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Glossary

Istisna

Category — Islamic Finance
Istisna contract is a purchase contract for future delivery of an asset between two parties, one of whom (the manufacturer) submits a specific request with certain specifications to the other party (the buyer). In Arabic, Istisna means “asking someone to manufacture”.

Parallel Istisna:

This is what is used in Islamic banks, the Islamic bank, in this formula, concludes a preliminary Istisna contract between itself and the customer (the buyer), and then concludes another contract, which is a parallel Istisna contract with the contractor (the real manufacturer) who will manufacture the commodity subject of the contract.

Characteristics of the Istisna contract:

1. The manufactured commodity must be accurately described as requested by the buyer.
2. The price must be determined when contracting, but the price is not required to be paid in full upon agreement, it is possible to postpone all or part of the price according to the agreement between the manufacturer and the buyer.
3. The date of delivery of the manufactured item must be specified.
4. The Istisna contract may include a penalty clause.

Advantages:

1. Istisna helps the buyer to meet his needs if he lacks sufficient experience to evaluate the project, the time required to follow it up, or the money required to finance it.
2. Istisna provides flexibility to the customer, where payments can be made in instalments linked to project completion, at delivery, or after project completion.
3. This contract is relevant and useful for a variety of financing, facilitating manufacture or construction of factories, houses, infrastructure serving both the public and private sectors.
4. Financing in Istisna allows the customer, after benefiting from this financing, to be independent in managing his project and making his investment decisions, and this is something that investors usually prefer as they do not prefer the participation of others in running their projects.

Disadvantages:

1. Determining the price when contracting, which exposes the buyer to the risks of price fluctuations.
2. It could be used for construction financing, not permanent financing, and would expose the project to refinancing risk.

Bai’ Salam and Istisna
Both Bai’ Salam and Istisna are types of forwarding sales, but despite their similarities, there are a number of differences between Istisna and Bai’ Salam. These include:

Istisna Bai’ Salam
The object of Istisna Usually needs to be manufactured. Can be applied to anything, no matter whether it needs manufacturing or not.
The price Does not necessarily need to be paid in full in advance, can be deferred to any time, and can be made in instalments. Must be paid in full in advance.
The time of delivery Does not have to be fixed. It is an essential part of the sale in Bai’ Salam.
Cancellation of the contract Can be cancelled before the manufacturer starts the work. Cannot be cancelled.
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