Tools of Islamic Finance: (6) Istisna - Kickoffall Info Hub

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Sunday, April 5, 2020

Tools of Islamic Finance: (6) Istisna

‘Istisna’’ is the second kind of sale where a commodity is transacted before it comes into existence.
Istisna is a contract of exchange, whereby one party agrees to deliver a commodity or an asset at a pre-determined future time at an agreed price as per the other party’s requirements. When the manufacturer undertakes to manufacture the goods as per the client’s requirements with material from the manufacturer, the transaction of Istisna’ comes into existence. Istisna is a mostly used mode of finance by Islamic banks and financial institutions to finance the construction of real estate-related activities.
Conditions of Istisna:
  • The specification of the commodity (intended to be manufactured) should fully settle between them.
  • The price should be fixed with the consent of the parties.
  • Before starting the preparation for manufacturing such as purchasing raw material etc, any one of the parties may cancel the contract after giving notice to the other.
  • After the start of manufacturing, the contract cannot be canceled unilaterally but can be canceled bilaterally.
Difference between Istisna and Salam
(1) The subject of Istisna’ is always a thing which has to be manufactured, while Bai Salam mostly happens on goods and products.
(2) The contract of Bai Salam cannot be canceled unilaterally, while the contract of Istisna’ can be canceled before the starting of the manufacturing.  
(3) The time of delivery is an essential part of the sale in Bai Salam while it is not an essential element in Istisna’.
Istisna as a mode of financing
Istisna can be used for providing the facility of financing in certain transactions, especially in the house finance sector. If the client has his own land and he seeks financing for the construction of a house, the financier may undertake to construct the house at that open land, on the basis of Istisna’, and if the client has no land and he wants to purchase the land also, the financier may undertake to provide him a constructed house on a specified piece of land.
On the other hand, it is not necessary that the financier himself constructs the house. He can enter into a parallel contract of Istisna’ with a third party or may hire the services of a contractor (other than the client).

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