Lec 7 - Istisna (1).pptx

Copyright © 2015 INCEIF e Learning. All rights reserved.
Istisna’

1/13/2024 Copyright © 2015 INCEIF e Learning. All rights reserved. 2
• Learning Outcomes
• Introduction to Istisna’
• Terms Used
• Critical Conditions
• Istisna’ as Mode of Financing
• Exercise

Market
Shariah
compliant
products/
services
efficiently.
Conduct audit
of Islamic
financial
transactions/
practices.
Structure
Shariah
compliant
products.
Handle
Shariah rules
as confronted
in real
practice.
Comprehend
major Shariah
principles
governing
financial
transactions.

Introduction to Istisna’
Root
Word
sana’ (
‫صنع‬
) or to manufacture or to construct something.
Technical
Meaning
It is an order to a producer to manufacture a specific commodity for the
purchaser.
Technically, it is a contract to purchase for a definite price, something that
may be manufactured later, according to agreed specifications between the
parties, and the manufacturer will use his own raw material.

Istisna’
Istisna’ is a contract where a person sells a specific product that involves
both raw materials and labour for a known price and delivers it at a
specified future date to the purchaser
Istisna’ involves
• both raw materials and labour
• making or manufacturing of a specific thing (‘ain)
Salam is applicable to
• Commodities only, excluding labour
• a generic/fungible commodity (dayn)
Istisna’ is also distinguished from employment ( ijarah )
• in istisna’, the maker provides both the raw materials and the labour,
• in ijarah, a person provides raw materials, and a maker contributes his labour and
skill to make the required item.

A Comprehensive definition of Istisna’ by al-Zarqa
A contract of selling a
manufacturable thing with an
understanding by the seller to
present it manufactured from
his own material, with specified
descriptions and at a
determined price.

Terms Used
The person who
manufactures the
product is called
Sani’
The person who
requested it to be
made is called
Mustasni’
The thing made is
called Masnu’

Critical Conditions
The item to be manufactured should be described precisely.
Date of delivery of the manufactured asset should be specified in
order to avoid dispute
• The dates for the completion of the various stages in the constructions of
manufactured items or buildings and other details should be specified in the
contract
Istisna’ contract is a binding contract on the parties, the
seller/manufacturer, and the buyer.
• One party cannot cancel the contract unilaterally
• The parties may include a penalty clause in the contract
The price is agreed upfront and can be paid in advance, upon
delivery, progressively with the completion of the various stages,
postponed and paid lump sum or by installments

The difference between Istisna’ and Ijarah
If the customer provides
the material and the
manufacturer is required to
use his labour and skill only,
then the transaction is
ijarah.

The difference between Istisna’ and Ju’alah
• Ju’alah is a contract in which one of the contracting parties
undertakes to give the second a specific amount for a specific
work where normally it is defined as a reward for bringing back
lost property and is not a binding contract before the objects
have been brought back.
• Ju’alah and Istisna’ are similar in the sense that in both contracts
the work or the labour is a condition but they differ in that
istisna’ can only be applied for manufacturing of goods while
ju’alah applies to everything.
• The labour can be determined in istisna’ but not in Ju’alah.
• The subject matter in istisna’ is labour and the material and in
ju’alah it is labour only.

Differences between Salam & Istisna’
The subject matter in istisna’ is
always something that needs to
be manufactured and cannot be
used for agricultural goods. But
salam is possible in anything in
which descriptive conditions are
fulfilled
In the Salam contract, the price
has to be paid in full and in
advance, while in istisna’ the price
can be paid according to mutual
agreement.
The classical jurists have also said
that one difference between
these two contracts is that
contract of salam is binding while
contract of istisna’is not (though
in the modern context istisna’is
binding from the beginning)
Time of delivery is essential in
salam while it is not in istisna’(this
is the classical point of view, but
in the modern context this might
not be the case)

Istisna’ as Mode of Financing
• Istisna’ can be used for the financing of assets that
require manufacturing or construction
• Sell and build
• BBA or Istisna’
• Parallel Istisna’
• The bank enters into a contract of istisna’ with the
customer and another istisna’ with the developer
• The two contracts should be separate and not
dependent on each other

Parallel Istisna’ with Third Party
Bank
Bank
Customer
Developer/C
ontractor
Deferred payment
schedule
To deliver house
as per
specifications
To deliver
house as per
specifications
First istisna’
Second istisna’ Progressive
payment

14
Types of Istisna’
• Ordinary Istisna’
• This is the common type of istisna which means an agreement
between the buyer or requestor the seller or manufacturer, to
manufacture a specified thing with specific specifications to be
delivered in the future.
• Parallel Istisna’
• To enter into two independent but somewhat inter-related contracts of
istisna.
• The first contract is between a bank as a manufacturer who undertakes to
manufacture a specified good, and a customer as the buyer to whom the
goods will be delivered.
• In the second contract, the bank as a buyer would request another company
to manufacture the same goods specified in the first istisna.
• The second istisna is independent of the first istisna, whereby no
liability arising from the first istisna contract shall be imposed on the
parties of another istisna.
• The manufacturer in the second istisna, is not liable to the end buyer
(the bank’s customer) in the first istisna.
• The parties are only responsible to those with whom they had
originally contracted.

16
1: Particular commodity in Istisna’
• Istisna’ is contract which is undertaken for something to produce or
manufacture. Therefore, it cannot be executed for a particular
product or commodity by pointing to it and saying “this car” or
“that building”.
• AAOIFI, Istisna’a, 3/1/3:
• It is not permissible that the subject-matter of an Istisna’a contract be an
existing and identified capital asset. For example, it is invalid for the
Institution to conclude a contract to sell a particular designated car or
factory on the basis of Istisna’a. This is because Istisna’a is a sale contract
applicable to items that are identified by specification, not by designation.
• BNM Shariah standards, Istisna, page 7:
• S 14.5 An existing or completed asset that can be specifically identified at
the time of entering into the istisna` contract must not qualify as a valid
istisna` asset.

17
2: Nature of Istisna’ contract
 All classical jurists agree that after the contractor has
completed the manufacturing process, the Istisna’
contract becomes binding.
 However, at the middle stage (i.e. after the offer and
acceptance, but before completion) some of the Hanafi
scholars opined that the contract would not be binding;
 However, Imam Abu Yusuf from the Hanafi school said that
Istisna contract becomes binding immediately after the offer
and acceptance. This view is prevalent among the Hanafi school
of thought.

Cont.
 Today, almost all scholars opine that contract is binding from
beginning provided certain conditions are met.
 BNM Shariah standards, Istisna, page 5:
 S 10.2 The istisna` contract must be binding on the contracting
parties upon entering into the contract provided that it fulfils its
essential elements of istisna` contract which must include− (a)
specifications of the istisna` asset; and (b) determination of the
price, time and place of delivery and mode of payment.
 AAOIFI, Istisna’: 2/2/1:
 A contract of Istisna’a is binding on the contracting parties provided
that certain conditions are fulfilled, which include specification of
the type, kind, quality and quantity of the subject-matter to be
produced.

19
3: Additional sum for extension of the period of
payment
 If the purchaser fails to pay any scheduled payment on time, it is
impermissible for the seller to charge an extra amount, OR upward
rescheduling of payments must not be done by increasing the
amount payable, as it would qualify as RIBA.
 AAOIFI, Istisna’:
 4/1/3 It is not permissible for amendments and changes to the
contract to be agreed on the basis that an additional sum will be
paid in consideration for an extension of the period of payment.
 BNM Shariah standards, Istisna, page 9:
 S 16.6 The agreed price must not be revised upwards due to
extension of the agreed payment period.

20
4: Sale and Buy-Back
 Clause 2/2/4 of AAOIFI’s SS no. 11 on Istisna’a and Parallel
Istisna’a states:

21
5: Nature of price in istisna
 Istisna is a unique kind of Sharia compliant contract, since it is neither
exactly like bai’ nor like ijarah, or Salam; because,
 Istisna is automatically terminated due to the death of any party before
completion of the project – this feature makes istisna similar to Ijarah.
 Seller uses his own raw material – this feature makes it similar to bai’
and dissimilar to Ijarah.
Therefore, unlike bai’, it is also allowed in Istisna that the price of the
istisna transaction is set to be usufruct of the subject matter of Istisna
itself; as in the case of BOT (Built Operate Transfer) transactions.
 Clause 3/2/1 of AAOIFI’s SS on Istisna:
 It is a requirement that the price for an Istisna’a contract be known at the
conclusion of the contract, in which case it can be in the form of cash or
tangible goods or the usufruct of an asset for a particular duration, whether
such usufruct is related to an asset other than the subject-matter or to the
subject-matter itself.

22
6: Revising the agreed price
In principle, the price of the subject matter in istisna, once agreed upon
at the time of offer and acceptance, cannot be increased or decreased
on account of the normal increase or decrease in commodity prices or
the costs of labor and/or raw material.
However, under special circumstances, this can be done by mutual
understanding of both parties, subject to some conditions.

BNM on revision in price
BNM Shariah standards, Istisna, page 9

AAOIFI on revision in price
4/2/1 It is permissible, by way of agreement of the contracting parties
or arbitration or judicial procedure, to amend the contract price of an
Istisna’a contract upwards or downwards, as a result of intervening
contingencies (force majeure). This rule must be read together with
item 4/1/3 above.

25
6: Miscellaneous
• Istisna cannot be drawn up on the basis of a murabahah (cost + profit)
because in a murabahah sale, the subject matter must be in existence.
Murabaha is basically a special type of normal sale where bai-ul-madum is
not allowed, whereas Istisnah is a special and exceptional kind of sale where
bai-ul madum is allowed but with certain conditions. (AAOIFI, Istisna, 3/2/5)
• It is not permitted for the manufacturer to stipulate, in the contract of istisna
that he will not be liable for defects in the subject matter.
• The buyer may stipulate in the istisna contract that the commodity shall be
manufactured or produced by a specific manufacturer or manufactured from
specific materials. This is not permitted in the case of a salam sale.
• Istisna is valid for objects that can be made. It is invalid for corn, wheat,
barley or fruit, and all other natural products whose sale on liability is a
salam contract.
• The object sold in istisna is a fixed liability debt therefore it is permissible to
be a valuable asset made according to special specifications.
• It is not a condition in the to pay the price in advance, although it is
permissible to do so.

Exercise
1. What are the differences between salam and istisna’
contract?
2. Ali owns a land and he wants to construct a five storey
building in the land. Ali approaches ABC Islamic Bank. What is
the most suitable Islamic finance contract that could be used
to fulfil Ali’s need and explain the procedures involved in such
a transaction.

Answer: Differences between Salam & Istisna’ contract
Salam
• The subject can be any thing.
• The price has to be paid in full in advance.
• Time of delivery is an essential part of the sale
• The contract cannot be cancelled unilaterally.
Istisna’
• The subject of Istisna is always a thing that needs to
be manufactured.
• The price in Istisna does not necessarily need to be
paid in full in advance.
• Time of Delivery does not have to be fixed, but the
stages of manufacture might be time bound
• The contract can be cancelled before the
manufacturer starts working.

Lec 7 - Istisna (1).pptx

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