Istisna’ in Islamic Financing: Meaning & Example

Understand

In Islamic Financing, the istisna’ is a special kind of sale transaction occurred before a good comes into existence where an Islamic banking institution (IFI)  manufacture/ construct required goods on behave of manufacturer or builder (contractor) to deliver to a customer

In other words, it is a contract of sale in future where an Islamic banking institution (IFI) works on behave of manufacturer or builder (contractor) by financing to the manufacturer or the constructor for manufacturing or construction of items specified by a purchaser or customer.

Example

In order to manufacture power plant, the parties in the istisna contract will be: the manufacturer who will construct the plant, the Islamic bank who will finance the project and the customer who is in need to manufacture the plant. In order to make a valid istisna, upon request of the customer, the bank will agree to manufacture the power plant at a pre-determined future time at an agreed price and will fix all requirements and completion time etc. In return, the customer will pay the agreed price as per agreed clauses on the contract; which might be in advance, in installments or later.

Why is it important?

After the istisna’ contract, there might be possibilities like the goods are not delivered on time, the manufacturer is unable to complete the task, defective goods found, and increase the cost of production after contract etc. Despite these risks, the contract also provides mitigation measure to minimize these risks like in case of late delivery pricing is linked to it, if manufacturer needs financial assistant then payment is made in installments, to control defective goods quality assurance agreement can be made and increased cost of production is toleranced by the manufacturer unless there are unforeseen events.

Copyright © 2016 - 2018 Explainry.com | All Rights Reserved