ISTISNA

Istisna Istisna' is a sale transaction where a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture a specific commodity for the purchaser. The manufacturer uses his own material to manufacture the required goods. In Istisna', price must be fixed with the consent of all parties involved. All other necessary specifications of the commodity must also be fully settled.

Cancellation of contract After giving notice Either party can cancel the contract before the manufacturing party has begun its work Once the work starts The contract cannot be cancelled unilaterally

Difference between Istisna' and Salam The subject mater must by an item which eeds to be manufactured. The subject may be anything that may or may not need manufacturing. The price does not necessarily need to be paid full in advance. It would be paid after delivery or according to contract. The price has to be paid in full in advance.

Difference between Istisna' and Ijarah: Ijarah tul Ashkhaas The manufacturer uses his own material or obtains it to make the ordered goods. The material is provided by the customer and the manufacturer uses only his labor and skill, i.e. his services are hired for a specified fee. The purchaser has a right to reject the goods after inspection. As Shariah permits somebody who purchases a thing not seen by him, to cancel the sale after seeing it. Right of rejection of goods after inspection does not exist.

ISTISNA' AS A MODE OF FINANCING

ISTISNA' AS A MODE OF FINANCING Istisna' could be used as a mode of financing in the following manner. Istisna' may be used to provide financing for house financing. If the client owns a land and seeks financing for the construction of a house, the financier may undertake to construct the house on the basis of an Istisna'. If client wants lands too so financier can provide him with a constructed house on a specified piece of land. (He can hire third party for construction)

ISTISNA' AS A MODE OF FINANCING Istisna' could be used as a mode of financing in the following manner. Istisna' can also be used for financing working capital requirements of a manufacturer. The bank will order the manufacturer to manufacture certain specified goods and pays the Istisna price.

ISTISNA' AS A MODE OF FINANCING Istisna' may also be used for similar projects like Installation of an air conditioner plant in the client's factory, Building a bridge or a highway etc.

ISTISNA' AS A MODE OF FINANCING The modern BOT (Built, Operate and Transfer) agreements may be formalized through an Istisna' agreement as well. So, if the government wants to build a highway, It may enter into an Istisna‘ contract with the builder. The price of Istisna' may be the right of the builder to operate the highway and collect Toll Taxes for a specific period.

Risk Mitigation in Istisna RISKS DETAILS MITIGANTS 1 Delivery Risk Delay in delivery of goods from the Manufacturer to bank. Istisna price can be reduced on daily basis to penalize the manufacturer. 2 Nonperformance The Manufacturer may not be able to manufacture the goods during assigned time and refuses to carry on the responsibility further. Bank can terminate the Istisna agreement and demand the price back from the manufacturer. Alternatively, the price may be paid by Bank in installments after being satisfied with the performance.

Risk Mitigation in Istisna 3 Quality risk The Manufacturer delivers defected/ inferior goods. Bank has the right to reject the goods and demand the price back. 4 Price risk Market price of the subject matter decreases after bank enters into Istisna agreement. Parallel Istisna or promise to purchase from a third party will mitigate the risk. 5 Storage risk The goods once delivered by Manufacturer will be at Bank’s risk before the same are sold to the ultimate purchaser. This may be covered through Takaful of the goods and by minimizing the time duration between acceptance of delivery under Istisna and delivery to the ultimate purchaser.