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ISTISNA

The document defines and explains the concept of Istisna, an Islamic financing structure where a buyer contracts a manufacturer to produce an asset for future delivery. Key points include: Istisna allows manufacturing goods to be pre-sold, the price and specifications must be agreed upfront, and either party can cancel before production begins. The document also compares Istisna to Salam and discusses conditions, delivery terms, parallel contracts, and potential applications and risks of Istisna agreements.

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m izaz
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159 views

ISTISNA

The document defines and explains the concept of Istisna, an Islamic financing structure where a buyer contracts a manufacturer to produce an asset for future delivery. Key points include: Istisna allows manufacturing goods to be pre-sold, the price and specifications must be agreed upfront, and either party can cancel before production begins. The document also compares Istisna to Salam and discusses conditions, delivery terms, parallel contracts, and potential applications and risks of Istisna agreements.

Uploaded by

m izaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Istisna

Definition
• Istisna’ is a sale transaction where a
commodity is transacted before it comes into
existence.
• It is an order to a manufacturer to
manufacture a specific commodity for the
purchaser.
• Price must be fixed with consent of all parties
involved.
Cancellation of contract:
• After giving prior notice, either party can
cancel the contract before the manufacturing
party has begun its work. Once the work
starts, the contract cannot be cancelled
unilaterally.
Conditions of Istisna
• The subject of Istisna is always a thing which
needs manufacturing
• Manufacturer use his own material
• Quality and Quantity should be agreed in
absolute term
• Purchase price should be fixed with mutual
consent
Revoking of Istisna
• The contract of Istisna can be cancelled
unilaterally before the manufacturer starts
working.
• After starting the work, Istisna cannot be
cancelled unilaterally.
Difference between Istisna’ & Salam
ISTISNA SALAM
• The subject of istisna is • The subject can be any
always a thing which thing.
needs manufacturing.
• The price in istisna does • The price has to be paid
not necessarily need to in full in advance.
be paid in full in advance.
Difference between Istisna’ & Salam
ISTISNA SALAM
• Time of Delivery does • Time of delivery is an
not have to be fixed essential part of the sale
• The contract cannot be
• The contract can be cancelled unilaterally.
cancelled before the
manufacturer starts
working.
Security
A security in form of a guarantee, mortgage or
hypothecation may be required for Istisna in order to
ensure that the manufacturer shall deliver the commodity
on the agreed date,
in the case of default in delivery, the guarantor may be
asked to deliver the same commodity, and if there is a
mortgage, the buyer can sell the mortgaged property and
the sale proceed can be used either to realize the required
commodity by purchasing it from the market, or to recover
the price advanced by him.
Time of Delivery

It is not necessary in Istisna that the time of delivery is fixed.


However, the purchaser my fix a maximum time for delivery
after the appointed time, he will not be bound to accept
the goods and pay the price.
In order to ensure that the goods will be delivered within
the specified period, some modern agreement of this
nature contain a penalty clause to the effect that in case
the manufacturer delays the delivery after the appointed
time, the price shall be reduced by a specified amount per
day.
Delivery of Manufacturing goods

• Before delivery, goods will remain at the risk of seller.


• After delivery, risk will be transferred to the
purchaser.
• Possession of goods can be physical or constructive.
• Transferring of risk and authority of use and
utilization/consumption are the basic ingredients of
constructive possession.
• If manufactured goods are delivered before agreed
date, purchaser can refuse to accept the goods.
Parallel Istisna and its applications

After the execution of Istisna agreement with one party, buyer


or seller executes another Istisna agreement with third party,

Conditions for Parallel Istisna :

(a) there must be two different and independent contracts, these


two contracts cannot be tied up and performance of one should
not be contingent on the other.

(b) Parallel Istisna is allowed with third party only.


Parallel Istisna Diagram

1st Istisna Manufacturer 2nd Istisna Purchaser

Parallel
Istisna Istisna
Sale

Delivery of Delivery of
Commodity Commodity

Islamic Bank Islamic Bank


Purchaser Seller
Potential of Istisna

The client can get finance for raw material, working


capital and other overhead expenses by the
execution of Istisna agreement.

House financing, import and export products can be


easily designed on Istisna basis.
Risks in Istisna applications and their solutions

RISKS SOLUTIONS
Ownership of Material
The Islamic bank is not the owner of the Security is available with the bank.
materials in the possession of the
manufacturer for the purpose of
producing the asset.
Delivery Risk
Islamic bank may be unable to complete Bank can reduce the Istisna price
the manufacturing of goods as acording to the Istisna agreement.
scheduled due to late delivery of
completed goods by the sub-contractor
of Parallel Istisna.

Sale not permissible before delivery


Sale of Istisna goods is not allowed Bank can take “promise to purchase”
before taking physical possession. from the third party and can make
arrangements for the “agency
agreement”

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