(Alternative to the conventional

Manufacturing & project

financing)

by:
Dr. Imam Uddin
Introduction
Istisna’ is sale transaction where commodity
is transacted before it comes into existence.
Definition
It is an order to producer to manufacture a
specific commodity for the purchaser.
Conditions of Istisna
(1)the subject of Istisna is always a thing which
needs manufacturing
(2)Manufacturer use his own material
(3)Quality and Quantity should be agreed in
absolute term
(4)purchase price should be fixed with mutual
consent
Price of Istisna
• price of istisna may be in the form of money,commodity and
usufruct.
• Price of Istisna may be spot and differed therefore Istisna is
applicable where Salam is not applicable.
• Price of Istisna is can be paid in installments.
• The installments may be tied up with different stages of
projects.

Option
When the required goods have been manufactured by the
manufacturer purchaser can exercise his option of defect,but
he cant use his option of seeing,
 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.
 Difference between Istisna’ & Ijarah
ISTISNA IJARAH
• The manufacturer The material is provided by
either uses his own the customer and the
material manufacturer uses only
his labor and skill.
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 Salam 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.
 Istisna as Mode of Financing

• House Financing
• Project Financing
• BOT Arrangement
• Export Pre Shipment
 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”