In the name of Allah, the compassionate the merciful
Istisna’a is an Islamic finance instrument that came out of Qiyas (analogical deductions), from Islamic scholars due to istihsan (human need). In other words, it has no direct source from the Quran and the Hadeeth but rather from analogical deduction based on the Quran and Hadeeth.
It is an important and versatile Islamic finance tool. Istisna’a allows for the creation of customized assets or goods.
It is an order to manufacture, or sale on order, or a request for the manufacturing of a specific item in a specific form. It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery, or future payment, and future delivery. Istisna‘a can be used to provide financing for a facility such as manufacturing/construction of houses, plants, projects, bridges, roads, and highways. The contract is referred to as the istisna‘a contract, the buyer of the Istisna’a product is referred to as Mustasni, the seller of the Istisna’a product is referred to as Sani and the commodity to be sold is referred to as Masnu.
Istisna’a is similar to a Salam contract in three ways; firstly, trading in an immediate item/commodity in exchange for a different one. Secondly, the sale of non-existent objects, and thirdly, the object of sale is identified as a liability to the seller.
On the other hand, an istisna’a contract is different from a Salam contract in four ways; firstly, the subject matter of istisna’a is always a thing that needs to be manufactured, while Salam can be on anything manufactured or not. Secondly, in the Salam contract, the price must be paid in full in advance, but not necessarily so in instisna‘a. Thirdly, once effected, the contract of Salam cannot be canceled unilaterally, but in istisna’a, the contract can be canceled before the manufacturer starts the work. Lastly, the time of delivery is an essential part of the sale in the Salam contract but time must not be fixed in the Istisna’a contract.
Some benefits of the Istisna’a contract
Customization: Istisna contracts are highly flexible and can be tailored to meet the specific needs and requirements of the parties involved. This makes it suitable for the construction of unique assets or goods.
Risk Mitigation: Istisna contracts can help mitigate risks, as the manufacturer or builder is responsible for ensuring that the final product meets the agreed-upon specifications. If the product is not delivered according to the contract, the manufacturer bears the risk.
Asset Creation: Istisna contracts facilitate the creation of tangible assets or goods, which can be beneficial for businesses and projects that require physical assets to operate or generate revenue.
Economic Development: Istisna can promote economic development by supporting infrastructure and construction projects, thereby creating jobs and stimulating economic growth.
Project Financing: It can be used as a financing tool for large-scale projects, as funds are disbursed progressively based on project milestones, reducing the need for large upfront capital.
Asset Ownership: In Istisna contracts, the purchaser usually owns the asset even before it is completed. This can be advantageous for businesses that need to use the asset during the construction process.
Sharia Compliance: Istisna’a is structured in compliance with Islamic principles, making it a preferred choice for individuals and businesses seeking Sharia-compliant financing solutions.
Profitability: While Istisna’a is primarily used for creating assets, it can also be structured to include a profit margin, allowing financial institutions to earn a return on their financing.
Risk Sharing: The Istisna’a contract encourages risk-sharing, as both parties have a vested interest in ensuring the project’s successful completion. This aligns with the principles of fairness and equity in Islamic finance.
Project Monitoring: The nature of Istisna’a contracts often involves close monitoring of project progress, which can lead to better project management and quality control.
It’s important to note that Istisna’a contracts should be structured carefully to ensure compliance with Islamic finance principles, and the terms and conditions should be clearly defined in the contract to avoid disputes and uphold the ethical principles of Islamic finance. This will serve the purpose of the Falah (benefiting from this world and the hereafter). “Praise be to Allah in Whose favor good things are accomplished”. And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
0506218343 / 0246873726
