ISTISNA MANUFACTURING FINANCE : Marifa Academy Islamic Finance

The word Istisna is a derivative from the root word ‘Sa na’a, which means to manufacture or to construct something. Istisna is a contract of sale of specified items to be manufactured or constructed with an obligation on the part of the seller to deliver them to the purchaser upon completion.

The legitimacy of Istisna is based on the Hadith narrated by Jabir (May Allah be pleased with him): A woman said, “O Allah’s Apostle! Shall I get something constructed for you to sit on as I have a slave who is a carpenter?” He replied, “Yes, if you like.” So she had that pulpit constructed. (Al Bukhari, Book #8, Hadith #440).

Important principles of Istisna

Contracting Parties: The conditions for the contracting parties for Istisna are the same as those of a regular sale contract. Thus the contracting parties must be competent by having legal capacity, i.e. they must be adults, mature and sane. Under this contract the Seller is called “San’e” while the buyer is described as “Mustasne”.

The subject matter: The subject matter of a contract of this type includes the object and the price.

Object: The object for an Istisna contract must be identified raw materials that can be transformed from their natural state by a manufacturing or construction process involving labour with unique descriptions. The object of Istisna cannot be an identified existing capital asset or goods. The Istisna goods can be produced by the seller using its own resources or resources of the other manufacturer or producer, but according to the specifications and within the period agreed upon with the Mustasene (purchaser). The Istisna contract can be drawn for real estate development on designated land owned either by one of the two contracting parties or by both.

Price: The price for Istisna goods must be known at the conclusion of the contract. The price could be in cash or tangible goods or the usufruct of an asset for a particular duration. Even the usufruct of Istisna goods themselves could be the price of the contract. Moreover, the price may be deferred or paid in installments within a certain period of time according to phases or stages of completion of work. The seller (San’e) can demand Urboun and guarantee from the purchaser (Mustasne) against its fulfillment of the payment obligations. In turn, the purchase (Mustasne) may demand from the seller (San’e) to provide with the performance guarantee, or the advance payment guarantee if any amount of Istisna’a price is paid in advance.

Conclusion of contract: An Istisna contract can be concluded by offer and acceptance between the seller (San’e) and a purchaser (mustasne) even before the seller (San’e) assumes the title to the Istisna goods to be sold to the purchase (mustasne). Since a contract of Istisna is binding, the parties to the contract are inevitably bound by all obligations and consequences flowing from their agreement and the contract can only be terminated by mutual agreement of the parties. If the Istisna work, however, has not commenced, either party may terminate the Istisn’a contract unilaterally. The seller (San’e) cannot stipulate in the contract that it is not liable for defects. After the conclusion of an Istisna contract, the seller (San’e) and the purchaser (mustasne) can mutually agree on amending and introducing new specifications and the Istisna’a price previously agreed upon. A contract of Istisna, by mutual consent of the parties, can include a clause to the effect that if any additional conditions are inserted into the contract at a later date, the extra expenses will be borne by the purchaser (mustasne).

Supervision of the execution of contract: A technically experienced consulting firm can be appointed by the purchase (mustasne) for ensuring whether the Istisna goods conform to the contractual specifications. The additional costs of supervision can be borne by either party as mutually agreed.

Delivery and disposal: Delivery of Istisna goods can take place before the due date or on the due date, or may take place through constructive possession by enabling the purchaser (mustasne) to take control over the subject matter after the completion of the production process. If the Istisna goods do not conform to the contractual specifications at the time of delivery, the purchase (mustasne) has the right to reject them. The seller (San’e) is discharged from liability once the Istisna goods are delivered.