Tapping into istisna potentials in retail markets

ISTISNA is grasped as a contract whereby a seller sells to a buyer an asset which is yet to be created or built based on agreed blueprints and delivered on an agreed specified future date at an agreed pre-determined price.

In the same token, it is business as one party asks others to fabricate an asset, to a certain extent.

The offered istisna in Islamic banks helps improve flexibility to the customer, where payments can be made instalments linked to project completion, at delivery or after project conclusion. Having said that, istisna includes the bank (the financier), the customer (the purchaser) and the manufacturer (the producer)

As such, three questions are answered. Q#1 – What are the characteristics of istisna contract? Q#2 – What are scopes of istisna? Q#3 – Does the istisna contract available in the context of the Islamic banking system?

In its typical form, istisna is crafted based on at least five components. These include contracting parties (seller, purchaser and manufacturer), offer and acceptance, istisna asset, price and mode of payment and the delivery of the asset.

These composed components of the contract explain the capacity to define its characteristics for divulging the merits that it has for our mutual understanding. The details are provided.

First, the subject matter “described commodity” is linked to the process of manufacturing the istisna asset. The subject matter is unlinked to the outputs that cannot be manufactured such as grains, and fruits or be planted.

Second, the subject matter is a liability undergone 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.

Third, the produced commodities have to be manufactured according to specs agreed upon. They should be “described” in a way to counter barbarism and avoid conflict – at the time of contracting.

Fourth, the materials used to manufacture the commodity are provided by the manufacturer. Needless to say, the contract is merely a lease or ijarah when the materials used to manufacture the goods are supplied by the buyer.

Fifth, the price paid is according to the agreement made. Unlike salam, the price does not have to be paid immediately in istisna and this is one of its most striking differences from the former. Whether the price is cleared promptly, delayed or paid on the instalment basis are considered permissible.

Concerning its scopes, istisna can embrace diverse developments of industries, thought to be applied due to the nature of the process of the manufacturing.

First, istisna is typically applied to modern industries that include aircraft, ship and machinery application, to mention some. The manufacturing necessitates a distinct level of capital reimbursed at different periods, which can be ranged from economical to pricey.

Second, istisna embraces the development of buildings and the like that include houses, schools and universities. These buildings have emotional values to local folks for ummah development to improve their future undertakings.

Third, istisna also covers the different types of industries that can be defined according to precise standards and specifications. These include manufacturing, extractive industries, food industries including the processes of canning and preservation of natural products.

At one point, the wisdom of istisna relies on its concept that presupposes the act of selling a commodity-based on “descriptions” that requires workmanship for completion and conclusion.

Although istisna is in tandem with Shariah out of improved Shariah compliance for a greater likelihood of demand, the istisna application to various Islamic banking products is still limited and falling short due to the poor philosophical merits sourced from the gaps existed in the theories and practices of the contract. By any means, istisna can also offer to those a landowner who builds a house, financed by an Islamic bank and called it as “reverse istisna”.

In practice, istisna has been applied in some circumscribed applications of Islamic banks when offering Islamic banking products to society at large. The details are shared.

First, istisna is employed by an Islamic bank when offering house financing to finance the underconstruction house, where the land is owned by the customer. For instance, Ali visits an Islamic bank for istisna financing to build his house. When the construction is done, Ali delivers it to the bank and later the bank sells it to Ali for profit.

Second, istisna is also employed for some goals. These include financing the purchase of an asset under construction, project financing, contract financing and repair financing, among others. As noted earlier, the bank might delegate the customer as an agent to supervise the construction tasks and when the completion takes place, the customer will deliver the asset to the bank. Hence, the bank subsequently hands over the asset to the customer.

It is of utmost importance that the offered istisna financing in retail markets entails with challenges, which need logical measures to cope with the tests smoothly. If a customer is granted financing based on istisna to build a house on his land, he assumes the role of developer entails “construction risks” and “project abandonment” due to failed experience, confined project expertise and lack of cost evaluation capacity about the job considered.

There is a pressing need, therefore, to have strong and balanced analytical foundations and practical acumen before istisna can find its way out in the industry. Balanced studies combining constructivism that captures both qualitative and quantitative approaches are of utmost importance to generate enhanced breadth and depth practical results.

Hence, the success and failure of istisna at the retail level are sourced from consumer beliefs about the offered - beliefs that are likely to advance as the innovation improved and consumers travel over the legs of the acceptance course.

In all, the competitiveness of receptiveness of istisna can be jacked up through the sharing of learnt risk mitigation plans among transacting parties along with improved shared experience and expertise to breed shared peace of mind, at least.

*The author is an Associate Professor at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.

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