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Istisna

Khairuddin Zakaria

khairuddinzakaria@gmail.com

Q 1

Explain the concept of Istisna.

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A 1 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 ormanufacture some goods for him.

Technically, it is a contract to purchase for a definite pricesomething that may be manufactured later on accordingto agreed specifications between the parties.

it is a contract of sale of specified items to bemanufactured or constructed with an obligation on thepart of the manufacturer or contractor to deliver them tothe customer on completion.

istisna is actually an exception to the general condition ina sale that the goods intended to be sold must be in thephysical 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 paymentsale.

3) The price is present but the goods will be delivered at alater agreed period, known as contract of salam.

The majority of jurists considered istisna as part of salamand therefore the price must be paid at the time of contractas in the case of salam.

according to the Hanafi jurists, istisna is another type ofcontract of sale, different from the contract of salam,whereby the price can be paid later, not at the time ofcontract.

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Q 2

Discuss the condition of istisna.

A 2 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 togharar (uncertainty) in the subject matter.

B. The subject matter must be goods that can be manufactured according tothe convention and it is not commodities.

the element of labour or manufacturing is crucial in istisna, whichdifferentiates it from the salam contract.

Therefore, the subject matter cannot be an existing or identified capitalasset or a particular designated item.

C. The manufacturer undertakes to construct the goods with his ownmaterial.

If the buyer supplies the raw material to be manufactured, it is thenconsidered as ijara, instead of istisna.

D. It is also a requirement that the price of the subject matter of istisna beknown at the time of the conclusion of the contract.

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Q 3

Discuss the prohibited elements in istisna.

A 3 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 ofthe contract, which was prohibited by the Prophet (pbuh).

On the other hand, the non-existent item in istisna is by nature to beproduced and delivered later which constitutes the non monetary obligationof the manufacturer.

3. The price could not be increased or decreased on account of the normalincrease 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 validonly in the sale of particular identified goods.

6. The contract of istisna cannot be drawn up on the basis of a murabahahsale or sale by determining the price on the cost plus basis.

This is because in a murabahah sale, the subject matter must be somethingalready in existence which is owned by the seller and the cost of which isknown prior to the conclusion of the murabahah sale.

On the other hand, istisna is concluded prior to the ownership of the subjectmatter to be manufactured in the future and therefore, the cost is essentiallynot known as required in murabahah.

7. In a parallel istisna , the institution or the bank cannot simply act as afinancial intermediary or the financier of the istisna between the ultimatebuyer and the actual manufacturer to avoid the element of riba.

Therefore, the two contracts must be independently constructed.

Q 4

What are the types of istisna?

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A 4 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 requestorand the seller or manufacturer to manufacture a specified thing withspecific specifications to be delivered in the future.

2. Parallel istisna or to contract two independent but inter-relatedcontracts of istisna.

The first contract, is between a bank as a /manufacturer whoundertakes to manufacture a specified good, and a customer as thebuyer to whom the goods will be delivered.

In the second contract, the bank as a buyer would request anothercompany to manufacture the same goods specified in the first istisna.

The second istisna is independent of the first istisna, whereby noliability arising from the first istisna contract shall be imposed on theparties 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 enteredinto a contract.

Q 5

There are some shariah issues related toistisna. Discuss those issues from Islamic lawperspective.

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A 5 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 thespecifications required.

because it is must be known to avoid ignorance whichleads 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 anistisna.

3 The object sold in istisna is a fixed liability debt andtherefore it is permissible to be a valuable asset madeaccording to special specifications nothing-like-it as thecustomer wishes with the proviso that it can be monitoredby description.

For this feature, istisna is different from salam which ispermissible only in similar “assets”.

Cont. 4 The materials should be supplied by the

maker. If they are supplied by the buyer, thecontract becomes ijara and not istisna.

5. The istisna is not confined to what the sellermakes after he contracts, but the maker will besatisfying his obligation.

if he brings in an article conforming to all thespecifications irrespective whether it wasmanufactured by him or the article is producedby some other parties.

The specifications demanded by the buyer arethe most important element of the contract.

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Cont.

6 The istisna contract is binding on the two parties, andno party has the right to retract; only if the asset doesnot conform to the specifications demanded, the buyerhas the option to retract.

7 Once the contract is concluded, the ownership of theasset is affirmed to the buyer and the ownership of theprice is affirmed to the maker.

8 It is not a condition in the istisna contract to advancethe price, though it is permissible to do so, to defer orinstall it.

Usually part of the price is paid in advance and theremainder will be withheld up to the time of delivery andreceipt of the commodity.

Cont.

9 It is a condition that the period of delivery isspecified, whether it is short or long so, to avoidconflict between the two parties.

10 It is a condition that the place of delivery isstated (specified) if the commodity needsloading or transportation expenses.

11 The buyer may stipulate in the istisnacontract that the commodity shall bemanufactured or produced by a specificmanufacturer, or manufactured from specificmaterials.

This is not permitted in the case of a salam sale.

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Q 6

What are the areas of application for istisna?

A 6 AREAS OF APPLICATION

The istisna contract may be applied in vast fields whereIslamic banks have the opportunity to finance publicneeds and the vital interests of the society in order todevelop the Islamic economy.

It can be applied in high technology industries such asaircraft industry, locomotive and shipbbuilding.

This contract is also applied in the construction ofapartment buildings, hospitals, schools, universitiesand whatever that supports infrastructure.

It should be noted that the istisna contract is alsoapplicable to various other industries such as the foodprocessing industry and the like as long as it can bemonitored by measurement and specifications.

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Q 7

Explain the mechanism of istisna in thecurrent practice.

A 7 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 theagreed price.

However, the Hanafi jurists disagreed on the question as to when exactly itbecomes binding on the parties during the different stages of the contract, asfollows:

A. At the time of the contract before the commencement of the work by themanufacturer, all of them agreed that istisna is not binding at this stage andboth 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 cancelthe 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, ImamAbu Hanifah was of the opinion that the parties still have the option to cancelthe contract.

However, according to Imam Abu Yusuf the option would ceased to exist forboth parties and the contract becomes binding with the delivery of thesubject of istisna.

The opinion of Imam Abu Yusuf is the preferred view over the other views inorder 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 weremanufactured according to his request and specifications, whichmight suit his own requirements and needs only.

istisna is actually a sale contract whereby the subject matter could bedelivered in future and the price could be paid according to the termsof agreement between the parties.

This flexible feature of istisna could provide a tool for financingprojects to be constructed in the future.

For example if the government wants to construct a highway, it mayenter into a contract of istisna with a contractor.

The price of the istisna in this instance might be the right of theconstruction company to manage the highway and collect the tolls fora 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 manufacturethe products on his behalf.

His obligation is to deliver the products with the agreed specifications and the actualwork 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 ahigher 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 andthe 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 theparties even before the house is completed and continues until the whole amount issettled.

For security purposes, the bank may keep the title deeds of the house or any othertype 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 financialintermediary between the ultimate buyer and the actualmanufacturer.

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 thesubcontractor and any guarantees arising therefrom.

This liability on the part of the bank indeed justifies the validity of theparallel istisna and the charging of profits by the bank on the ultimatebuyer/customer.

Thank You

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