Sukkur IBA

University
Islamic Finance

Submitted To
Dr. Shabir Khan

Submitted By
Safi Ullah
BBA-6

Istisna as a solution to deal with small

scale manufacturing process

Dated:10/12/2020
Introduction
A contract among two parties, one is the demander who demands the
manufacturing of goods and the other party is the manufacturer itself who
possess the skills and knowledge to prepare the product by fulfilling the
requirements of demander agreed upon a certain price. It is a long term contract
where goods and products are deliver in future by the party. In Istisna contract,
payments paid by the demander may be in installments, on delivery, or on
completion.
The role and scope of Istisna can be seen in industrial finance, Real estate
financing, can contribute to income, and create incentive for the use of
technology in Islamic countries for the production of goods. Istisna in industrial
finance is more related towards manufacturing of primary goods which later
converted to many other related products with different value addition. In Real
Estate, it create pathways for construction projects such as housing and
buildings.
The sale contract where a person is ready to buy prepared products and seller is
willing to sale is the normal form of Istisna. The big scope of Istisna is not only
in personal limitation but the need of Istisna contract is increasing in emrging
economies. The contract shape and its working is so convenient that economists
feel to good such positive contracts for the uplifting of the economy.
Istisna: Important in itself
The importance of Istisna can be seen in great facilitation for the dealers. The
Istisna contract promises to deliver the goods or products on future even they
are not existed on current time but the delivery of price is when the contract is
done among the parties.
The Istisna contract is beneficial for:
Manufacturer
The manufacturer better know what he can make and sell in order to get more
profits. The Istisna will help manufacturer to know what he should make rather
than what he makes and not demanded in the market. If he manufacture a
product without knowing the demand he might suffer from great number of
losses.
Client
The clients might get the goods or products of better quality which he really
wants. He need not to buy which are not good. However, some goods which are
not ready made just like equipment that may take time to be manufactured. An
Istisna can assure the timing of the product to be manufactured and delivered to
the client.
Society
The structure of Istisna makes money move from one hand to other hand.
Which makes the economy improved and healthy. So by Istisna many members
of society can get their house income increase as the money will not stuck to
one hand and the overall growth of the country can improve.
Istisna: Industrial Field
The Islamic finance is really a gift to businesses by providing different
convenient products. It is satisfying of the needs and demand of the industry. It
is a really good and working substitute for interest. The Istisna product of
Islamic finance can help industries to finance without following the interest
based system. Istisna can benefit industries in following ways:
 One of the important of Istisna in industries is that it creates a strong relation between raw
materials which later converted in finished goods and can add value addition to these
finished goods. The income from manufacturing sector can increase by Istisna which can
help to increase the household income.
 Istisna is contributing towards different economic activities such as helping to provide
transport facilities, construction and manufacturing. This help industries to expand
themselves because of good transportation and infrastructure facilities.
 It is fulfilling the clients requirement where client do not have to waste his time by finding a
good project.
 It makes the industries to use best technological facilities.

Istisna in Banks
Istisna is a financing tool which makes available the manufactured product to be
provided by the bank to the client. The other contract created by the bank is
with the manufacturer. The Islamic bank tries to find a manufacturer at low
price in the market so that it creates a reasonable profit by selling it to its
customer at affordable price. This how the link is created between bank, client,
and manufacturer. Which is true sense of business activity and good for the
economy of a country. Istisna in banks is an alternative to the interest based
contracts which is harmful for society.
Fluctuating Price and Istisna
One of the reason that stop istisna contract is the variation of market prices of
goods and services. Since Istisna contract is mostly dependent on current market
prices of goods and services which is said to be capital risk for banks and these
prices fluctuate from manufacturing to delivery of the product. This is why most
of the bank fear to go to adopt Istisna. Some jurisprudence are seeking for
solution to this problem.

Recommendation
Istisna is a good way for contract of manufacturing goods. It is really good for small
businesses. But the problem lies in the fluctuating prices of goods and services in the market
which makes Istisna less attractive to banks. The only recommendation to Istisna contract
should be that in this contract the prices of goods and services must be adjusted so that no one
should face the loss. Istisna needs more modification and improvement and these
improvements should be brought according to Islamic rules and regulations.

Conclusion
Istisna contract helps small scale manufacturing process by its simplicity. It creates ease of
providing manufacturing goods to the client in the shape of a simple contract and trust is built
within this contract. Istisna contract provides guarantee of providing the future goods so that
the businesses should run without worrying of receiving those goods at loss.

References
https://core.ac.uk/download/pdf/268005441.pdf

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165336

https://www.emerald.com/insight/content/doi/10.1108/QRFM-07-2018-0083/full/html

https://www.academia.edu/download/944733/SALAM___ISTISNA.pdf

http://www.academia.edu/download/31143524/LJMS_vol1_2007_21-28_3_.pdf

http://journals.researchub.org/index.php/JSSHR/article/view/415