Istisnaa

Istisnaa or Istisna (الاستصناع) is specific type of sales contract, whereby the good is clearly described and ordered to be manufactured. Payment is allowed to be deferred, e.g. to define certain milestones as common in project finance.

The manufacturer needs to contribute certain materials. Among the contract types of Islamic law it is by the most flexible in terms of payment and delivery it leaves an open field for negotiation. The currently non-existing asset is to be built according the buyer’s specification and to be delivered on a specified date at a fixed price. Installments could be paid and agreed upon e.g. to finance the progress accordingly. It is therefore an applicable method for project finance.

Parallel Istisnaa

Parallel Istisnaa, also known as al-istisna al tamwili, is a form of istisnaa used by Islamic banks to finance the manufacturing of an asset requested by a customer. Since a financer is not interested to keep the manufactured assets, there is a need for an ultimate client paying the price upon delivery. Therefore the financer enters two parallel Istisnaa contracts with same specifications. It is worthwhile noting that both contracts are independent and if the manufacturer defaults the bank itself would default.

Bibliography

• Shariah Opinions on Istisna, Contracting and Salam Albaraka, Jeddah