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