Istisna'a Definition: Characteristics of Istisna : The subject matter of Istisna The sold commodity is a debt borne by the manufacturer

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1 Istisna'a Definition: it is a contract whereby a specific good is manufactured (includes the process of manufacturing) by the seller using his own materials according to certain agreed-upon specifications at a determined price to be paid according to agreement. Characteristics of Istisna : - Istisna' is a type of sale contracts (it is neither Ijara, nor a promise of sale ) - The subject matter of Istisna has to be something that can be manufactured (goes through the process of manufacturing): istisna' is not valid for the products that cannot be manufactured such as grains and fruit (this is what distinguishes it most from salam). - The sold commodity is a debt borne by the manufacturer who has to deliver it on the due date. It does not need to be accomplished by the undertaking party, unless this was conditioned in the contract. - The sold manufactured goods have to be manufactured according to specifications agreed upon. They should be described in a way to prevent ignorance and avoid dispute- whether the manufactured goods are extant or inexistent at the time of contracting. - The sold manufactured goods have to be manufactured with materials provided by the manufacturer: the materials used to manufacture the goods have to be provided by the manufacturer, because if they are provided by the buyer, the transaction will be mere Ijara rather than istisna'. - The price is to be paid according to agreement: the price does not have to be paid immediately in istisna' (and this is one of its most striking differences from salam). However; the parties should agree on value of the price and on the modalities of payment and whether the price is to be paid immediately, deferred or paid on installment basis). Scope of Istisna Applications: - Modern Industries: (aircrafts trains and ships industries and the manufacturing of other machinery and equipment). - Construction of Various Buildings and the like: (for example, residential compounds, hospitals, schools, and roads etc). - The Different Types of Industries that can be defined according to precise standards and specifications: manufacturing, extractive industries,

2 food industries including the processes of canning and preservation of natural products Applications of Istisna'a' in Islamic Banks: - Istisna' Contract combined with appointing the manufacturer as agent to sell the manufactured goods (the bank as buyer beneficiary ): In this case, the bank takes part in istisna' operation (as a buyer) to finance the manufacturer to manufacture specific goods. Then, the bank (by an agency contract independent from istisna' contract) appoints the manufacturer as agent to market the goods (after the goods are manufactured and their possession is taken by the bank) and sell them to a third party. It is permissible for this agency to be free or in return for a fixed payment. The practical steps of this operation can be summed up in what follows: The Client: applies to the bank to request finance of his istisna' operation through the bank's purchase of goods of determined specifications the client undertakes to manufacture. The Bank: approves of the client's request and concludes istisna' contract with him. The Bank: authorizes its client (manufacturer) by an agency contract separate from istisna' contract to sell the manufactured goods (after they are acquired by the bank) on its behalf. The Bank: pays the price of the manufactured goods to the client.

3 The Client: After conclusion of the transaction, and the bank's taking possession of the goods, sells the goods on behalf of the bank (according to the agency contract signed with the bank) The Client: delivers the goods to the new buyer and receives the price (on behalf of the bank). The Client: pays to the bank the money he has received as price of the goods according to the agency contract. The Bank: pays to its client the fees of agency (in return for the marketing and sale of the goods). The Bank: realizes profit resulting from the difference between the price paid for manufacturing the goods by istisna' and the price of sale to a third party. - Istisna' Contract combined with Murabaha to the purchase orderer (the bank as manufacturing orderer mustasni ): In this case, the bank does not enter into an istisna' transaction (as a manufacturing orderer) to finance the operation of the manufacturer (its client), but upon receiving a prior promise of purchase from a third party to buy the manufactured goods. This is a measure taken by the bank so as to minimize the risks of the operation by securing the sale of the goods after acquiring them. Generally, the client (the manufacturer) plays a pivotal role in facilitating the relation between the bank and the purchase promise maker (the purchase orderer), who is, very often, one of the manufacturer's customers who wishes to purchase the goods, but is incapable of paying the price in advance. The practical steps of this operation can be summarized in the following: The Client: approaches the bank to request finance of his istisna' operation through the bank's purchase of goods of determined specifications the client undertakes to manufacture. The Bank: obtains a purchase order from a third party to buy goods of defined specifications (the manufactured goods). The Bank: approves of the client request and concludes istisna' contract with him. The contract defines the modalities of payment and the date of delivery. The Bank: pays the price of the manufactured goods to the client. The Bank: After acquisition of the manufactured goods, concludes a sale contract to sell the manufactured goods in Murabaha with its client the purchase orderer. The Bank: authorizes his client (the manufacturer) to deliver the goods on its behalf to the final purchaser (the purchase orderer). The Client (the purchase orderer): pays the price of the goods according to the agreement, and the bank realizes its profit ensuing from the difference between the

4 price paid for manufacturing the goods and the price of its Murabaha sale to a third party. - Istisna' Contract combined with Parallel Istisna' A- Istisna' Contract combined with Parallel Istisna'( The bank as manufacturing orderer (Mustasni ) in the first contract, as a manufacturer in the second contract ): In this case, the bank enters into an istisna' transaction (as a manufacturing orderer) to finance the operation of the manufacturer, then it concludes a parallel sale contract (as a manufacturer) with a third party. According to this contract the bank undertakes to manufacture the required goods according to the same specifications of the goods it purchased by istisna', at a higher price and a further date than the first contract, without any of the contracts being conditioned to the other. The practical steps of this operation can be summarized in the following: The Client: approaches the bank to request finance of his istisna' operation through the bank's purchase of goods of determined specifications the client undertakes to manufacture. The Bank: obtains (from a third party) a wish to manufacture goods of defined specifications (the bank undertakes to manufacture the goods). The Bank: approves of the client's request and concludes istisna' contract with him. The contract defines the modalities of payment and the date of delivery. Likewise, the bank concludes with its client (the beneficiary) a parallel an istisna' contract in which the bank is a manufacturer (both contracts have to be separate). The Bank: pays the price of the manufactured goods to the client (the manufacturer). The Bank: can entrust by a separate contract its client (the beneficiary) with supervising the manufacturing of the goods by the manufacturer. The Client (the manufacturer): delivers the goods to the bank and the bank delivers the goods to its client (the beneficiary). The bank can authorize its client (the manufacturer) to deliver the goods to the client (the beneficiary) directly, on behalf on the bank. The Client (the purchase orderer): pays the price of the goods according to the agreement, and the bank realizes its profit ensuing from the difference between the price paid to its client (from Istisna a) and the price of sale of the goods to its client (Murabaha).

5 Istisna' Contract combined with a parallel istisna' (the bank as a manufacturer (sani ) first, as a manufacturing orderer (Mustasni ) second): The bank enters into istisna' operations (as a manufacturer) in many cases, including the bank's purchase of a plot of land on which it constructs houses and buildings in order to sell them for its clients in istisna' operation (the bank is the manufacturer). The bank can undertake to construct the buildings on a plot of land owned by its client (the bank is manufacturer again). Likewise, the bank can enter into istisna' operations with its clients wishing to obtain defined industrial products and incapable of paying on the spot (the bank undertakes to provide these products as a manufacturer). The bank can implement the manufacturing operations by itself (by the contracting and industrial companies it owns ). In this case the bank does not need a parallel istisna'. Likewise, the bank may, and this is the most common practice, conclude parallel istisna' contracts (separate from the first contract with a manufacturer for these goods/ constructor of these buildings in the same quantity and with the same specifications (in this case the bank is a manufacturing orderer and not a manufacturer). The practical steps of this operation can be summarized in the following: The Client: applies to the bank with a wish to purchase manufactured goods or buildings of determined specifications by istisna'. The Bank: approves of the client's request and concludes istisna' contract with him (the bank as manufacturer). The contract defines the modalities of payment and the date of delivery. The bank also concludes a parallel istisna' contract with its client the manufacturer, in which the bank is a manufacturing orderer. Both contracts have to be separate). The Bank: pays the price of the manufactured goods to the client (the manufacturer) (the bank is a manufacturing orderer here). The Bank: can authorize, by a separate contract, its client (the manufacturing orderer) to supervise the implementation of the manufacturing contract by the final manufacturer. The Client (the manufacturer): delivers the manufactured goods to the bank, which in turn delivers it to its client the manufacturing orderer (the bank can

6 authorize its client (the final manufacturer) to deliver the goods directly to the client (the manufacturing orderer), on behalf of the bank. The Client (the manufacturing orderer): pays the price of the goods according to the agreement, and the bank realizes its profit from the difference between the price of the goods paid to the final manufacturer client and the sale price of the goods to the manufacturing orderer client.

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