are then explored, such as whether BBA resembles forbidden riba, issues around guarantees and rebates. The document also describes how BBA is commonly practiced by Islamic banks in Malaysia through various agreements. It concludes by discussing ongoing Shariah issues regarding BBA financing in Malaysia
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
Istisna is a contract for the production or manufacture of goods or assets, where payment is made in advance based on a description but delivery occurs later, once the item is produced. Key conditions for a valid Istisna contract include specifying the item, price, and delivery date. The contract cannot be used simply as a device to provide interest-based financing. Istisna is permitted for transforming raw materials through a manufacturing process, but not for existing capital assets. Payment can be made in installments corresponding to stages of production.
This document discusses the Shariah rules and principles of Istisna, which is a contract for the production and sale of goods to be delivered at a future date. Key points include:
- Istisna allows the sale of goods before they are produced, provided the specifications, price, and delivery date are agreed upon.
- The sale is finalized once production is complete, distinguishing it from Murabahah where separate sale and financing agreements are required.
- Istisna cannot be used as a device to provide interest-based financing in substance.
- Parallel Istisna allows an institution to purchase goods for a customer via two separate, non-linked contracts for
This document defines and discusses the Islamic financing contract of bay' al-istisna'. It begins by defining istisna' as a contractual agreement with a manufacturer to produce specified goods at an agreed upon price using their own materials and labor. The document then covers evidence for its legitimacy, the key pillars of an istisna' contract, different types including classical and parallel istisna', conditions, differences from salam contracts, and modern applications for istisna' financing such as for industrial production or real estate development.
The document discusses the concept of Istisna, which is a contract of sale for goods that are to be manufactured or constructed in the future. Some key points:
- Istisna allows the sale of goods before they are delivered, as long as they involve a manufacturing or construction process. The goods must not already exist.
- The contract specifies details of the goods like type, quality and quantity. The manufacturer is then obligated to deliver the goods.
- Various terms like price, delivery timeline and payment schedules can be negotiated between parties. The price can vary depending on delivery date or contingencies.
- The document outlines sample legal documentation and structures for Istisna contracts,
The document discusses the Islamic financing contracts of Salam and Istisna. Salam allows payment in advance in exchange for deferred delivery of goods, while Istisna is used for manufacturing goods where the price is paid in installments over time or on delivery. Both contracts aim to fulfill financing needs and provide alternatives to interest-based loans. Key conditions and differences between the two contracts are outlined.
Istisna'a is a contract for the sale of goods that will be manufactured or constructed in the future. It allows a sale to take place without immediate delivery. The contract must be for goods requiring labor to produce, not existing assets. Once work begins, neither party can unilaterally terminate the contract. The buyer does not own raw materials until delivery. Payment can be made in advance, installments, or after delivery. The price can change if delivery is delayed or contingencies occur. Istisna'a can finance production overheads in addition to raw materials. It is well-suited for manufacturing financing needs and short-term liquidity management.
The document discusses Islamic banking, its products and services, and how it differs from conventional banking. Islamic banking adheres to Sharia law which prohibits interest and gambling. Its main products include deposit accounts, investment accounts based on profit/loss sharing, and financing through leasing or partnership models. Investments in Islamic banks are not guaranteed and based on shared risk. Oversight of Islamic scholars ensures operations comply with Sharia. The relationship with customers is a partnership rather than debtor-creditor.
This document discusses the concept of al-Tawarruq, an Islamic financing structure. It begins with an overview of Bank Islam Malaysia and its Shariah governance bodies. It then defines al-Tawarruq as the buying of a commodity on deferred payment and selling it for cash to a third party. The document outlines arguments for both prohibiting and permitting al-Tawarruq, and discusses issues around its operationalization. It concludes with trends showing growing use of al-Tawarruq products in Malaysian Islamic banks.
Murabaha is an Islamic financing structure where a financial institution purchases an asset for a customer and sells it to them at an agreed upon markup. The document defines Murabaha, provides examples of how it works, and answers common questions about the process. Key points include:
- In Murabaha, the cost of the asset and the pre-agreed profit amount must be disclosed to the customer.
- The financial institution purchases the asset then sells it to the customer for a higher price paid in installments or all at once.
- The customer can be appointed as an agent to select the asset on behalf of the bank.
BBA is a contract where goods are delivered immediately but payment is deferred to a future date. It involves the prompt delivery of goods to the buyer while postponing payment until a later specified date or through installments. Hadith provide evidence that deferred payment contracts were permitted by the Prophet Muhammad, including instances where he engaged in such contracts and where the payment terms included profit for the seller in addition to the price. For BBA contracts, there must be an offer (sighah), an asset or goods, and an agreed upon price between the buyer and seller. BBA is commonly used in Malaysia for medium to long-term financing of goods like property, vehicles, education costs, and other assets.
The document defines Istisna as an agreement for the sale of an asset that is to be manufactured or constructed in the future at an agreed price. There are two parties in an Istisna contract: the manufacturer (Sani) and the purchaser (Mustani) of the asset (Masnu) to be produced. The contract must specify details like price, quality, quantity, delivery timeframe and location. Risks include delayed delivery, defective goods, increased production costs, and storage risks for parallel Istisna contracts. Scholars differ on obligations if the goods are found defective after delivery or if one party passes away before completion.
The document discusses Salam, a type of Islamic financing contract. Some key points:
1. In a Salam contract, the seller undertakes to supply specific goods to the buyer at a future date in exchange for full payment of the price at the time of the contract.
2. Several conditions must be met for a Salam contract to be valid, including full advance payment, precise specification of goods, and setting an exact date and place of delivery.
3. Salam can help finance agricultural sectors by allowing farmers to receive funds upfront before harvest in exchange for committing to future delivery of crops. Banks can use parallel Salam contracts to mitigate delivery risk.
This document discusses Bay' Bi-Thaman Ajil (BBA), which is an Islamic financing structure that involves the deferred payment of goods. It defines BBA, provides evidence from Islamic sources, discusses its objectives including providing financing flexibility. It covers pricing considerations for BBA, conditions like clearly stating durations, and applications like using BBA for property and vehicle financing. BBA allows the delivery of goods upfront with payment deferred to a later date through installments, at a higher price to compensate for the deferred payment.
Bay al-dayn refers to the sale of debt in Islamic finance. It involves the sale and purchase of a quality debt, either to the debtor or a third party. There are differing views among Islamic scholars on whether debt can be sold to a third party. Proponents argue it can be allowed subject to certain conditions to avoid risks like gharar. Critics argue the sale of debt to non-debtors is prohibited due to issues like selling something one does not possess.
1) Diminishing musharakah is an Islamic financing structure where the bank and customer are partners in purchasing an asset like a home, with the bank paying most of the purchase price initially.
2) Over time, the customer makes regular payments to purchase shares of the bank's ownership stake in the home, thereby gradually acquiring more ownership until they own the home outright.
3) This structure links financing to the real asset sector and involves risk and reward sharing between bank and customer as co-owners, unlike conventional mortgages where only the customer bears risk.
This clause makes the Ijarah contract invalid because selling of the asset cannot be contingent upon fulfilling the terms of the Ijarah contract. Under Islamic finance principles, the lease and sale contracts must be separate, with the sale not being an automatic outcome of fulfilling the lease terms.
Bai muajjal bai salam and istisna in islamic banking pakistanFaria Fary
Bai muajjal bai salam and istisna in islamic banking pakistan. The explanation behind this paper is to aggregate up the report on the thoughts and use of Bai Muajjal Bai Salam and Istisna in Islamic Banking System.
Ijarah is an Islamic financing method where a lessor leases an asset to a lessee for an agreed upon rental payment. There are three key points:
1) Ijarah allows the use of an asset but ownership remains with the lessor, who bears risks related to ownership. The lessee bears risks related to use of the asset.
2) Rental payments and sale of the asset must be structured separately to avoid making the lease contingent on sale.
3) Rules governing ijarah require the asset to be identified and the lease period determined. Rent can be set ahead of time but not increased unilaterally. The lessee bears costs of use while the lessor
This document defines and discusses the concept of bay' al-sarf (money exchange) under Islamic law. It provides definitions, evidence from hadith, and discusses the pillars, conditions, scholars' opinions, and applications of bay' al-sarf, including its use in modern foreign exchange markets through spot transactions or structures using promises or murabahah contracts.
Al Bai Bithaman Ajil - Syariah and legal issues - the Malaysian ExperienceFaizal Ahamad
This document discusses the Shariah and legal issues regarding the application of Al-Bai Bithaman Ajil (BBA) as a financing facility in Malaysia. It begins with defining BBA as a sale contract where payment is deferred to a future date. It then examines the legal evidence for BBA from the Quran and hadiths. It outlines the objectives, pillars, and typical transaction process for BBA. Several Shariah issues are then explored, such as whether BBA resembles forbidden riba, issues around guarantees and rebates. The document also describes how BBA is commonly practiced by Islamic banks in Malaysia through various agreements. It concludes by discussing ongoing Shariah issues regarding BBA financing in Malaysia
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
Istisna is a contract for the production or manufacture of goods or assets, where payment is made in advance based on a description but delivery occurs later, once the item is produced. Key conditions for a valid Istisna contract include specifying the item, price, and delivery date. The contract cannot be used simply as a device to provide interest-based financing. Istisna is permitted for transforming raw materials through a manufacturing process, but not for existing capital assets. Payment can be made in installments corresponding to stages of production.
This document discusses the Shariah rules and principles of Istisna, which is a contract for the production and sale of goods to be delivered at a future date. Key points include:
- Istisna allows the sale of goods before they are produced, provided the specifications, price, and delivery date are agreed upon.
- The sale is finalized once production is complete, distinguishing it from Murabahah where separate sale and financing agreements are required.
- Istisna cannot be used as a device to provide interest-based financing in substance.
- Parallel Istisna allows an institution to purchase goods for a customer via two separate, non-linked contracts for
Istisna is a contract for the sale of goods that do not currently exist, where the seller undertakes to manufacture or build the goods according to the buyer's specifications. An Islamic bank can use Istisna to finance projects by first contracting to purchase goods from a manufacturer, then entering a parallel Istisna contract to sell those same goods to a customer on a deferred payment basis. The bank must assume ownership risk and ensure the parallel contract does not transfer its obligations to the manufacturer. Payment can be made in installments linked to stages of completion.
The document discusses the contract of Istisna in Islamic finance. Istisna is a contract for the manufacture or construction of specified goods to be delivered in the future. Key points include:
- Istisna involves a seller (San'e) who agrees to manufacture goods according to a purchaser's (Mustasne) specifications for an agreed upon price, which can be paid in installments.
- The goods must involve a manufacturing process and be identified by description, not existing goods. The price must also be known at the time of agreement.
- An Istisna contract is binding and can only be amended or terminated by mutual consent. Supervision of production and inspection
The document discusses the contract of Istisna in Islamic finance. Istisna is a contract for the manufacture or construction of specified goods to be delivered in the future. Key points include:
- Istisna involves a seller (San'e) who agrees to manufacture goods according to a purchaser's (Mustasne) specifications for an agreed upon price, which can be paid in installments.
- The goods must involve a manufacturing process and be identified by description, not be existing assets. Real estate development is also allowed.
- Important principles governing Istisna contracts involve the contracting parties, subject matter including object and price details, conclusion of the contract, supervision of execution
This document provides an overview of topics related to legal aspects of business, including the Indian Contract Act 1872, Sale of Goods Act 1930, and key concepts such as formation of contracts, conditions and warranties, transfer of property, and sale by sample. Specifically, it outlines the essential elements of a valid contract, discusses offer and acceptance, consideration, and performance. It also summarizes formation of contracts for sale, subject matter of contracts, ascertainment of price, and implied conditions regarding title, quality, and fitness for purpose.
This document provides an overview of the Islamic financing contract of Istisna'.
Istisna' is a contract where a person sells a specific product that involves both raw materials and labor for a known price, to be delivered at a specified future date. It is used to finance the manufacturing or construction of assets.
The key characteristics of Istisna' discussed are: it must involve both raw materials and labor; the item must be precisely described; delivery dates and payment terms must be specified; and the contract is binding on both parties. Istisna' is distinguished from other contracts like Salam, Ijarah, and Ju'alah. Issues around the nature of the commodity,
This document discusses two Islamic financing contracts: Salam and Istisna.
Salam allows farmers and traders to receive payment in advance for goods to be delivered later. It benefits both parties, with the seller receiving early payment and buyer getting goods at a lower price. Istisna finances manufacturing by allowing payment to be made to a manufacturer before production is complete.
The document defines each contract, outlines their key terms and conditions, compares their differences, and discusses risks for Islamic banks engaging in Salam, such as counterparty default, price fluctuations, and ensuring parallel contracts are fulfilled. It provides guidance on mitigating risks through security, penalties, and alternate supply sources.
This document discusses using istisna' (commissioned production) contracts as an interest-free alternative for financing infrastructure projects. Istisna' allows for both the price and goods to be deferred, unlike other Islamic financing contracts. The document proposes a formula where investors construct facilities for a public authority in exchange for deferred price certificates (DPCs) representing the authority's debt. While DPCs cannot be traded before maturity, the document suggests methods for imparting some liquidity, including using them to purchase goods at a higher deferred price or having authorities control their transferability. Islamic banks could facilitate such deals through marketing and collecting repayments. The document also discusses structuring different maturity tranches to attract longer-term investors
The document provides an overview of the Sale of Goods Act of 1930 in India. Some key points:
1) Originally, sale and purchase of goods was regulated under the Indian Contract Act of 1872, but a separate Sale of Goods Act was passed in 1930 to overhaul the laws and meet modern needs.
2) The Sale of Goods Act defines a sale as a contract whereby the seller transfers ownership of goods to the buyer for a price. It distinguishes between a sale, where ownership transfers immediately, and an agreement to sell, where ownership transfers conditionally or at a future time.
3) For a contract of sale to be valid, there must be two parties, goods as the subject matter, transfer of
This document outlines standards and guidelines for Istisna'a contracts from AAOIFI Sharia Standard No. 11. Key points include:
- Istisna'a contracts can be used before the institution owns materials, and the institution can use customer price quotes to evaluate costs. However, the institution cannot act merely as a financial intermediary.
- Istisna'a contracts are binding once conditions like specifications are met. Payments can be made in stages as work is completed.
- The subject of an Istisna'a must be something that can be transformed through production. Existing assets cannot be the subject. Guarantees like earnest money are allowed.
-
Diminishing Musharakah is a financing structure where a financier and client jointly own a property or business, with the client purchasing incremental shares from the financier over time until becoming sole owner. Key elements include creating joint ownership, the financier leasing their share to the client, and the client promising to periodically purchase portions of the financier's share.
Istisna is a sale contract where a manufacturer produces a specified good for a purchaser using their own materials. The price and specifications must be agreed upon upfront. Istisna can be used for project financing, such as building a house or factory.
Ijara is a leasing contract where the owner transfers usage of an
Islamic Financial Contracts Training Document_Maxbridge.pptxAdem Mohammed
The document discusses various Islamic finance contracts and products, including their definitions, rules, and classifications. It provides information on valid, invalid, and void contracts in Islamic finance. It also explains the difference between a promise and a contract, and covers prohibited elements in contracts. Specific Islamic finance contracts and products discussed include Musharaka, Mudaraba, and Wakala.
11262014 The Legal Environment of Business, Ch. 6 - Learning.docxhyacinthshackley2629
11/26/2014 The Legal Environment of Business, Ch. 6 - Learning Activity - Week3 - LAW/421 - eCampus
https://newclassroom3.phoenix.edu/Classroom/ToolContainer.jsp?context=co&contextId=OSIRIS:44425562&activityId=96f01290-3b42-490d-be28-e6f95540138d… 1/24
Overview and Formation of Contracts
Learning Outcomes Checklist
After studying this chapter, students who have mastered the material will be able to:
Distinguish between contracts based on categories and apply the correct source of law to specific contracts.
Explain the concept of mutual assent by defining the legal requirement of agreement.
Identify and explain the other requirements for the formation of a valid contract.
List the events that terminate the power of acceptance and distinguish between termination through action of the parties versus
operation of law.
Apply the mailbox rule to resolve a question of when acceptance is effective.
Articulate the legal requirement of consideration and identify which contracts do not require consideration.
Give examples of circumstances where the legal requirements of capacity or legality are at issue.
Explain the concept of enforceability and geniune assent.
Categorize what contracts must be in writing to be enforceable and explain the minimum required terms that satisfy the law.
The law of contracts is one of the most common and important areas of the law that business owners and managers deal with on a dayto
day basis. Everyone working in a business environment will, in one form or another, deal with contracts throughout their career.
Employment contracts, leases, and agreements of sale for assets or land or merchandise are just a few examples of contracts commonly
used in business transactions. The simple act of purchasing office supplies from a local merchant is a form of agreement governed by
contract law.
Formation and legal enforcement of agreements have been recognized since ancient times. As early as 1780 BC, contracts were being
enforced by the Babylonians by virtue of the authority of the Code of Hammurabi. During much of the rule of the Roman Empire, the
Justinian Code included the rule pacta sunt servanda (agreements shall be kept). Many legal scholars, notably Dean Roscoe Pound, have
written extensively on the importance of society recognizing legally enforceable promises and providing remedies for those who suffered
losses. Consider the consequences of failing to provide for legal enforceability of a promise and its impact on the very fabric of civilized
societies.
Since business owners and managers are often involved in daytoday oversight of various agreements and transactions, understanding
contract law reduces risk by limiting liability through the recognition of potential legal issues, crafting an appropriate response, and
implementing a system to ensure compliance. Contract law is also essential to structuring business transactions in strategic ways to
achieve business objectives without excessive risk.
In this.
Sale of-goods-act by Neeraj Bhandari ( Surkhet.Nepal )Neeraj Bhandari
This document summarizes key concepts from the Sale of Goods Act relating to contracts for the sale of movable goods in India. It defines a sale as a contract where ownership transfers from seller to buyer, while an agreement to sell involves future or conditional transfer of ownership. It outlines essential elements of a sale contract, implied conditions and warranties, and consequences of breaching conditions or warranties. Exceptions to the caveat emptor doctrine are noted. Hire-purchase agreements and their differences from installment sales are also summarized.
This document discusses key concepts in Islamic contract law:
1. It defines a contract as an agreement between two or more parties through offer and acceptance regarding a subject matter, with mutual consent called an Aqd.
2. It outlines important terminologies - undertaking, unilateral promise, and bi-lateral promise - and distinguishes between promises and contracts.
3. It explains the basic elements of a valid Islamic contract, including specified parties and subject matter, offer and acceptance, and transfer of ownership.
The document discusses the key aspects of a contract of sale under Indian law. It begins by defining a contract of sale and differentiating between a sale and an agreement to sell. It then covers the essential elements of a valid contract of sale, implied conditions and warranties, caveat emptor, and how the transfer of property occurs. Specifically, it examines how property is transferred for unascertained goods, specific goods, and goods sold on approval. The document provides a comprehensive overview of contract of sale with examples to illustrate important legal concepts.
The document discusses key concepts related to contracts for the sale of goods under Indian law. It defines terms like buyer, seller, sale, agreement to sell, delivery, and outlines essential elements of a valid contract for sale like two parties, goods as the subject matter, and price in money. A sale involves immediate transfer of ownership, while an agreement to sell involves future transfer, with ownership remaining with the seller. Breach of a condition allows treating the contract as void, while breach of a warranty only permits damages. Stipulations can be conditions or warranties depending on their importance to the purpose of the contract.
The document discusses the primary and secondary sources of Indian law. It defines custom, judicial precedent, statute, and personal law as the primary sources. It also discusses English law, principles of justice/equity/good conscience as secondary sources. It provides details on customs, judicial precedent based on stare decisis, statute law created by legislation, and personal laws governing Hindus, Muslims, Christians. It also summarizes the key sources of English law that influence Indian law - common law, equity, law merchant, and statute law.
The Sale of Goods Act 1930 governs contracts for the sale of goods in India. A contract of sale involves the transfer of property in goods from a seller to a buyer for a price. For a valid contract of sale, there must be an offer and acceptance between two parties regarding identifiable goods for a monetary consideration. The risk and rights of the parties depend on whether the property is transferred immediately or in the future. The contract also becomes void if the goods perish before the transfer of property.
1. 1
Islamic Mode of Finance "Istisna"
Alfalah Institute of Banking and finance
Bahauddin Zakariya University Multan
MBA (Banking & Finance)
4th
Semester
2. 2
Article
On
"Istisna" Islamic Mode Of finance
Submitted to:
Mr. Umair Shahid
Submitted by:
Muhammad Aamir Ayaz
MBK-11-01
Muhammad Asif
MBK-11-03
Rashid Aqeel
MBK-11-21
Muhammad Faheem
MBK-11-32
Kashif Waseem
MBA (B & F) 4th
semester
Alfalah Institute of Banking and Finance
3. 3
Abstract:
This paper examines the meaning and concepts of the Islamic mode of finance istisna in Islamic
banking. Different thoughts of Islamic scholars about istisna are given. How the istisna compliance
with Islamic shariah. Two case studies are discussed that how the istisna in Islamic banking work. It is
shown that how istisna can be used for export finance.
Introduction:
This paper will analytically explain the theory of the contract of istisna' and its practical application in
Islamic banking and financial institutions operations. The topics to be discussed, among others, are
the concept and definition of istisna', differences between Salam sale and istisna', legitimacy of
istisna', the binding effect of istis.nii' contract, conditions for the legality of istisna, penalties in
istisna', termination of the contract of istisna. In this article also two case studies are discussed. with
the help of these case studies you will be able to understand the physical application of the istisna in
Islamic banking.
Istisna and its concepts and definition:
Definition: The word istisna is derived from the word Sana'a which literally means "making,
manufacturing or constructing something."
Istisna„a, is a special kind of Bai„where the sale of a commodity is transacted before the commodity
comes into existence.
We can define istisna in following way:
"Istisna„a is an agreement in a sale at an agreed price whereby the purchaser places an order to
manufacture, assemble or construct (or cause so to do) anything to be delivered at a future date."
OR
In other word it is a contract ('aqd) made with a manufacturer pursuant to which the manufacturer
agrees to produce a specific thing for a purchaser on certain agreed upon specifications at a
determined price and for a fixed date of delivery.
Parties:
There are two parties in istisna
1. Sani
2. Mustani
Sani: The person who makes it is called sani'.
Mustani: person who causes it to be made called mustani.
4. 4
Masnu: the thing made called Masnu.
Subject Matter of Istisna:
This contract is valid only for those objects that have to be manufactured or constructed. But it is not
necessary that the seller himself manufactures the item, unless stated in the contract. The subject of
Istisna„a (the thing to be manufactured or constructed) must be known and specified to the extent of
removing any ignorance or lack of knowledge of its kind, type, quality and quantity.
The sellers agree to provide the subject matter transformed from raw materials through manufacturing
or goods manufactured by human hands. It is invalid for natural things or products like animals, corn,
fruit, etc. Both unique and homogeneous types of assets are covered under Istisna„a provided their
specifications are agreed at the time of the contract.
For example, items of unique description that have no regular market, have no substitute in the market
and where the value of each unit of that type of goods may be different, are covered by istisna„a.
In Istisna„a, the manufacturer arranges both the raw material and the labour. If material is supplied by
the purchaser and the manufacturer is required to use his labour and skill only, this is the contract of
Ujrah (doing any job against an agreed wage/remuneration) and not of Istisna.
It is not permissible that the subject matter of an Istisna„a contract be an existing and identified asset.
For example, it is invalid for an Islamic bank to conclude a contract to sell a particular designated car
from a factory on the basis of Istisna„a. But an asset that has already been produced by the seller or by
another can become the subject matter of Istisna„a provided that it is not identified in the contract and
the contract identifies speciation only.
An Istisna„a contract may be drawn for real estate developments on designated land owned either by
the purchaser or the contractor, or on land in which either of them owns the usufruct. It is allowed
because the contract involves the construction of specified buildings that will be built and sold
according to specification and, in this case, the contract of Istisna„a does not specify a particular
identified place.
Price in Istisna:
The price in Istisna„a can be in the form of cash, any tangible goods or usufruct of identified assets.
The price should be known in advance to the extent of removing ignorance or lack of knowledge and
dispute. It is permissible that the price of Istisna„a transactions varies in accordance with variations in
delivery date. There is also no objection to a number of offers being subject to negotiation, provided
that eventually only one offer is chosen for concluding the Istisna„a contract. This is to avoid
uncertainty and lack of knowledge that may lead to dispute.
The price, once settled, cannot be unilaterally increased or decreased. However, as manufacturing of
huge assets may involve more time, sometimes necessitating many changes, the price can be
5. 5
readjusted by the mutual consent of the contracting parties because of making material modifications
to the item to be manufactured or due to unforeseen contingencies or changes in prices of the inputs.
It is not necessary in Istisna„a price is paid in advance (unlike Salam, in which spot payment of price
is necessary). The price can be paid in installments within the agreed time period and can also be
linked with the completion stages.
Penalty Clause: Delay in Fulfilling the Obligations:
An Istisna„a contract may also contain a penalty clause stipulating an agreed amount of money for
compensating the purchaser adequately if the manufacturer is late in delivering the asset. Such
compensation is permissible only if the delay is not caused by intervening contingencies (force
majeure). Further, it is not permitted to stipulate a penalty clause against the purchaser for default in
any payment because this would be Riba. A voluntary rebate for prepayment is permissible, provided
it is not agreed in the contract. It can be agreed, in other words, between the parties that in the case of
delay in delivery, the price shall be reduced by a specified amount.
The scholars have contended this on the basis of analogy. The classical jurists allowed such a
condition in Ijarah, e.g. if a person hires the services of a tailor, he may tell him that the wage will be
10 dirham's if he prepares the clothes within a week and 12 if within two days. By analogy, experts
allow a penalty clause in the Istisna„an agreement in the case of a delay in delivery, supply or
construction of the subject of Istisna„a.
In Fiqh, this principle is termed Shart-e-Jazai (penalty condition), or the condition of
decreasing the price on account of a delay in delivery of the subject matter of Istisna„a. This reduction
will enhance the income of the orderer (purchaser) and it will not go to charity, as in the case of all
other modes. This special permission is on account of the fact that, in Istisna„a, timely completion of
the work depends on labour and commitment of the manufacturer (seller). If he does not devote full
time to completion of the job of a particular contract and engages in other contracts in his quest for
more and more orders and maximum earnings, he can be fined. This benefit would go to the
purchaser, who might suffer in the case of non delivery at the stipulated time. Any such undertaking
by the manufacturer would be binding on him.
The Binding Nature of an Istisna Contract:
The Hanafi jurists generally divide the binding effect of this kind of contract into three stages. Their
views are mainly based on their position about the legal basis of this contract.
At the first stage, where the work of manufacturing has not yet started, the Hanafi jurists are
fully agreed that the contract is not binding ('aqd ghayr lazim) upon either of the parties and the
6. 6
manufacturer may refrain(stop) from making the commodity. On the other hand, both contracting
parties have the right of revocation.
At the second stage, the manufacturer may finish making the needed goods, but the purchaser has not
seen the manufactured object yet. The manufacturer still has the right even to sell the commodity to a
third party.
The third stage is when the required goods have been manufactured and presented to the purchaser. In
this case, Muslim jurists have different opinions whether the purchaser has the right to reject the
commodity or not. AI-Imam Abu Hanifah is of the opinion that the purchaser can exercise his option
of inspection (Khiyar-e-RoiyyaT) after seeing the goods, because istisna' is a sale and if somebody
purchases a thing which he has not seen, he has the option to cancel the sale after seeing it. The same
principle is also applicable to istisna'. Abu Yusuf, a follower of Abu Hanifah, opines that if the
commodity was in conformity to the inspections agreed upon between the parties at the time of the
'contract, the purchaser is bound to accept the goods and he cannot exercise the option of inspection
(khiyar al ru'yah).
Finally, influenced by Abu Yusuf new opinion and the change of circumstances in the new
and modem transactions, Majallah al-Ahkam al- 'Adliyyah considers the contract of istisna' as binding
from the beginning. "After istisna is concluded by an agreement, the parties cannot go back on the
bargain. But if the thing does not agree with the description, the person who gives the order has an
option". It is clear from the above mentioned of Majallah that the contract is binding from the
beginning unless the recommended goods do not fulfill the prescriptions in the contract.
Conditions for the Legality of Istisna:
These conditions are divided into general conditions and specific conditions. In the case of general
conditions, the istisna' sale must fulfill the requirement of a valid contract as discussed by the jurists,
i.e. the capacity of the contracting parties, offer and acceptance, and the subject-matter should be a
valuable thing. In addition to these general conditions, there are some specific conditions for the
contract of istisna' to be legal, as follows:
1. The object must be precisely determined both in its essence and quality. In other words, it is a
condition in istisna' contract to state in the clear type, quality, quantity and all the
specifications required because it is a condition that the sold commodity must be known by
the parties involved to avoid ignorance which may lead to dispute later on.
2. The recommended manufactured goods should be things that people customarily deal with in
the field of manufacture. Otherwise, the contract of istisna' will be invalid. In this regard, Ibn
'Abidin, a Hanafi Jurist, is of the opinion that it is not permissible to practice istisna' in what
7. 7
is not familiar among people under this contract such as the manufacture of cloth. However,
the example of cloth manufacture prohibited by the early Hanafis was undoubtedly different
from the modem practice, as nowadays it has become very familiar. Perhaps what was said by
the earlier jurist was just an example on reason the types of manufacture differ from age to
age and for this reason the Majallah al-Ahkam al- 'Adliyyah cites new permissible things
stating that: "or if there is a bargain with a ship-carpenter to make a ship or boat and its
length, breadth, quality and things required are explained, the istisna' becomes a complete
contract".
3. It is a condition that the time of delivery is specified whether it is short or long so as to avoid
ignorance, which might lead to conflict between the two parties. Nevertheless, this is not the
position in Abu Hanifah view where he says that the time of delivery must not be stipulated in
the contract of istisna', otherwise the contract will be a contract of Salam rather than istisna.
However, the two disciples of Abu Hanifah, namely, Abu Yusuf and al-Shaybaru hold that it
is not a condition to stipulate a time of delivery. If the time of delivery stipulated, the contract
would still be a contract of istisna' and would not be transformed to a contract of Salam. They
argue that this is customarily practiced and people normally stipulate a time of delivery in the
contract of istisna. As istisna itself is allowed, because of the need and practice of the people,
the stipulation of time for delivery would be part of the practice and it would not transformed
istisna' into a Salam contract. It is worth to mention here that the opinion of Abu Yusuf and
Muhammad b. al-Hasan al-Shaybani is preferable to the view of Abu J:Ianifah and in line
with the practice of the modem transaction which makes the stipulation of a time of delivery a
necessary requirement. Moreover, in our time, the era of heavy industry and technology,
when the manufacturing of some commodities may take years to complete, it is reasonable
and rational to make the stipulation of delivery compulsory for the stability of transactions.
4. The materials should be supplied by makers, if they are supplied by the buyer, the contract is
regarded as al-Ijarah and not istisna'.
5. It is a condition that the place of delivery is stated if the commodity needs loading or
transportation expenses.
Guarantees:
The bank, acting either in the capacity of the manufacturer or of the ultimate purchaser, can give or
demand security, collateral or a performance bond to ensure that the work is performed within the
agreed time and as per specifications. It can also get „Arbun, which will either be part of the price if
the contract is fulfilled, or forfeited if the contract is rescinded. However, it is preferable that the
amount forfeited be limited to an amount equivalent to the actual damage suffered.
8. 8
Parallel Contract – Subcontracting:
Istisna is not confined to what the manufacturer himself makes, and if the contract is silent or it
expressly allows such, the seller/supplier can get it manufactured as per the specifications given in the
contract from anyone else. Financial institutions, as sellers, would contract with someone else to
manufacture the same. This could be a case of a Parallel Istisna„a contract.
An Istisna„a contract shall be entered into, on the one hand, between the bank and a customer, while
on the other hand, the bank may enter into a Parallel Istisna„a with a third party (contractor) for
preparation of the subject matter of the first Istisna„a. The delivery date of the parallel contract must
not precede the date of the original Istisna„a contract.
In one contract, the bank will be the buyer and in the second, the seller. Ownership related risks of the
two contracts will remain separate and will have to be borne by the respective parties so long as the
asset is not transferred to the other. Each of the two contracts shall be independent of the other. They
cannot be tied up in a manner whereby the rights and obligations of one contract are dependent on the
rights and obligations of the other contract. Further, Parallel Istisna is allowed with a third party only.
It is permissible for the bank to buy items on the basis of a clear and unambiguous
Specification and to pay, with the aim of providing liquidity to the manufacturer, the price in cash
when the contract is concluded. Subsequently, the bank may enter into a contract with another party in
order to sell, in the capacity of manufacturer or supplier, items whose specifications conform to the
wishes of that other party, on the basis of Parallel Istisna„a, and fulfill its contractual obligation
accordingly.
Post Execution Scenario:
Work in Process:
Before the manufacturer starts work on the subject matter of Istisna, both of the parties have the right
to rescind the contract. Once the seller/manufacturer initiates the work, the contract becomes binding
and any change is possible only with mutual consent. The parties to the contract are inevitably bound
by all obligations and consequences flowing from their agreement. The purchaser will make the
payment as per the agreed schedule and the manufacturer/seller will supply the asset as per the
specifications agreed. If the subject matter does not conform to the specifications agreed upon, the
customer has the option to accept or to refuse the subject matter. The purchaser shall not be regarded
as the owner of the materials in the possession of the manufacturer for the purpose of producing the
asset.
If the actual cost incurred by the bank (as seller) on an asset sold on Istisna„a is less than the forecast
cost, or the bank gets a discount from the subcontractor on a Parallel Istisna„a basis, the bank is not
obliged to give a discount to the purchaser and any additional profit, or loss if any, pertains to the
9. 9
bank. The same rule adversely applies when the actual costs of production are greater than the
forecast costs.
If so desired by a customer, the Islamic bank (as purchaser) may replace an existing contractor to
complete a project which has already been commenced by the previous contractor. For this purpose,
the existing status of the project needs to be assessed, whereby the cost of such assessment and all
liabilities as of that date shall remain the responsibility of the customer. The bank, working as a
manufacturer (seller), must assume liability for ownership risk, maintenance and Takaful expenses
prior to delivering the subject matter to the purchaser as well as the risk of theft or any abnormal
damage. The manufacturer cannot stipulate in the contract of Istisna„that he is not liable for defects.
Therefore, if the bank is the manufacturer for the purpose of an Istisna„a contract, it cannot absolve
itself from loss on this account. The orderer (purchaser) has the right to obtain collateral from the
manufacturer for the amount he has paid and as regards delivery of the commodity with specifications
and time of delivery.
A voluntary rebate for prepayment is permissible, provided it is not agreed in the contract.
Delivery and Disposal of the Subject Matter:
1. Before delivery of the asset to the purchaser, it will remain at the risk of the seller; any loss to the
raw material or to the item in the process of manufacturing will be borne by him.
2. After delivery, risk will be transferred to the purchaser.
3. Possession of goods can be physical or constructive, depending upon the nature of the asset and
transfer of ownership/risk. Transferring risk and delegating authority of use and
utilization/consumption are the basic ingredients of constructive possession. For this, there should be
a demarcation line between handing over and taking over of possession.
4. If a manufactured asset is delivered before the agreed date, the purchaser should accept it if the
asset meets the stipulated specifications. He can refuse to accept the goods if these are not as per the
agreed specifications or there is some other genuine justification for not accepting before the agreed
date (Istisna„a Standard, clauses 6/1 to 6/3).
5. If the condition of the subject matter does not conform to the contractual specifications at the date
of delivery, the ultimate purchaser has the right to reject the subject matter or to accept it in its present
condition, in which case the acceptance constitutes satisfactory performance of the contract.
The Potential of Istisna:
Islamic banks can use Istisna for manufacturing of high technology goods like aircrafts, ships,
buildings, dams, highways, etc. It can also be used for housing and export financing, meeting working
capital requirements in industries where sale orders are received in advance.
Potential areas are given below:
• financing the construction industry – apartment buildings, hospitals, schools and Universities;
10. 10
• Development of residential/commercial areas and housing finance schemes;
• financing high technology industries such as the aircraft industry, locomotive and shipbuilding
Industries.
Risk Management in Istisna:
Banks could face the following risks in Istisna„a-based financing:
• Settlement risk;
• Price risk;
• Delivery risk;
• Possession risk;
• Market risk.
As a whole, risks in Istisna„a would be mitigated by taking proper collateral, performance bonds,
technical expertise in the relevant areas for timely and effective marketing and for ensuring cost
effectiveness, by resorting to suitable Takaful policies, by choosing good clients and by adopting
suitable capital budgeting and liquidity management policies. Mitigation for some of the risks is
shown in Box 10.9. As little is available so far on the practical application of Istisna„a, we shall also
give a number of hypothetical case studies.
Risk Mitigation in Istisna:
Ownership of material:
The Islamic bank is not the owner of the materials in the possession of the manufacturer for the
purpose of producing the asset. It can have no claim on it in the case of any nonperformance.
Security is available with the bank.
Delivery risk
The bank may be unable to complete the manufacturing of goods as scheduled due to late delivery of
completed goods by the subcontractor in Parallel Istisna„a.
On the basis of the rule of “Shart-e-Jazai”, the bank can put in the Istisna agreement a clause
to reduce the Istisna„a price in the case of delay.
Sale not permissible before delivery
Sale of Istisna„a goods is not allowed before taking physical possession. This may lead to asset, price
and marketing risk
The bank can take a “promise to purchase” from a third party and can make arrangements for
sale through agency.
Quality risk
The Islamic bank gets delivery of inferior quality manufactured goods, which also may affect the
original contract.
11. 11
The bank can obtain a guarantee of quality from the original supplier.
Termination of the Istisna' Contract:
As one of the nominated contracts in Islamic Commercial Law, istisna' is terminated by the normal
ways of termination of contracts, namely when manufacturer makes the commodity and presents it to
the purchaser and receives the payment.
Furthermore, the jurists are of the opinion that the contract of istisna' can be terminated by the death
of one of the contracting parties. This rule is based on the analogy of istisna' to Ijarah in the Hanafi
School due to the similarity between ijarah and istisna.' However, due to the extensive application of
the contract of istisna' now a days' transactions, the manufacturer is not a single person. It is rather a
large corporation. Therefore, it is not applicable the contract will be ended by the death of one or two
persons because this one or the other has signed the contract on behalf of the corporation. Thus, it
must be differentiated between a contract of istisna' between individuals and one which involves
corporations and companies.
In the former case, it will be terminated by the death of one of the contracting parties, but in the
second case, it will continue as long as the corporation or company is in existence and will not be
affected by the death of its members.
12. 12
Housing Finance through Istisna:
Rs. 5million+rent over a period
Of 10 years
Hypothetical Case Study:
The following could be the flow process:
1. Suppose a builder/contractor C has announced a scheme for the construction and sale of apartments
costing Rs. 7 million each. (He demands cash and has no financial relationship with the bank.)
2. Client A decides to have an apartment; he has Rs. 2 million and needs financing from bank B of
Rs. 5 million for ten years.
Bank Rs.5M DIMINISHING MUSHARAKAH CustomerRs.2 M
Spot
Deferred
Rs.7M
Istisna
Spot
Contractor
Istisna-Housing Finance during Construction Phase
13. 13
3. A and B create a Musharakah pool of Rs. 7 million under the principle of Shirkat_ul_ milk and
jointly enter into Istisna agreements with C for the construction and sale of an apartment of defined
specifications and pay Rs. 7 million in four installments.
4. C starts building the apartment as per the requirements of the Istisna contract.
5. The bank appoints A its agent to supervise the construction work.
6. C hands over the apartment to A; B leases out its part of ownership to A in rent.
7. A purchases one unit of the bank‟s part every month; the rental starts decreasing after each payment
and after ten years, the bank‟s investment is redeemed and ownership is transferred to the client.
Istisna for Pre shipment Export Finance:
Rs.110M
(Export proceeds)
Hypothetical case study:
1. Client A gets an export order for the export of ready-made garments of value
Rs.110 million.
2. A approaches bank B for financing and indicates that he has the expertise to prepare the
consignment.
Istisna-Pre shipment -Export
Bank Rs.100 M (Istisna)
Spot
Customer
Deferred
Agent
EXPORT Rs.110 M
14. 14
3. B enters into an Istisna agreement with A for the supply of garments of a specified nature for
Rs. 100 million within a period of three months. This contract will be a sale; A will make
delivery at the agreed time.
4. B also appoints A its agent for export of the garments when they come under its ownership.
5. A foreign importer opens an L/C of value Rs. 110 million in the name of B (the L/C can also
be in the name of A but that would be under an agency agreement). If an L/C has already
been opened, Istisna is not possible (avoiding Bai„ al „Inah).
6. A prepares the garments and informs B to take delivery; the bank takes actual/constructive
delivery of the garments and henceforth the garments come under its risk/liability.
7. A exports the consignment as agent of B, sending documents on behalf of B. B gets Rs. 110
million, as per the terms of the L/C.
Difference between Istisna’ and Salam:
Istisna Salam
1. The subject of Istisna is always a thing
which needs manufacturing.
The Salam subject can be either
natural products or manufactured
goods.
2. The price in Istisna does not
necessarily need to be paid in full in
advance.
The price has to be paid in full in
advance.
3. Penalty in the form of a reduction in
price on account of a delay in
delivery will reflect the income of
the purchaser (the principle of Shart-
e-Jazai approved by the jurists.)
Penalty for late delivery shall go to
charity and the P&L Account of the
purchaser (bank) will be unaffected.
4. As long as work has not started,
Istisna is nonbinding; any of the
parties can revoke the contract.
Salam is a binding contract; once
executed, it cannot be rescinded
without the consent of the other.
15. 15
Difference between Istisna’ and Ijarah:
Istisna Ijarah
1. The manufacturer uses his own
materials and the sale price is fixed.
The manufacturer on an Ujrah basis uses
the material provided by the buyer and he
is paid the agreed wages.
2. Istisna can be of anything that needs
manufacturing.
Ijarah can be only on those assets
the corpus of which is not consumed
with use.
3. In Istisna, asset risk is transferred to
the purchaser soon after delivery of the
item to him and he has to pay the price
irrespective of what happens to the
asset.
In Ijarah, asset risk remains with the
owner (lessor) and the lessee has to give
rental only if the assets capable of being
used as per normal market practice.
Conclusion:
The above discussion can be safely concluded that istisna contract in Islamic Commercial Laws
is one of the important methods of investment in Islamic banking and can play an important role in
economic development. It encourages the demand for manufacturing goods, financing economic
activities, contributing to the stabilization of prices of manufactured goods, promoting industrial and
technological advancement and making use of the available possibilities of the economy.
References:
1. Meezan Bank's Guide to Islamic Banking by Dr. Imran Ashraf Usmani.
2. Istisna in Islamic Banking: Concept and Application by Joni Tamkin Borhan.
3. Understanding Islamic Finance by Muhammad Ayub.
4. AAOIFI, 2004–5a, clauses.
5. Muhammad al-Bashir, op.cit, pp. 80-82.
6. Majallah al-Ahkam al- 'Adliyyah, Art. 388.
7. Draft Shariah Parameter Reference5:Istisna Contracts by Central Bank Of Malaysia
8. Istisna by Al Maali Islamic Finance Training & Consultancy
9. Islamic Banking and Finance By Mufti Muhammad Taqi Usmani.