Istisna'a

The majority of the jurists consider Istisna'a as one of the divisions of Salam; therefore it is assumed under the definition of Salam. But the Hanafite school of jurisprudence makes Istisna'a an independent and distinct contract. The jurists of the Hanafite school have given various definitions to Istisna'a some of which are :"That it is a contract with a manufacturer to make something".

The purchaser is called "mustasnia" contractor and the seller is called "sania" maker r manufacturer and the thing is called "masnooa" "manufactured, built, made".

Istisna'a combines two distinctive features:

• Permissibility of Salam transaction even though the subject of the contract does not exist at the time of contract.
• The feature of ordinary absolute sale whereby the price is fiduciary, not necessarily to be advanced as in Salam. Because Istisna'a involves labour beside the materials, it becomes akin to "ljara" in which deferment of payment is permissible.

The bank can utilize Istisna'a in two ways:

• It is permissible for the bank to buy a commodity under Istisna'a contract and sell it on receipt of cash installment or deferred payment basis.
• It is also permissible for the bank to enter into Istisna'a Contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna'a Contract in the capacity of a buyer with another party to make (manufacture) the commodity agreed upon in the first contract.

The first Istisna'a can be immediate or deferred (the payment). The payment terms in the second Istisna'a can also be cash or deferred.

Stated below are the practical steps which the bank takes in the mode of Istisna'a sale, parallel Istisna'a with reference to the non-existence of any legal relation or financial obligation between:

• The purchaser requesting Istisna'a (the end user) in the first contract, and
• The manufacturer or the seller who manufactures the article in accordance to the parallel Istisna'a contract.

Any disagreement that may arise is settled under each contract separately according to the provision therein.


The practical steps of the Istisna'a sale and the parallel Istisna'a

1. Istisna'a sale contract:

The buyer: Expresses his desire to buy a commodity and sends Istisna'a request to the bank with a specific price. The timing of payment whether cash or deferred shall be subject to agreement.

The bank: Usually calculates what it will actually pay in parallel Istisna'a contract plus the profit it deems reasonable.

The bank: Puts itself under obligation to manufacture a certain commodity and to deliver it in a specific period subject to agreement (the bank puts into consideration that the due date is the same or after the due date of its receipt to the commodity in the parallel contract).

2. The parallel Istisna'a contract:

The bank: Expresses its desire to order the manufacture of the commodity it has undertaken to manufacture in the first Istisna'a contract (with the same specification as in the first contract) and agrees with the maker on the price and the date of delivery.

The seller: Puts himself under obligation to manufacture the specific commodity and to its delivery on the due date agreed upon.

3. Delivery and receipt of the commodity:

The seller: Delivers the manufactured commodity to the bank directly or to any party at the place decided by the bank on the contract.

The bank: Delivers the manufactured commodity directly to the purchaser or authorizes any party to deliver the commodity to the purchaser who has the right to make sure that the commodity satisfies the specification he has demanded in the contract.

AREAS OF APPLICATIONS

The contracts in the nature of BOT (Build, operate, and Transfer) can be categorized as Istisna'a transactions. For example, the government may enter into a contract with a builder will be repaid through toll collection over a specified period.

• Istisna'a contract opens wide fields of application for the Islamic banks to finance the public needs and the vital interests of the society to develop the Islamic economy.
• Istisna'a contract is applied in high technology industries such as aircraft industry, Locomotive and ship building industries, in addition to the different types of machines made in the big factories or workshops.
• The Istisna'a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, universities to whatever that makes the network of modern life.

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