Bay' al-Istisna'
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This document defines and discusses the Islamic financing contract of istisna'. It begins by defining istisna' literally and technically. It then outlines the pillars (parties and elements) of an istisna' contract and compares it to salam. Finally, it discusses examples of modern applications of istisna' contracts like parallel istisna' and sukuk istisna'.
Bay' al-Istisna'
- 1. MAHYUDDIN KHALID emkay@salam.uitm.edu.my
- 2. CONTENT DEFINITION DEFINITION EVIDENCE EVIDENCE PILLARS OF AL-ISTISNA’ TYPES OF AL-ISTISNA’ PILLARS CONDITION OF AL-ISTISNA’ CONDITION DIFFERENCES BETWEEN AL-ISTISNA’ AND BAY’ AL-SALAM COMPARISON MODERN APPLICATION APPLICATION 2
- 3. DEFINITION Literally: DEFINITION The word istisna’ derived from the arabic verb “istasna’a” which is mean to request someone to EVIDENCE manufacture an asset. PILLARS Technically: Bay’ al-istisna’ is defined as a contractual agreement CONDITION with manufacturer to produce items with specified description at a determined price, and manufactured from his own materials with his own effort. COMPARISON APPLICATION
- 4. DEFINITION The Majallah al-Ahkam al-Adliyyah (Ottoman code DEFINITION of Islamic civil law) defines istisna’ as A contract with the maker, (manufacturer) on the EVIDENCE specific task that is liable to complete. PILLARS Malaysian Accounting Standards Board (MASB) defines the istisna’ as: CONDITION A contract of exchange whereby an IFI, at the request of the customer, acquires an asset for purchase or COMPARISON construction based on specifications by the customer. The payment of acquisition price to manufacturer, APPLICATION developer or vendor of the asset is made up-front by determined future date.
- 5. DEFINITION It is an order to producer to manufacture a specific DEFINITION commodity for the purchaser. The emphasis in istisna is the specificity of subject EVIDENCE matter to avoid gharar (uncertainty) ensuring that the seller cannot transact with something that cannot be PILLARS accurately described; one can describe equipment, a factory or an industrial plant, but not fish in the sea prior CONDITION catching them since their type and volume is unknown. Upon delivery, the IFI sells it to the customer at a COMPARISON prevailing market price comprising original acquisition price and a margin of profit. APPLICATION The customer repays by installments within a period and in the manner agreed between the IFI and the customer.
- 6. EVIDENCE According to jurist, the legality on an istisna’ DEFINITION contract is established from different legal sources such as the Sunnah, ijma’, qiyas and istihsan. EVIDENCE There is no differences of opinion on its PILLARS permissibility. It clearly can be seen from hadith: Indeed that the Prophet s.a.w booked the making of a CONDITION golden ring The istisna’ contract is legitimate on the basis of the COMPARISON people’s customary practice of this contract in all periods of time without any objection, which in turn APPLICATION constitutes a legal consensus. 6
- 7. PILLARS OF ISTISNA’ Mustasni’ DEFINITION Customer EVIDENCE Sani’ Manufacturer PILLARS Ra’s al-Mal The Price CONDITION Masnu’ COMPARISON The Product Sighah APPLICATION Ijab (Offer) Qabul (Acceptance) 7
- 8. FLOWS OF ISTISNA’ 1) Ijab (Offer) DEFINITION 3) Ra’s al-Mal EVIDENCE (Price) PILLARS Mustasni’ Sani’ CONDITION (Customer) (Manufacturer) COMPARISON Masnu’ APPLICATION 4) (Product) 2) Qabul (Acceptance) 8
- 9. TYPES OF ISTISNA’ CONTRACT DEFINITION Classical Istisna’ Parallel Istisna’ EVIDENCE • The normal • Contractual agreement istisna’contract that consists of two series of PILLARS involves two seperate istisna’ transacting parties; the contracts whereby the CONDITION customer (mustasni’) first istisna’ contract is and the manufacturer between the ultimate COMPARISON (sani’) purchaser (customer) and the seller (bank), APPLICATION who is responsible for delivering the specified asset to the purchaser. 9
- 10. CONDITION OF ISTISNA’ DEFINITION Conditions of subject matters (masnu’) EVIDENCE • The object to be manufactured must be precisely determined in its type, kind, quantity and quality, considering that PILLARS istisna’ contract is a form of sale of the non-existence. • The object of an istisna’ contract must be something that the people are familiar with to contract it on the basis of CONDITION manufacture and construction process. • Istisna’ contract always associated with the risk of COMPARISON uncertainty of the deliverability of the subject matter which can be mitigated through the above said mechanism. APPLICATION • If the subject matter does not conform to the contractual specifications at the time of delivery, the purchaser has the right to either refuse or accept it.
- 11. CONDITION OF ISTISNA’ Conditions of time of delivery DEFINITION • The best view to fix the delivery time to avoid dispute even though it is not a requirement. EVIDENCE • The time of delivery of the manufactured object must be clearly specified to avoid uncertainty and ambiguity which may lead to a later dispute among the transacting parties. PILLARS • The customer permitted to penalize the manufacturer if the latter fails to deliver the work on specified date. CONDITION Conditions of price for istisna’ • Price of istisna may be in the form of money, commodity and usufruct. COMPARISON • Price of istisna may be spot and differed therefore istisna is applicable where salam is not applicable. APPLICATION • Price of istisna is can be paid in installments. • The installments may be tied up with different stages of projects. • 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.
- 12. DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM BAY AL-ISTISNA’ BAY’ AL-SALAM DEFINITION The subject of istisna’ is always a The subject can be any thing, thing which needs whether need manufacturing or EVIDENCE manufacturing. not The price in istisna’ does not The price has to be paid in full in PILLARS necessarily need to be paid in full advance. in advance. CONDITION Time of delivery of istisna’ Time of delivery is an essential product does not have to be fixed part of the sale COMPARISON The contract can be cancelled The contract cannot be cancelled before the manufacturer starts unilaterally. working. APPLICATION 12
- 13. APPLICATIONS In contemporary Islamic finance, an istisna’ contract DEFINITION is applicable to various industrial productions which can be constructed or manufactured and EVIDENCE supervised by specification. PILLARS Customers are able to apply for the istisna’ financing facility and other product offered by CONDITION Islamic bank using istisna’ contract such as: Parallel istisna’ (Istisna’ Mawazi) COMPARISON Hybrid Istisna’ Sukuk istisna’ APPLICATION 13
- 14. PARALLEL ISTISNA’ (ISTISNA’ MAWAZI) 2 DEFINITION 3 Bank EVIDENCE PILLARS CONDITION Customer COMPARISON Also as developer 4 Original Seller/ APPLICATION Developer (Builder) 1 14
- 15. PARALLEL ISTISNA’ (ISTISNA’ MAWAZI) Parallel salam takes effect through two separate contract. DEFINITION In the first contract the IFI act in the capacity as manufacturer, builder or supplier and concludes a EVIDENCE contract with the customer. In the second contract the IFI act in the capacity of a PILLARS purchaser and concludes another contract with a manufacturer, builder or supplier in order to fulfill its CONDITION contractual obligations towards the customer in the first contract. COMPARISON By this process a profit is realized through the difference APPLICATION in price between the two contracts and in most cases, one of the contract is concluded immediately and the second contract concluded later. 15
- 16. END OF CHAPTER DEFINITION EVIDENCE PILLARS CONDITION COMPARISON APPLICATION 16