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Istisna

Khairuddin Zakaria
khairuddinzakaria@gmail.com

Q1

 Explain the concept of Istisna.

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A1
 Literally, the word istisna is a derivative from the root
word sana or to manufacture or to construct something.
 Istisna is an order or request to manufacture something,
whereby the requestor invited another to make or
manufacture some goods for him.
 Technically, it is a contract to purchase for a definite price
something that may be manufactured later on according
to agreed specifications between the parties.
 it is a contract of sale of specified items to be
manufactured or constructed with an obligation on the
part of the manufacturer or contractor to deliver them to
the customer on completion.
 istisna is actually an exception to the general condition in
a sale that the goods intended to be sold must be in the
physical or constructive possession of the seller.

Cont.
 There are three types of sale by reference to the availability
of the subject matter of the sale at the time of the contract:
 1) Both the price and the goods are present at the time of
contract.
 This is the common type of sale.
 2) The subject matter is present but the price will be at a
later agreed period of time or known as deferred payment
sale.
 3) The price is present but the goods will be delivered at a
later agreed period, known as contract of salam.
 The majority of jurists considered istisna as part of salam
and therefore the price must be paid at the time of contract
as in the case of salam.
 according to the Hanafi jurists, istisna is another type of
contract of sale, different from the contract of salam,
whereby the price can be paid later, not at the time of
contract.

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Q2

 Discuss the condition of istisna.

A2
 THE CONDITIONS OF ISTISNA
 in order for istisna to be valid there some conditions must be fulfill, these
requirements are:
 A. The subject matter or the goods to be manufactured must be identified.
 This includes its kind, type, measure, quality and quantity or any related
specifications.
 Thus, if any part of the subject matter of the contract is not specified, the
contract is not valid on the grounds of lack of knowledge that may lead to
gharar (uncertainty) in the subject matter.
 B. The subject matter must be goods that can be manufactured according to
the convention and it is not commodities.
 the element of labour or manufacturing is crucial in istisna, which
differentiates it from the salam contract.
 Therefore, the subject matter cannot be an existing or identified capital
asset or a particular designated item.
 C. The manufacturer undertakes to construct the goods with his own
material.
 If the buyer supplies the raw material to be manufactured, it is then
considered as ijara, instead of istisna.
 D. It is also a requirement that the price of the subject matter of istisna be
known at the time of the conclusion of the contract.

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Q3

 Discuss the prohibited elements in istisna.

A3
 THE PROHIBITED ELEMENTS IN ISTISNA
 There are several prohibited elements in istisna and it can be summarised
as follows:
 1. The presence of the element of gharar (uncertainty) is in fact prohibited
in any contract.
 in the case of istisna this prohibition is more significant especially with
regard to the subject matter of the contract.
 This is because the subject matter is not in existence at the time of the
contract, as it is to be manufactured in the future.
 2. It is prohibited that the subject matter be already in existence at the time
of the contract.
 3. The subject matter must be identified by specifications only to be
manufactured in the future.
 If the items to be sold are specific identified items, the transaction then
involves selling identified items that the seller does not own at the time of
the contract, which was prohibited by the Prophet (pbuh).
 On the other hand, the non-existent item in istisna is by nature to be
produced and delivered later which constitutes the non monetary obligation
of the manufacturer.
 3. The price could not be increased or decreased on account of the normal
increase or decrease in commodity prices or the cost of labour.

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Cont.
 4. The raw material of the subject matter to be manufactured could not be
supplied by the buyer, otherwise, the contract becomes an ijara.
 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 reason for this prohibition is that istisna is a sale of specified goods to
be delivered in the future, while the exclusion of liability as to defects is valid
only in the sale of particular identified goods.
 6. The contract of istisna cannot be drawn up on the basis of a murabahah
sale or sale by determining the price on the cost plus basis.
 This is because in a murabahah sale, the subject matter must be something
already in existence which is owned by the seller and the cost of which is
known prior to the conclusion of the murabahah sale.
 On the other hand, istisna is concluded prior to the ownership of the subject
matter to be manufactured in the future and therefore, the cost is essentially
not known as required in murabahah.
 7. In a parallel istisna , the institution or the bank cannot simply act as a
financial intermediary or the financier of the istisna between the ultimate
buyer and the actual manufacturer to avoid the element of riba.
 Therefore, the two contracts must be independently constructed.

Q4

 What are the types of istisna?

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A4
 9.5 TYPES OF ISTISNA
 There are two types of istisna :
 1. Ordinary istisna: This is the common type of istisna as discussed
above which means an agreement between the buyer or requestor
and the seller or manufacturer to manufacture a specified thing with
specific specifications to be delivered in the future.
 2. Parallel istisna or to contract two independent but 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 entered
into a contract.

Q5

 There are some shariah issues related to


istisna. Discuss those issues from Islamic law
perspective.

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A5
 SHARIAH ISSUES RELATED TO ISTISNA
 1 It is a condition in the istisna contract to state in the
clearest of terms, the type, dimensions and all the
specifications required.
 because it is must be known to avoid ignorance which
leads to dispute.
 2 Istisna contract is valid for objects that can be made.
 It is invalid for corn, wheat, barley or fruit, and all natural
products whose sale on liability is a salam and not an
istisna.
 3 The object sold in istisna is a fixed liability debt and
therefore it is permissible to be a valuable asset made
according to special specifications nothing-like-it as the
customer wishes with the proviso that it can be monitored
by description.
 For this feature, istisna is different from salam which is
permissible only in similar “assets”.

Cont.
 4 The materials should be supplied by the
maker. If they are supplied by the buyer, the
contract becomes ijara and not istisna.
 5. The istisna is not confined to what the seller
makes after he contracts, but the maker will be
satisfying his obligation.
 if he brings in an article conforming to all the
specifications irrespective whether it was
manufactured by him or the article is produced
by some other parties.
 The specifications demanded by the buyer are
the most important element of the contract.

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Cont.
 6 The istisna contract is binding on the two parties, and
no party has the right to retract; only if the asset does
not conform to the specifications demanded, the buyer
has the option to retract.
 7 Once the contract is concluded, the ownership of the
asset is affirmed to the buyer and the ownership of the
price is affirmed to the maker.
 8 It is not a condition in the istisna contract to advance
the price, though it is permissible to do so, to defer or
install it.
 Usually part of the price is paid in advance and the
remainder will be withheld up to the time of delivery and
receipt of the commodity.

Cont.
 9 It is a condition that the period of delivery is
specified, whether it is short or long so, to avoid
conflict between the two parties.
 10 It is a condition that the place of delivery is
stated (specified) if the commodity needs
loading or transportation expenses.
 11 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.

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Q6

 What are the areas of application for istisna?

A6
 AREAS OF APPLICATION
 The istisna contract may be applied in vast fields where
Islamic banks have the opportunity to finance public
needs and the vital interests of the society in order to
develop the Islamic economy.
 It can be applied in high technology industries such as
aircraft industry, locomotive and shipbbuilding.
 This contract is also applied in the construction of
apartment buildings, hospitals, schools, universities
and whatever that supports infrastructure.
 It should be noted that the istisna contract is also
applicable to various other industries such as the food
processing industry and the like as long as it can be
monitored by measurement and specifications.

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Q7

 Explain the mechanism of istisna in the


current practice.

A7
 MECHANISM OF ISTISNA
 The effect of istisna is the establishment of the right of the buyer over the
subject matter and the establishment of the right of the seller over the
agreed price.
 However, the Hanafi jurists disagreed on the question as to when exactly it
becomes binding on the parties during the different stages of the contract, as
follows:
 A. At the time of the contract before the commencement of the work by the
manufacturer, all of them agreed that istisna is not binding at this stage and
both parties reserve the right to revoke the contract.
 B.after the commencement of the work and before the delivery to the buyer,
they are also in agreement that it is not binding and any party may cancel
the contract and the manufacturer can sell the goods to another party.
 C.In the case of completion of the work and the delivery to the buyer, Imam
Abu Hanifah was of the opinion that the parties still have the option to cancel
the contract.
 However, according to Imam Abu Yusuf the option would ceased to exist for
both parties and the contract becomes binding with the delivery of the
subject of istisna.
 The opinion of Imam Abu Yusuf is the preferred view over the other views in
order to avoid disputes and injustice on both parties.

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Cont.
 As for the manufacturer, he has the obligation to ensure the
compliance of the required specifications.
 As for the buyer, he cannot refuse to take delivery as the goods were
manufactured according to his request and specifications, which
might suit his own requirements and needs only.
 istisna is actually a sale contract whereby the subject matter could be
delivered in future and the price could be paid according to the terms
of agreement between the parties.
 This flexible feature of istisna could provide a tool for financing
projects to be constructed in the future.
 For example if the government wants to construct a highway, it may
enter into a contract of istisna with a contractor.
 The price of the istisna in this instance might be the right of the
construction company to manage the highway and collect the tolls for
a specified period, known as BOT (build-operate-transfer).

Cont.
 Another important mechanism of istisna is that it is possible for the manufacturer to
manufacture or construct the products required or to ask another party to manufacture
the products on his behalf.
 His obligation is to deliver the products with the agreed specifications and the actual
work can be done by him or by another party, through the operation of parallel istisna.
 Istisna therefore provides a proper Shariah-compliant instrument for financing,
especially for the house financing sector, particularly for houses under construction.
 In this instance, the bank as the financier has two options:
 1) Either to contract an istisna as a buyer with the developer who constructs the
house and upon completion and delivery of the house, sells it to its customer at a
higher price.
 2) To enter into contract in its capacity as a seller with the customer.
 for example, to build a house, and then to have a parallel istisna with the housing
developer according to the specifications required by the customer in the first istisna.
On completion of the project, the developer will deliver the house to the financier and
the financier will, in turn, hand over the property to the buyer (customer).
 The payment of instalments by the client may start at any point as agreed by the
parties even before the house is completed and continues until the whole amount is
settled.
 For security purposes, the bank may keep the title deeds of the house or any other
type of guarantee agreed by both parties, until the last instalment is paid by the client.

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Cont.
 the independent of both contracts must be maintained in order to
avoid riba based on the fact that the bank solely acts as a financial
intermediary between the ultimate buyer and the actual
manufacturer.
 Thus, a few conditions must be fulfiled in a parallel istisna:
 A. The bank as a manufacturer in the first istisna will remain solely
responsible for the execution of its obligations.
 if the parallel contract (second istisna) does not exist.
 Hence, the bank would remain liable for any default, negligence or
breach of contract ensuing as a result of the parallel contract.
 B. The manufacturer in the second istisna is accountable to the bank
as the buyer in the parallel contract.
 He has no direct legal relationship with the buyer in the first istina.
 C. The bank as the manufacturer in the first istisna is liable to the
(buyer) with regard to any defects in the execution of the
subcontractor and any guarantees arising therefrom.
 This liability on the part of the bank indeed justifies the validity of the
parallel istisna and the charging of profits by the bank on the ultimate
buyer/customer.

Thank You
‫ﺷﻜﺮا ﺟﺰﯾﻼ‬

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