2.  The students will be made familiar
with:
 Definition of Istisna’
 Differences between Salam and
Istisna’
 Istisna’ as a mode of finance
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3.  Istisna’ is the second kind of sale where a sale
contract is executed in respect of a commodity
that has not yet came into existence.
 It means to order a manufacturer to
manufacture a specific commodity for the
purchaser.
 The material required for manufacturing the
commodity is provided by the manufacturer.
 Price is fixed with the consent of the parties.
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4.  Necessary specifications of the commodity
(intended to be manufactured) is fully settled
between the buyer and the seller.
 The contract to manufacture cannot be
cancelled unilaterally after the manufacturer
has started the wok.
 Anyone of the parties may cancel the
contract after giving a notice to other before
the manufacturer starts any work.
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5.  It is invalid for natural things or products like
animals, crops, fruit, etc.
 It is not permissible that the subject matter of an
Istisna’ contract be an existing and identified
asset.
 The price once settled cannot be unilaterally
increased or decreased.
 It is not necessary in Istisna’ that the price is paid
in advance. The price can be paid in installments
and can also be linked with the completion
stages.
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6. 6Essentials of Islamic Finance - Chapter 6

7.  In Istisna’ the manufacturer undertakes to
manufacture the goods with his own
material. If the customer provides the
material, it will be a transaction of ijarah
whereby the services of a person are hired for
a specified fee paid to him.
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8.  Once the manufacturer presents the goods
manufactured by him to the client, whether
the client can reject the goods at this stage?
There is a difference of opinion among the
Muslim jurists on this issue.
 But keeping in view the present day set up of
trade and industry, it will be damaging to allow
the client to reject the goods without assigning
any reason even though the goods are in full
conformity with the required specifications.
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9.  It is not necessary in Istisna’ that the time of
delivery is fixed. However, the client can fix a
maximum time of delivery which means that if the
manufacturer delays the delivery after the
appointed time, he will not be bound to accept the
goods and to pay the price.
 In order to ensure that the goods will be delivered
with in the specified period, some agreements of
Istisna’ include a clause that if the manufacturer
delays a delivery after a certain time, he shall be
liable to a penalty which shall be calculated on daily
basis.
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10.  Istisna’ can be used for providing the facility of
financing in certain transactions, especially in the
house finance sector:
 If the client owns the land, the financer can construct
the house on his land and in case client does not own
any land, the financier may undertake to provide him a
constructed house.
 The time of payment may be fixed in whatever
manner they wish. The payment may also be in
installments.
 Parallel Istisna’: It is not necessary that the financer
himself construct the house. He can enter into a
parallel contract of Istisna’ with a third party.
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11.  The payment of installments can start right from
the day when the contract of Istisna’ is signed
and may continue during the period of
construction of house and after it is handed over
to the client.
 In order to secure the payment of the
installments, the title deed of the house or any
other property of the client may be kept by the
financer as a security, until the client pays the
last installment.
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12.  The financer will be responsible for
construction of the house in full conformity
detailed in the agreement. In case of any
discrepancy the financer shall undertake
necessary action at his own cost.
 The instrument of Istisna’ may also be used for
project financing.
 The contract of Istisna’ can be used for
building a bridge or highway. The modern BOT
(Build, Operate & Transfer) agreement may
also be formalized on the basis of Istisna’
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13.  Before the manufacturer starts work on the subject matter
of Istisna’ both of the parties have the right to rescind the
contract. Once the manufacturer initiates the work, the
contract becomes binding and any change is possible only
with mutual consent.
 If the actual cost incurred by the bank (as seller) on an asset
sold on Istisna’ is less than the forecast cost, or the bank gets
a discount from the subcontractor on a Parallel Istisna’ basis,
the bank is not obliged to give a discount to the purchaser
and any additional profit, or loss if any, pertains to the bank.
The same rule adversely applies when the actual costs of
production are greater than the forecast costs.
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14.  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 or any abnormal damage.
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15.  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.
 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’
 Sale not permissible before delivery: Sale of
Istisna’ goods is not allowed before taking
physical possession. This may lead to asset,
price and marketing risk.
 Quality risk: The Islamic bank gets delivery of
inferior quality manufactured goods, which
also may affect the original contract.
 Security is available with the bank
 The bank can put in the Istisna’
agreement a clause to reduce the
Istisna’ price in the case of delay.
 The bank can take a “promise to
purchase” from a third party and
can make arrangements for sale
through agency.
 The bank can obtain a guarantee
of quality from the original
supplier.
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