Istisna

Presented by:
Muhammad Najeeb Khan
(Shriah Advisor)
in
Habib Metropolatin Bank Islamic Banking
Presented at
AlHuda CIBE Workshop.

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
The price has to be
does not necessarily
paid in full in advance.
need to be paid in full
in advance.

Difference between Istisna & Salam

ISTISNA
Time of Delivery does
not have to be fixed
The contract can be
cancelled before the
manufacturer starts
working.

SALAM
Time of delivery is an
essential part of the
sale
The contract cannot
be cancelled
unilaterally.

Difference between Istisna & Ijarah

ISTISNA
The manufacturer
either uses his own
material

IJARAH
The material is provided
by the customer and
the 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

Istisna
Sale

Delivery of
Commodity

Islamic Bank
Purchaser

2nd Istisna Purchaser

Parallel
Istisna

Delivery of
Commodity

Islamic Bank
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
Ownership of Material
The Islamic bank is not the owner of the
materials in the possession of the
manufacturer for the purpose of
producing the asset.
Delivery Risk
Islamic bank may be unable to complete
the manufacturing of goods as
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
before taking physical possession.

SOLUTIONS
Security is available with the bank.

Bank can reduce the Istisna price

acording to the Istisna agreement.

Bank can take promise to purchase

from the third party and can make
arrangements for the agency
agreement