Istisna

Istisna

Istisna (Manufacturing Contract)

Overview:

Meaning

Important principles

Permissibility

Application

Mechanism

Difference between Salam and Istisna

Meaning

The word ‘Istisna’ is a derivative from the root word ‘Sa na’a, which means to manufacture or to construct something. Istisna is a contract of sale where one party agrees to deliver specified items at a pre-determined future time at an agreed price. In istisna contract the Seller is called “San’e” while the buyer is described as “Mustasne”.

Important principles

  • There should be proper offer and acceptance between the seller and a purchaser. The parties involved must be competent to enter into contract.  They must not be minor or of unsound mind.
  • The nature and quality of the item to be delivered must be specified.
  • The object for an Istisna contract must not be natural resources. It should be identified raw materials that can be transformed through manufacturing or construction process.\
  • The price for Istisna goods must be known at the conclusion of the contract. The price could be in cash or tangible commodity or the usufruct of an asset. The price can be deferred or paid in installments
  • A contract of Istisna is binding and the parties to the contract are certainly bound by all obligations due to contract. The contract can only be terminated by mutual agreement of the parties but, before commencement of Istisna work, either party may terminate the Istisn’a contract unilaterally.
  • Delivery of  goods can take place before the due date or on the due date as it is not fixed. The item is deliverable upon completion by the manufacturer.  If the Istisna goods are not in accordance with the contractual specifications the purchase has the right to reject them.

Permissibility

The Permissibility of Istisna is based on the Hadith,

“Narrated by Jabir (May Allah be pleased with him): A woman said, “O Allah’s Apostle! Shall I get something constructed for you to sit on as I have a slave who is a carpenter?” He replied, “Yes, if you like.” So she had that pulpit constructed.”

(Al Bukhari, Book 8, Hadith 440).

Application

The Contract  can be used for real estate developments.  It includes the construction of buildings such as factories, hospitals, universities, public utilities such as parks. The instrument of istisna can be used for project financing. It can be used for building bridges and highways etc.

Mechanism

  1. A customer who wants to purchase certain specified assets which needs to be manufactured or constructed approaches the Islamic Bank.
  2. Islamic bank promises to deliver the asset on a future date and the bank adds cost of construction plus the bank profit margin in the contract because  payment is usually effected on a deferred arrangement. Both the party execute an Istisna contract as a buyer and seller.
  3. When manufacturing of asset is done, the Bank delivers the assets to the customer on or before  agreed delivery date. The customer makes the payment to the seller in lump-sum or in installments at the delivery of the asset.
  4. Mostly banks have no competence in construction work so they draw a parallel Istisna contract with a contractor. In this way, bank sub-contracted the construction work. The contractor promises to deliver the specified constructed asset or manufactured goods to the bank at a future date, before the date of delivery to customer.
  5. The bank pays the agreed price to the contractor. The price at which the bank sub-contracts the project is lower than that in the first Istisna.

 

Difference between Salam and Istisna

Basis of Difference Salam Istisna
Subject The subject of salam can be anything. It may be manufacturing commodity or not. The subject of is always a thing which needs manufacturing,
Price It is requirement of salam that the price is paid full in advance on the spot.  paying price full in advance is not necessary.
Cancellation The contract of salam cannot be cancelled unilaterally,  It can be cancelled before the manufacturer begins the work.
Time of delivery The time of delivery is an important part of the sale in salam and it is fixed.  the time of delivery may not be fixed.

 

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