Istisna v final by wasimullah
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Istisna v final by wasimullah
- 1. Presented by Prof Wasimullah Islamic Banking and Finance | Faculty of Management Sciences | International Islamic University Islamabad
- 2. Istisna
- 3. Istisna Definition and Shariah Legitimacy Conditions of Istisna Models of Istisna Application of Istisna Meezan Bank Istisna Product Comparisons Accounting Treatment & Specimens
- 4. Istisna General Rules of Sale in Islam Existence | Ownership | Possession Istisna Definition “Istisna is a sale transaction where commodity is transacted before it comes into existence. It is an order to producer to manufacture a specific commodity”
- 5. Istisna Shariah Legitimacy • On Bases of Urf • Sharia gives permission to recognize customs that prevailed at the time of Muhammad (SAW) but were not abrogated by the Qur'an or the Hadis. • Under Qiyas • Subject Matter in this contract does not exist but its availability is Certain • Under Istishan • Hanfi School of Thought People are Unanimous on its need • Hadis Reference “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]
- 6. Istisna Similarities Istisna Salam • Subject Matter • Non Existence of • Subject Matter Manufacture able Anything Subject Matter • Price • Price • Future Delivery Prompt , Installments Full Advance Payment Deferred • Termination • Termination Differences Once affected can’t be Unilaterally Before Start unilaterally cancelled. of Work. • Time of Delivery. • Time of Delivery. Fixed Delivery Time Variable Delivery Time
- 7. Istisna Subject Matter Price Delivery Security Termination
- 8. Istisna Subject Matter • The requirement of a valid contract. Capacity of the contracting parties, offer and acceptance • Subject Matter in accordance with Islamic Principles • Manufacture able Goods Construction process involving labor • Type, quality, quantity can be clearly Specifications To remove factor of Garar • Use of own goods for manufacturing of Istisna Commodity. Difference between ijara and istisna
- 9. Istisna Price • Price fixed with Mutual consent • Price can be Money, Commodity and Usufruct • Payment of Price Flexible On Spot , Differed, In Installments • Tier Pricing System Price according to versions in delivery Installments according to Delivery of Product
- 10. Istisna Delivery • Time and Place of Delivery • Before Delivery risk associated with Istisna commodity lies on manufacture • After Delivery risk associated with Istisna commodity lies on buyer • Possession can be physical or constructive
- 11. Istisna Security • Right of Security for both Manufacturer and purchaser • Purchaser has right of option of defect
- 12. Istisna Termination • After completion of Contract • Can be cancelled with Mutual Consent • Can be cancelled unilaterally before start of Work
- 13. Istisna 1 Direct Istisna Sale Model Payment of Istisna Price (Always less then market price) Manufacturer Bank Deferred Delivery of Manufacture able goods Istisna Goods sold to market at market Rate Market
- 14. Istisna 2 Parallel Istisna Sale Model Delivery of Istisna Product Specified order of Manufacture able Goods Usually Higher then Market Price Payment on Spot Or 3rd Party Installments on Deferred Basses Bank • Order to Manufacturer • Same Specification • Delivery Date • Market Price • Agency Agreement Manufacturer • Indirect Delivery on Request for Delivery Behalf of bank
- 15. Istisna 1 House Financing 2 Project Financing 3 BOT Financing 4 Working Capital Financing Source : Islamic Banking Bulletin, Islamic Banking Department State Bank of Pakistan
- 16. Istisna Order for House 1 House Financing Installments • Land Market Price + X • Construction • Use of Parallel Istisna Delivery of House • Payment Schedule Bank Customer • Security • Discrepancy Ownership of Bank 2 Project Financing Construction of House • Industrial Projects Market Price • Factory, Machinery Parallel Istisna • Up gradation Constructor
- 17. Istisna 3 BOT Financing Build Operate and Transfer ,Developmental Projects ,Toll Fee After 20 Years Ownership Transfer Yearly Contract Operate Toll Fee Contractor Government Ownership Construction Bank Highway Financing Agreement (Period 20 years) Constructor Parallel Istisna
- 18. Istisna 4 Working Capital Financing Murabaha Replacement in Manufacturing Concern Parallel Istisna at Market Price Installments Date: (Y – 1 month) Financing Requirement for Steel Structures Agency Agreement Constructor Specifications Ithehad Steel Market Price + X Bank Date Y Constructive Possession Delivery of Steel Structures
- 19. Istisna Contents Product Risk • Bank Magnitude • Pricing Factors Management Requirements • Pricing System • Process Flow • Market Share • Default Risk • Financing Product • Delivery Risk Product Breakup • Order Cancelation Design • Istisna Share Pricing Risk • Option of Defect • Risk of Damage
- 20. Istisna •Bank Requirements • Confirm Order • Process Flow • Nature of Product Product Incompliance with Islamic Principles Design • Credibility of Manufacturer Financial Statements, Banking Relationships, Assets and Liabilities, ECIB (Electronic Credit Information Beaurue) etc. • Reliability of Order Reliable ordering Source • Market Situation Easley Marketable product
- 21. Istisna • Bank Requirements •Process Flow • Step 1: Master Istisna Agreement Time, Quantity, Price, Specification, Delivery Date Product • Step 2: Security Design According to the volume of finance required. • Step 3:Istisna Price Either Full or in Installments • Step 4: Request for Acceptance of Delivery Identification & Separate storage, Goods Receiving Note , Risk Transfer • Step 5: Agency Agreement Constructive Possession, Agency Fee • Step 6: Payment Adjustment • Step 7: Order Cancellation Agent will sale product in market with Bank’s mutual consent.
- 22. Istisna • Bank Requirements •Process Flow • Step 1: Master Istisna Agreement Time, Quantity, Price, Specification, Delivery Date Product • Step 2: Security Design According to the volume of finance required. • Step 3:Istisna Price Either Full or in Installments • Step 4: Request for Acceptance of Delivery Identification & Separate storage, Goods Receiving Note , Risk Transfer • Step 5: Agency Agreement Constructive Possession, Agency Fee • Step 6: Payment Adjustment • Step 7: Order Cancellation Agent will sale product in market with Bank’s mutual consent.
- 23. Istisna Tijarah Loans and running Istisna 1% Salam finances 1% 8% Product Musharakah 2% Magnitude 0% Murabaha Diminishing 37% Musharakah • Market Share 23% •Financing Breakup Ijarah • Istisna Share 17% Diminishing Istisna Export Loans and Musharakah 4% Tijarah Salam Refinance 1% running 24% Musharakah 0% 11% finances 0% 1% Breakup of Financing of Murabaha 37% Meezan Bank in Year 2009 Ijarah 24% Export Refinance 9% Breakup of Financing of Meezan Bank in Year 2008 Source: Meezan Bank 2009 Annual Report
- 24. Istisna Istisna Share in Total Financing Over the Years Product 60000000000.00 8.4 % Magnitude 4% 50000000000.00 0.68% • Market Share • Financing Breakup 40000000000.00 • Istisna Share 30000000000.00 20000000000.00 10000000000.00 0.00 2009 2008 2007 Istisna Share 3729059000.00 1605460000.00 238,275,000 Total Financing 46716610000.00 40626920000.00 34,576,339,000 Source: Meezan Bank Annual Report
- 25. Istisna •Pricing System • Based on Kibor Benchmark • Pricing Factors • Pricing based on K + (1 to 5 %) rate of Return Suppose 10,000 is required Order Price:12000 Product Kibor : 12 % Pricing Return at K+1 (13%) : 11,300 | 1300 Return at K+3 (15%) : 11,500 | 1500 Return at K+5 (17%) : 11,700 | 1700 • Profit of Bank is Difference of Istisna Price(price given by bank) and Sale Price of order. Istisna Price at K+1 :12000-1300 = 10,700 ( Manufacturer Profit = 700 | Bank Profit = 1300) Istisna Price at K+3 : 12000-1500 = 10,500 ( Manufacturer Profit = 500 | Bank Profit = 1500) Istisna Price at K+5 : 12000-1700 = 10,300 ( Manufacturer Profit = 300 | Bank Profit = 1700)
- 26. Istisna • Pricing System •Pricing Factors • Normal Market Price Istisna Price is Always Less the Market Price so that bank can earn by selling product in market at Product market rate. Pricing • Nature of Product Easily Marketable • Volume of Product • Creditability of Manufacturer • Risk Factor Involved
- 27. Istisna Risk • Security Management In accordance with Volume of Financing Mortgage Property etc •Default Risk • Credibility of Company • Delivery Risk Financial Statements, Banking Relationships, Assets • Order Cancelation Risk and Liabilities, ECIB (Electronic Credit Information • Option of Defect Beaurue) etc. • Risk of Damage • Market Dynamics
- 28. Istisna Risk • Delivery Delayed Management As Istisna is a Manufacture able Product • Default Risk • Confirm Orders •Delivery Risk Credibility of The Company is also at stake to fulfill • Order Cancelation Risk the original order. • Option of Defect • Risk of Damage • Tier Pricing System Price is associated with the variation in delivery date. This is permissible by Islamic Principles.
- 29. Istisna Risk • 3rd Party Refuse to buy Product Management • Default Risk • Reliability of Order is Checked Before Istisna • Delivery Risk Agreement •Order Cancelation Risk • Nature of Product, Easily Marketable , Product • Option of Defect Expiry • Risk of Damage • Sale to another Customer Through Agent
- 30. Istisna Risk Management • Low Quality, Deviation from Specification • Default Risk • Bank has option to Reject Delivery of Product, and • Delivery Risk Demand Adjustment • Order Cancelation Risk •Option of Defect • Even it can liquidate the Security to recover any • Risk of Damage loses.
- 31. Istisna Risk • After Delivery All the Risk lies with Bank. Management • Default Risk • Risk of Damage is reduced using Takaful • Delivery Risk Instrument • Order Cancelation Risk • Option of Defect •Risk of Damage
- 32. Istisna Comparison Istisna Conventional Loan • Non Interest • Interest Based • Limitation on Use • No Limitation of Finance • No Surety of Profit • Surety of Profit • No Grace Period Continuous • Grace Period in Compounded Delivery. Interest.
- 33. Istisna
- 34. Istisna Example Details Istisna (Purchase) Price/Cost/Principal 1,000 Tenure 1.5 months Sale Price of the Goods sold to 3rd Party 1,200 Total profit on transaction 200 Date of Disbursement to the customer 1-Apr-07 Date of Delivery 15-May-07 Date of Sale by the Bank 20-May-07 At the time of Disbursement 1-Apr 2010 Dr Cr Istisna Financing (A/R) 1000 Pay Order / Party Account/ Cash 1000
- 35. Istisna At Date of Delivery 15- May- 2010 Dr Cr Asset 1000 Istisna Financing (A/R) 1000 At Date of Sale 20 - May - 2010 Dr Cr Cash 1200 Asset 1000 Sale 200
- 36. Istisna Istisna Model Agreement
- 37. Istisna Istisna Model Agreement
- 38. Istisna Istisna Model Agreement
- 39. Istisna Istisna Model Agreement
- 40. Istisna Istisna Model Agreement
- 41. Istisna Istisna Model Agreement
- 42. Istisna Istisna Model Agreement
- 43. Istisna Istisna Model Agreement
- 44. Istisna
- 45. Istisna
- 46. Islamic Banking and Finance | Faculty of Management Sciences | International Islamic University Islamabad
Editor's Notes
- al-Kasanf, a ~anaff jurist defines isti~nii' as "when one orders acraftman to prepare a piece of furniture for a determined price, to be delivered lateror one may engaged a cobbler to make a pair of shoes for a fixed price," or "a contracton a commodity on liability with the provision of work" or "to order a manufacturerto produce a specific commodity in a specific way".to make a contract w}th a skilled person tomake something.From the above discussions, it could besaid that isti~na' is the giving of an order to a labourer or artisan to make a defmitearticle with agreement to pay a definite price for that article when made
- Despite the fact thatisti~nii' and salam have some points of similarities such as the non-existence of thesubject-matter (ma 'qud 'alayh) or the future delivery, there are some points of differencesas follows:
- Despite the fact thatisti~nii' and salam have some points of similarities such as the non-existence of thesubject-matter (ma 'qud 'alayh) or the future delivery, there are some points of differencesas follows: