Fundamentals of Islamic Finance and Banking

CHAPTER 9Istisna

Learning outcomes

Upon completion of this chapter, you should be able to:

1. Define Istisna and describe the Shariah rules and general principles guiding its characteristics.
2. Discuss the role of Islamic banks in Istisna and parallel Istisna and the problems related to these contracts.
3. Elaborate the Istisna financing process and compare it with a conventional loan.
4. Compare Istisna with Salam and Ijara and describe the practical applications of Istisna.

INTRODUCTION TO ISTISNA

Istisna is the second sales contract, in addition to Salam, that is an exception to the Shariah requirements for a valid sales contract. These Shariah requirements are that the asset being sold must exist at the time of the contract, the seller should be the owner of that asset and the asset should be in the possession or control of the seller, either physically or constructively. The word Istisna is derived from the Arabic word Sina'a, which means to manufacture a specific commodity. Shariah scholars allow the Istisna contract as an exception to a valid sales contract since it helps meet the needs and requirements of individuals and organizations which cannot be financed through standard sales contracts.

Istisna is a sales contract in which the buyer contracts with the seller to manufacture, produce, construct, fabricate, assemble or process any asset in accordance with given specifications, descriptions, quality and quantity identified, and within a specified period and at an ...