Group(B) members Abdirahman Addow Hassan Abbas Abdulkarim Mohamed Ahmed Dhi’isow Elmi Mohamud Mohamed Habarwaa

Financing Asset under Construction- Istisna’a & Parallel Istisna’a

learning Goals Definition of istisna’ Parties on ististna’ Steps of istisna’ Essentials of ististna’ Price of ististna’ Binding nature of ististna’ contract Parallel istisna’ and its application Difference between ististna’ and Ijarah Difference between ististna’ and salam Risks in ististna’ applications and their solutions.

Definition of istisna’ The word istisna’ is derived from the word Sana’a which literally means “making, manufacturing or constructing something.” Istisna’ is an agreement in a sale at an agreed price whereby the purchaser places an order to manufacture or assemble anything to be delivered at a future date.

Parties in istisna There are two parties in istisna: Sani Mustani Sani: The person who makes it is called sani’. Mustani: The person who causes it to be made it is called Mustani. Masnu: the thing made is called Masnu.

Steps in istisna’ contract Client asks Bank to develop or construct or manufacture an asset X with clear specifications. The Bank undertakes to manufacture the commodity as per specifications and deliver it to the customer at some agreed upon time in the future at agreed upon price. The Bank then enters into a parallel Istisna’a agreement with a third party to manufacture asset X with same specifications. The manufacturer in the parallel Istisna’a develops or constructs or manufactures asset X, receives progress payments from Bank as per agreed terms during different stages of manufacturing.

Steps in istisna’ contract (Cont…) The Bank fixes a price that is lower than that agrees to in the original agreement and requires delivery on or before date fixed in the original contract. Manufacturer gives delivery of asset to Bank. Bank gives delivery of asset to Client. The Bank as seller accepts a long-term schedule of payments from its customer. The Bank as buyer pays the manufacturer over a shorter period with progress payments. The difference between the bank’s payment to the manufacturer and customer’s payment to the bank is the bank’s compensation for the finance.

Essentials of istisna’ contract An istisna’ contract: It must be definitely stated in clear terms and conditions. The price must be Specified. It must be ,as well, Specified the quality ad quantity of goods, the type , dimensions, period and place of delivery of the asset. The asset can be manufactured or produced by any one or specific manufacturer from specific materials.

Price of Istisna Price of istisna may be in the form of cash, commodity and usufruct of identified assets. The price should be known in advance to the extent of removing ignorance or lack of knowledge and dispute. It is permissible that the price of istisna’ transactions varies in accordance with variations in delivery date. The price, once settled, cannot be unilaterally increased or decreased. Price of Istisna is can be paid in installments with agreed time period and can also be linked with the completion stages.

The binding nature of istisna contract The Hanafi jurists generally divide the binding effect of this kind of contract into three stages: At the first stage, where the work of manufacturing has not yet started. At the second stage, the manufacturer may finish making the needed goods, but the purchaser has not seen the manufactured object yet. The third stage is when the required goods have been manufactured and presented to the purchaser. In third stage Muslims scholars have different opinions: AI-Imam Abu Hanifah is of the opinion that the purchaser can exercise his option of inspection (Khiyar-e-RoiyyaT) after seeing the goods. Abu Yusuf, a follower of Abu Hanifah, opines that if the commodity was in conformity to the inspections agreed upon between the parties at the time of the contract, the purchaser is bound to accept the goods and he cannot exercise the option of inspection (khiyar al ruyah).

GENERAL CONDITIONS In the case of general conditions, the istisna sale must fulfill the requirement of a valid contract as discussed by the jurists: The capacity of the contracting parties. The subject-matter. Offer and acceptance

SPECIFIC CONDITIONS: The object must be precisely determined both in its essence and quality. The recommended manufactured goods should be things that people customarily deal with in the field of manufacture. Otherwise, the contract of istisna will be invalid. It is a condition that the time of delivery is specified whether it is short or long so as to avoid ignorance, which might lead to conflict between the two parties. The materials should be supplied by makers, if they are supplied by the buyer, the contract is regarded as al Ijarah and not istisna. It is a condition that the place of delivery is stated if the commodity needs loading or transportation expenses.

PARALLEL ISTISNA AND ITS APPLICATIONS After the execution of Istisna agreement with one party, buyer or seller executes another Istisna agreement with third party. Conditions for Parallel Istisna : (a) There must be two different and independent contracts, these two contracts cannot be tied up and performance of one should not be contingent on the other. (b) Parallel Istisna is allowed with third party only.

Parallel Contract-subcontracting

Difference between Istisna’ & Ijarah The manufacturer either uses his own material Istisna can be of anything that needs manufacturing. IJARAH The manufacturer on an Ujrah basis uses the material provided by the buyer and he is paid the agreed wages. Ijarah can be only on those assets the corpus of which is not consumed with use

Difference between Istisna’ & Ijarah Asset risk is transferred to the purchaser soon after delivery of the item to him and he has to pay the price irrespective of what happens to the asset. IJARAH Asset risk remains with the owner (lessor) and the lessee has to give rental only if the assets capable of being used as per normal market practice.

Difference between Istisna’ & Salam The subject of istisna is always a thing which needs manufacturing. The price in istisna does not necessarily need to be paid in full in advance. The contract of Istisna’a can be cancelled before the manufacturer starts the work. SALAM The subject can be any thing. The price has to be paid in full in advance. The contract of Salam, once affected cannot be cancelled unilaterally.

Risks in Istisna applications and their solutions Ownership of Material The Islamic bank is not the owner of the materials in the possession of the manufacturer for the purpose of producing the asset. Security is available with the bank. Delivery Risk Islamic bank may be unable to complete the manufacturing of goods as scheduled due to late delivery of completed goods by the sub-contractor of Parallel Istisna. Bank can reduce the Istisna price acording to the Istisna agreement. Sale not permissible before delivery Sale of Istisna goods is not allowed before taking physical possession. Bank can take “promise to purchase” from the third party and can make arrangements for the “agency agreement”

Questions ?