​Islamic Contract – Bay’ al-Istisnā‘: Basic Rules and Conditions of Istisnā‘
1. The Object of Istisnā‘ Must Be Specifically Described
Explanation
Since istisnā‘ involves the sale of an asset that does not yet exist (bay‘ al-ma‘dūm), the subject matter must be clearly specified to avoid uncertainty (gharar).
The following specifications must be clearly determined:

• type;
• kind;
• quality;
• quantity;
• measurements;
• design; and
• essential characteristics.

If the manufactured asset does not comply with the agreed specifications, the purchaser may:

1. reject the asset and terminate the contract;
2. accept the asset at the agreed price; or
3. accept the asset subject to revised terms such as:
   • reduced price; or
   • extended completion period.

Example
A customer orders a customised sofa set through istisnā‘.
Agreed Specifications

• Material: Genuine leather
• Colour: Black
• Length: 3 metres
• Quantity: 2 sofa units
• Price: RM25,000

However, the manufacturer delivers fabric sofas instead of leather sofas.
Purchaser’s Rights
The purchaser may:

• reject delivery entirely;
• accept the sofas at RM25,000;
• negotiate a lower revised price.

2. The Object Must Be Manufacturable
Explanation
The subject matter of istisnā‘ must be something:

• commonly manufactured or constructed; and
• customarily contracted through istisnā‘.

Examples include:

• houses;
• vehicles;
• aircraft;
• furniture; and
• machinery.

An already completed or existing asset does not qualify as a valid istisnā‘ asset.
Similarly, items not commonly manufactured through istisnā‘ arrangements may not qualify.


Example
Valid Istisnā‘
A company commissions the construction of:

• a warehouse;
• delivery trucks; or
• industrial machinery.

These are manufacturable assets.
Invalid Istisnā‘
A person attempts to use istisnā‘ to purchase:

• an already completed apartment.

Since the apartment already exists and is identifiable at contract formation, it does not qualify as a valid istisnā‘ asset.


3. Materials Must Be Supplied by the Manufacturer
Explanation
In an istisnā‘ contract:

• the manufacturer (ṣāni‘) should supply the construction or manufacturing materials.

If the purchaser (mustaṣni‘) supplies the materials:

• the contract changes in nature and may become an ijārah (service) contract instead of istisnā‘.

Example
Valid Istisnā‘
A contractor agrees to build a house and personally supplies:

• cement;
• steel;
• bricks; and
• construction materials.

This is a valid istisnā‘ arrangement.
Ijārah Situation
A homeowner personally purchases all building materials and only hires the contractor for labour and construction work.
This arrangement resembles ijārah because the contractor mainly provides services rather than manufacturing.


4. Time of Delivery Must Be Specified
Explanation
The delivery date must be clearly determined to avoid uncertainty and future disputes.
If the seller fails to deliver on time, the purchaser may:

1. accept the asset on an “as-is” basis; or
2. terminate the contract.

Example
A company orders customised buses under istisnā‘.
Contract Terms

• Delivery date: 1 December 2027
• Contract price: RM2,000,000

The manufacturer delays delivery by 6 months.
Purchaser’s Options
The purchaser may:

• continue and accept late delivery; or
• terminate the contract due to non-compliance.

5. Place of Delivery Must Be Determined
Explanation
The delivery location should be specified, especially where:

• transportation;
• shipping; or
• loading arrangements are involved.

This avoids confusion regarding:

• delivery obligations; and
• transfer of possession.

Example
A manufacturer constructs industrial generators.
Contract Terms

• Delivery place: Port Klang, Selangor
• Delivery date: 15 March 2028

The specified location determines:

• transportation responsibilities;
• delivery completion point; and
• transfer of risk.

6. Price Must Be Determined
Explanation
The price in istisnā‘:

• must be known and agreed during the contract session.

The price may be:

• cash;
• deferred payment;
• progressive payment;
• usufruct; or
• other valuable consideration.

Payment arrangements may include:

• bullet payment;
• instalments; or
• progressive payments linked to project completion stages.

The parties may later revise:

• specifications; and
• price accordingly.

However:

• the price cannot be increased merely because of an extension in payment period.

Example
A construction company agrees to build a factory.
Contract Details

• Contract price: RM10,000,000
• Payment arrangement:
  • RM2,000,000 upfront
  • RM4,000,000 during construction
  • RM4,000,000 upon completion

Later:

• the purchaser requests additional warehouse space;
• parties revise the contract price to RM11,500,000.

Permissible Revision
The price increase is permissible because:

• specifications changed.

Impermissible Revision
The seller cannot increase the price solely because:

• the purchaser requested longer payment time.

7. Possession and Ownership Transfer
Explanation
Ownership transfers to the purchaser only after:

• the purchaser takes possession of the istisnā‘ asset; and
• the asset complies with agreed specifications.

Possession may occur through:

• actual possession (qabd haqīqī); or
• constructive possession (qabd hukmī).

Before delivery:

• ownership remains with the seller;
• ownership risks are borne by the seller.

The purchaser cannot sell the exact istisnā‘ asset before taking possession.
However:

• the purchaser may enter into another separate istisnā‘ contract (parallel istisnā‘) involving a similar asset.

Example
An Islamic bank commissions construction of a ship under istisnā‘.
Contract Details

• Ship construction price: RM50,000,000
• Delivery period: 3 years

Before delivery:

• the ship remains under the ownership and risk of the manufacturer.

After completion:

• the bank takes constructive possession through delivery documents and registration transfer.

Only then:

• ownership transfers to the bank.

The bank may subsequently sell:

• a similar ship through a separate parallel istisnā‘ arrangement.

​Islamic Contract – Bay’ al-Istisnā‘: Determination of the Delivery Date in Istisnā‘ Contracts
Q1: Why is the delivery date important in an istisnā‘ contract?
Answer:
The delivery date is important in an istisnā‘ contract because:

• the subject matter does not yet exist at the time of contract;
• the asset will only be manufactured or constructed in the future.

Therefore, determining the delivery timeline helps:

• remove uncertainty (gharar);
• avoid disputes between parties; and
• ensure contractual certainty regarding completion and handover.

Q2: What is the AAOIFI position regarding the delivery date?
Answer
According to AAOIFI Shariah Standard (Para 2/2/1):

• the delivery date must be determined if necessary.

This means:

• flexibility is allowed in certain situations;
• especially where customary business practice sufficiently determines delivery expectations.

AAOIFI adopts a relatively flexible approach depending on:

• nature of the manufactured asset;
• industry custom; and
• practical commercial circumstances.

Q3: What is the BNM position regarding the delivery date?
Answer
According to the Bank Negara Malaysia (BNM) Policy Document on Istisnā‘ (Para 10.2):
the istisnā‘ contract must include the time of delivery.
Under BNM:

• specifying the delivery date is mandatory;
• the delivery timeline must be clearly stated in the contract.

This stricter approach aims to:

• increase legal certainty;
• strengthen risk management; and
• reduce future contractual disputes.

Comparison Notes: AAOIFI vs BNM on Delivery Date
AAOIFI Position

• Delivery date determined if necessary.
• More flexible approach.
• May rely on customary business practice.

BNM Position

• Delivery date must be specified.
• Mandatory contractual requirement.
• Greater emphasis on certainty and documentation.

Case Study 1: AAOIFI Flexible Approach
A customer enters into an istisnā‘ contract for handcrafted furniture.
Contract Details

• Asset: Handmade luxury furniture
• Contract price: RM80,000

The contract states:
“Delivery shall be made upon completion according to normal industry practice.”
No exact delivery date is specified because:

• handcrafted manufacturing time may vary depending on artistic customisation.

Analysis
Under AAOIFI:

• this may be acceptable if:
  • industry custom sufficiently removes uncertainty;
  • parties understand expected completion timeframe.

Case Study 2: BNM Mandatory Delivery Date Requirement
An Islamic bank finances construction of industrial machinery under istisnā‘.
Contract Details

• Machinery price: RM2,000,000
• Delivery date: 30 June 2028

The contract expressly specifies:

• exact delivery timeline;
• installation completion schedule.

Analysis
Under BNM:

• specifying the delivery date is compulsory;
• this ensures:
  • certainty of obligations;
  • enforceability;
  • proper risk allocation.

Q4: What happens if the manufacturer fails to deliver on time?
Answer
If delivery is delayed:

• the purchaser may:
  • accept late delivery;
  • renegotiate terms; or
  • terminate the contract depending on contractual provisions.

The rights of parties depend on:

• agreed contractual terms;
• extent of delay; and
• applicable Shariah and legal standards.

Example of Delay in Delivery
A contractor agrees to construct a warehouse under istisnā‘.
Contract Details

• Contract price: RM5,000,000
• Delivery date: 1 January 2029

The contractor fails to complete construction by the agreed date.
Purchaser’s Options
The purchaser may:

1. accept delayed completion;
2. negotiate revised terms;
3. terminate the contract.

Important Principle in Istisnā‘
Because istisnā‘ involves:

• future manufacturing;
• deferred delivery; and
• non-existent assets at contract formation,

clear determination of:

• specifications;
• delivery period; and
• contractual obligations

is essential to preserve:

• Shariah compliance;
• fairness; and
• commercial certainty.

Islamic Contract – Bay’ al-Istisnā‘: Avoidance of Sale and Buyback Transactions (Bay‘ al-‘Īnah) in Ordinary and Parallel Istisnā‘
​
Q1: Why must istisnā‘ avoid bay‘ al-‘īnah?

Answer:
Islamic finance requires istisnā‘ transactions to involve:

• genuine manufacturing;
• real ownership transfer; and
• actual commercial risk.

If the arrangement merely circulates assets between the same parties to obtain financing, it may resemble:
bay‘ al-‘īnah (sale and buyback transaction),
which many scholars prohibit because it may function similarly to an interest-based loan.
For this reason, AAOIFI imposes safeguards to prevent:

• artificial transactions;
• circular ownership structures; and
• disguised financing arrangements.

AAOIFI Position
According to AAOIFI Shariah Standard (Para 2/2/4):

• the manufacturer cannot be the ultimate purchaser; and
• the ultimate purchaser cannot own more than one-third of the manufacturing facility.

This ensures:

• independence between contracting parties;
• genuine transfer of ownership and risk.

BNM Position
The BNM Policy Document on Istisnā‘ is:
silent on this specific restriction.
However:

• transactions must still remain genuine and Shariah-compliant.

PART A — Ordinary Istisnā‘
1. Normal Ordinary Istisnā‘ (Permissible)
Structure
Only two parties:

• purchaser (mustaṣni‘);
• manufacturer (ṣāni‘).

Example
A hotel company orders customised furniture from an independent furniture manufacturer.
Contract Details

• Furniture manufacturing price: RM500,000
• Delivery period: 6 months

The manufacturer:

• supplies materials;
• manufactures furniture;
• delivers completed furniture to hotel company.

Analysis

• Independent parties.
• Genuine manufacturing.
• No buyback arrangement.
• Real transfer of ownership and risk.

Result
✅ Valid ordinary istisnā‘.


2. Ordinary Istisnā‘ Involving Sale and Buyback (
Bay‘ al-‘Īnah)(Problematic)
Example
A company owns a furniture manufacturing factory.
The same company:

1. asks its own factory to manufacture furniture under istisnā‘;
2. then “purchases” the furniture from the factory through financing arrangement.

Ownership Structure

• Customer owns 90% of manufacturing company.

Analysis
Although two legal entities appear to exist:

• economically they are substantially the same party.

This creates concern that:

• no genuine commercial transfer occurs;
• transaction merely simulates financing.

Result Under AAOIFI
❌ Generally prohibited due to resemblance to bay‘ al-‘īnah.


PART B — Parallel Istisnā‘
1. Normal Parallel Istisnā‘ (Permissible)
Structure
Two separate independent contracts.


First Istisnā‘ Contract
Between:

• customer;
• Islamic bank.

Contract Price
RM20,000,000
The bank promises to deliver:

• 100 buses.

Second Istisnā‘ Contract
Between:

• Islamic bank;
• independent manufacturer.

Manufacturing Cost
RM17,000,000
The manufacturer constructs buses for bank.


Profit Calculation
RM20,000,000 - RM17,000,000 = RM3,000,000
20,000,000 - 17,000,000 = 3,000,000
Analysis

• Contracts are separate.
• Manufacturer independent from customer.
• Genuine manufacturing occurs.
• No circular ownership.

Result
✅ Valid parallel istisnā‘.


2. Parallel Istisnā‘ Involving Sale and Buyback (
Bay‘ al-‘Īnah
) (Problematic)
Example
An Islamic bank enters into parallel istisnā‘ for aircraft manufacturing.


First Contract
Bank agrees to deliver aircraft to Airline A.
Contract Price
RM200,000,000


Second Contract
Bank appoints Manufacturer B to construct aircraft.
Manufacturing Cost
RM180,000,000


Problematic Ownership Structure
Airline A owns:

• 80% shares in Manufacturer B.

Analysis
Although formally:

• two separate contracts exist,

in substance:

• customer substantially controls manufacturer.

This creates risk that:

• the arrangement becomes a circular financing structure;
• rather than genuine independent manufacturing.

Concern
The aircraft effectively moves:

• from customer-controlled manufacturer;
• back to customer.

This resembles:
sale and buyback arrangement (bay‘ al-‘īnah).
Result Under AAOIFI
❌ Generally impermissible.


Simplified Comparison
Normal Ordinary Istisnā‘
✅ Independent manufacturer and purchaser.


Ordinary Istisnā‘ with
Bay‘ al-‘Īnah
❌ Purchaser substantially controls manufacturer.


Normal Parallel Istisnā‘
✅ Independent customer, bank, and manufacturer.


Parallel Istisnā‘ with
Bay‘ al-‘Īnah
❌ Customer substantially controls manufacturer used in second contract.


Important Principle
Islamic finance requires:

• genuine commercial activity;
• real manufacturing risk;
• independent contracting parties.

Transactions should not merely:

• circulate ownership artificially;
• disguise financing;
• or replicate conventional interest-based lending through formal legal structures.

Islamic Contract – Bay’ al-Istisnā‘: Late Delivery Charge Clause in Istisnā‘ Contracts
Q1: Why are the terms
gharamah
and
ta‘wīd
not commonly used in istisnā‘ late delivery clauses?
Answer
The terms:

• gharamah (penalty); and
• ta‘wīd (compensation)

are more commonly used in:
debt-based contracts such as murābahah financing.
This is because murābahah primarily creates:

• a debt obligation owed by the customer to the bank.

Late payment in murābahah therefore concerns:

• delayed settlement of debt.

Hence:

• ta‘wīd compensates actual losses from delayed payment;
• gharamah acts as a deterrent penalty against intentional default.

Why Istisnā‘ Is Different
In istisnā‘:

• the issue is not late payment of debt;
• the issue is:

delay in completing or delivering a manufactured/construction asset.
Therefore, the late delivery clause in istisnā‘ is usually treated as:
a contractual performance penalty clause (shart jazā’ī)
rather than:

• debt compensation (ta‘wīd); or
• debt penalty (gharamah).

This is because:

• the purchaser suffers loss due to construction or manufacturing delay,
• not due to unpaid debt.

Q2: What is the AAOIFI position regarding late delivery charges?
Answer
According to AAOIFI Shariah Standard (Para 6/6):

• a fair penalty clause may be included in the istisnā‘ contract to compensate the purchaser if the manufacturer delays delivery.

However:

• force majeure situations are excluded.

Examples of force majeure:

• floods;
• earthquakes;
• war;
• government restrictions.

The compensation must be:

• fair;
• proportionate; and
• linked to actual contractual delay.

Q3: What is the BNM position regarding late delivery charges?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 27.4):

• the contracting parties may include:

a punitive clause (shart jazā’ī)
against the seller for late delivery.
Unlike murābahah:

• the penalty amount may be recognised as income by the purchaser.

This is because:

• the purchaser may suffer genuine commercial losses from project delay.

Q4: What is
shart jazā’ī
?
Answer
Shart jazā’ī means:
a contractual penalty clause agreed upon in advance for breach or delay in performance obligations.
In istisnā‘:

• it applies when the seller/manufacturer:
  • fails to complete;
  • delays construction;
  • or delivers late.

Comparison Between Murābahah and Istisnā‘ Late Charges
Murābahah
Nature of Issue
Late payment of debt.
Terms Used

• ta‘wīd
• gharamah

Reason
Customer delays repayment obligation.


Istisnā‘
Nature of Issue
Late delivery or late construction.
Term Used

• shart jazā’ī

Reason
Manufacturer delays contractual performance.


Case Study 1: Murābahah Late Payment (Ta‘wīd and Gharamah)
An Islamic bank provides murābahah vehicle financing.
Financing Details

• Selling price: RM120,000
• Monthly instalment: RM2,000

The customer delays payment for:

• 5 months.

Analysis
This concerns:

• delayed debt repayment.

Thus:

• ta‘wīd and gharamah may apply.

Case Study 2: Istisnā‘ Late Delivery (
Shart Jazā’ī
)
A contractor agrees to construct a warehouse.
Contract Details

• Construction price: RM10,000,000
• Completion date: 1 January 2029

The contract states:
“Contractor shall pay RM15,000 per week for unjustified delay.”
The contractor delays completion by:

• 6 weeks.

Penalty Calculation
15,000 times 6 = 90,000​

Result

• Contractor pays RM90,000 to purchaser.

Analysis
This is:

• not ta‘wīd for debt delay;
• not gharamah for late payment.

Instead:

• it is a contractual performance penalty (shart jazā’ī)
  for delayed completion of construction.

Case Study 3: Force Majeure Situation
A construction company builds a factory under istisnā‘.
Contract Details

• Factory value: RM30,000,000

During construction:

• severe earthquake damages site.

Completion delayed by:

• 4 months.

Analysis
Delay caused by:

• force majeure beyond contractor’s control.

Therefore:

• penalty clause should not apply.

Result
✅ No shart jazā’ī imposed.


Important Principle
Murābahah
Late charges relate to:
debt repayment obligations.
Thus:

• ta‘wīd and gharamah apply.

Istisnā‘
Late charges relate to:
failure to complete or deliver manufactured asset on time.
Thus:

• shart jazā’ī applies instead.

The distinction exists because:

• the legal nature of the obligation is different.

Islamic Contract – Bay’ al-Istisnā‘: Determination and Revision of Price Based on Cost
Q1: Can the price in an istisnā‘ contract be determined using murābahah cost-plus pricing?
Answer
According to AAOIFI, an istisnā‘ contract:
cannot be structured as a murābahah sale based on cost-plus pricing.
This means:

• the manufacturer is not required to disclose:
  • actual construction cost; and
  • profit margin separately.

Unlike murābahah:

• istisnā‘ is not a fiduciary (trust-based) sale.

Instead:

• the price in istisnā‘ is based on:

mutual agreement between the contracting parties.


Why Is Istisnā‘ Different from Murābahah?
Murābahah
In murābahah:

• seller must disclose:
  • acquisition cost;
  • profit markup.

Example:

• Cost = RM100,000
• Profit = RM20,000
• Selling price = RM120,000

This is:
✅ cost-plus sale.


Istisnā‘
In istisnā‘:

• parties only agree on:
  • final contract price.

The manufacturer does NOT need to disclose:

• construction cost;
• profit margin.

This is because:

• istisnā‘ focuses on manufacturing obligation,
• not resale of existing asset.

Q2: What is the AAOIFI position regarding price determination?
Answer
According to AAOIFI Shariah Standard (Para 3/2/5):

• istisnā‘ cannot be converted into murābahah pricing structure;
• determining price strictly as:

“cost + disclosed profit”
is not the nature of istisnā‘.
AAOIFI seeks to preserve:

• the independent contractual identity of istisnā‘.

Q3: What is the BNM position regarding determination and revision of price?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 16):

• the price of the istisnā‘ asset must be determined through:

mutual agreement (agreed price)
at the time of contract.
However:

• the agreed price may later be revised if:
  • construction costs increase; or
  • construction costs decrease.

This flexibility reflects:

• practical realities of long-term construction and manufacturing projects.

Q4: Why does BNM allow price revision?
Answer
Large construction and manufacturing projects may face:

• inflation;
• increase in material prices;
• labour cost changes;
• design modifications.

Therefore:

• parties may mutually agree to revise the contract price after contract formation.

However:

• price revision must relate to:
  • actual construction cost changes;
  • specification amendments.

The price cannot be revised merely because:

• payment period is extended.

Otherwise:

• it may resemble ribā-based increase for deferment.

Comparison Notes: AAOIFI vs BNM
AAOIFI Position

• Istisnā‘ cannot use murābahah cost-plus structure.
• No requirement to disclose cost and profit separately.
• Preserves distinct nature of istisnā‘.

BNM Position

• Price determined by mutual agreement.
• Price may later be revised due to construction cost changes.
• Reflects commercial practicality.

Case Study 1: Impermissible Murābahah-Style Istisnā‘ Pricing
A contractor agrees to construct a factory.
The contract states:

• Construction cost = RM8,000,000
• Profit = RM2,000,000
• Selling price = RM10,000,000

The structure explicitly treats the contract as:
“cost plus disclosed profit.”
Analysis
Under AAOIFI:

• this resembles murābahah pricing methodology;
• inconsistent with independent nature of istisnā‘.

Result
❌ Not preferred under AAOIFI approach.


Case Study 2: Valid Normal Istisnā‘ Pricing
A developer agrees to construct an apartment building.
Contract Terms

• Agreed contract price = RM15,000,000
• Delivery period = 3 years

The purchaser and developer:

• only agree on final contract price;
• no disclosure of construction cost or profit breakdown.

Analysis

• Price determined through mutual agreement.
• Contract maintains nature of istisnā‘.

Result
✅ Valid istisnā‘ pricing.


Case Study 3: Permissible Price Revision Due to Increased Construction Cost
A contractor enters into istisnā‘ contract to build a warehouse.
Original Contract

• Agreed price = RM12,000,000

During construction:

• steel prices increase significantly;
• parties mutually agree to revise price upward.

Revised Price
RM13,500,000


Price Increase Calculation
13,500,000 - 12,000,000 = 1,500,000


Analysis
Price revision is permissible because:

• actual construction costs increased;
• both parties mutually agreed.

Result
✅ Permissible under BNM.


Case Study 4: Impermissible Price Revision Due to Extension of Payment Time
A purchaser requests:

• additional 2 years to pay construction price.

The contractor increases price solely because of:

• delayed payment period.

Original Price
RM10,000,000
Revised Price
RM12,000,000
Analysis
The increase is:

• not linked to construction cost;
• only linked to payment deferment.

This resembles:

• increase due to time value of debt.

Result
❌ Impermissible because it may resemble ribā.


Important Principle
In istisnā‘:

• price is based on:
  • manufacturing obligation;
  • agreed construction value.

It is NOT:

• a trust-based cost-plus resale like murābahah.

Price revisions are only permissible when linked to:

• genuine construction-related changes,
  not:
• mere extension of payment time.

​Islamic Contract – Bay’ al-Istisnā‘: Application of Istisnā‘ in Islamic Finance
Q1: How is istisnā‘ applied in contemporary Islamic finance?
Answer
In contemporary Islamic finance, istisnā‘ is widely used in:

• Islamic banking;
• project financing;
• industrial manufacturing; and
• ṣukūk structuring.

Istisnā‘ is especially suitable for:
assets that need to be manufactured, constructed, or developed according to specific requirements.
This is because the contract allows:

• future construction/manufacturing;
• flexible payment arrangements; and
• delivery at a future date.

Q2: What types of projects commonly use istisnā‘ financing?
Answer
Istisnā‘ is commonly used in financing:

• housing construction;
• infrastructure development;
• industrial manufacturing;
• advanced technology industries.

Examples include manufacturing or construction of:

• aircraft;
• automobiles;
• ships;
• factory equipment;
• buildings;
• roads;
• bridges.

Q3: Why is istisnā‘ suitable for construction and manufacturing industries?
Answer
Istisnā‘ is suitable because:

• the asset does not need to exist at contract formation;
• assets can be custom-built according to specifications;
• payment can be:
  • progressive;
  • deferred;
  • or upfront.

This flexibility makes istisnā‘ highly practical for:

• long-term projects;
• engineering industries;
• infrastructure financing.

Case Study 1: Housing Construction Financing
An Islamic bank finances the construction of residential houses through istisnā‘.
Contract Details

• Construction of 50 houses
• Total project value = RM25,000,000
• Construction period = 3 years

Structure
First Istisnā‘ Contract
Between:

• home developer;
• Islamic bank.

The bank agrees to deliver completed houses.


Second Istisnā‘ Contract (Parallel Istisnā‘)
Between:

• Islamic bank;
• construction company.

The contractor constructs the houses.
Construction Cost
RM22,000,000


Bank’s Profit Calculation
25{,}000{,}000 - 22{,}000{,}000 = 3{,}000{,}000
25{,}000{,}000 - 22{,}000{,}000 = 3{,}000{,}000
Analysis

• Houses are constructed according to specifications.
• Parallel istisnā‘ structure used.
• Common application in Islamic banking.

Case Study 2: Aircraft Manufacturing Financing
An airline company requires customised aircraft.
Contract Details

• Aircraft manufacturing price = RM500,000,000
• Delivery period = 5 years

The Islamic financial institution enters into:

• istisnā‘ arrangement with airline;
• parallel istisnā‘ with aircraft manufacturer.

Analysis
Istisnā‘ is suitable because:

• aircraft require future manufacturing;
• detailed specifications necessary;
• project involves long-term production.

Q4: How is istisnā‘ applied in ṣukūk structures?
Answer
Istisnā‘ is widely used in:
ṣukūk (Islamic bonds) for infrastructure and development projects.
In ṣukūk istisnā‘:

• investors finance construction/manufacturing projects;
• returns are generated from project completion and operation.

Case Study 3: Infrastructure Ṣukūk Using Istisnā‘
A government issues ṣukūk to finance construction of a highway.
Project Value
RM2 billion
Structure

• Investors subscribe to ṣukūk.
• Funds used to construct highway through istisnā‘.
• Upon completion:
  • highway may be leased using ijārah structure.

Analysis
Istisnā‘ finances:

• construction stage.

Ijārah finances:

• operational/use stage after completion.

Q5: What is an example of green ṣukūk using istisnā‘?
Answer
The world’s first green ṣukūk issued in Malaysia by:
Tadau Energy Sdn Bhd
was structured using:

• istisnā‘; combined with
• ijārah.

The ṣukūk financed:

• environmentally sustainable solar energy projects.

How the Structure Worked
Istisnā‘ Stage

• solar facilities were constructed.

Ijārah Stage

• completed facilities were leased to generate returns.

This demonstrates how:

• istisnā‘ finances creation/construction;
• ijārah monetises operational use.

Case Study 4: Green Energy Project
A renewable energy company constructs solar power facilities.
Project Cost
RM250,000,000
Structure

1. Investors fund project via ṣukūk.
2. Solar facilities constructed through istisnā‘.
3. Completed facilities leased under ijārah.

Analysis

• Istisnā‘ used during construction.
• Ijārah used after completion to generate rental returns.

This structure supports:

• sustainable financing;
• socially responsible investment.

Important Difference Between Istisnā‘ and Ijārah in Finance
Istisnā‘
Used for:

• construction;
• manufacturing;
• creation of assets.

Example
Building:

• houses;
• aircraft;
• infrastructure.

Ijārah
Used after asset completion for:

• leasing;
• operational usage;
• generating rental income.

Example
Leasing:

• completed buildings;
• machinery;
• solar facilities.

Important Principle
Istisnā‘ plays a major role in Islamic finance because it enables:

• Shariah-compliant project financing;
• infrastructure development;
• industrial manufacturing;
• sustainable investment projects;

while ensuring:

• genuine asset creation;
• ownership transfer; and
• real economic activity.

Islamic Contract – Bay’ al-Istisnā‘: When Does the Customer Make Payment?
Q1: When does the customer pay in an istisnā‘ contract?
Answer
In an istisnā‘ contract, payment is very flexible.
The customer may pay:

1. fully in advance;
2. progressively during construction;
3. upon completion and delivery; or
4. on a deferred instalment basis.

Unlike salam contracts:

• full upfront payment is NOT required in istisnā‘.

This flexibility is one of the reasons why istisnā‘ is widely used in:

• construction financing;
• infrastructure projects;
• Islamic banking.

Q2: What are the common payment methods in istisnā‘?
1. Upfront Payment
The purchaser pays the entire price at the beginning of the contract.


Example
A customer orders customised furniture.
Contract Price
RM100,000
Payment

• RM100,000 paid immediately upon signing.

Delivery
Furniture delivered after 6 months.


2. Progressive Payment (Most Common)
The purchaser pays according to stages of completion.
This is commonly used in:

• housing construction;
• infrastructure projects;
• manufacturing industries.

Example
Construction of a house.
Contract Price
RM500,000
Payment Structure

• RM100,000 upon signing;
• RM200,000 when structure completed;
• RM200,000 upon final delivery.

Analysis
Payments follow construction progress.


3. Payment Upon Completion
The purchaser only pays after the asset is completed and delivered.


Example
A factory orders machinery.
Contract Price
RM2,000,000
Payment
Full payment made:

• after machinery delivered.

4. Deferred Instalment Payment
The purchaser pays over time after delivery.
This structure is commonly used in:

• Islamic banking financing.

Example
An Islamic bank constructs a house through istisnā‘.
Construction Cost
RM400,000
The bank delivers completed house to customer.
The customer pays:

• RM2,500 monthly instalments for 20 years.

Analysis

• House constructed first.
• Customer repays gradually after delivery.

Q3: In parallel istisnā‘, who pays whom and when?
Answer
Parallel istisnā‘ involves:

• two separate contracts.

Thus:

• payment flows separately.

Example of Parallel Istisnā‘ Payment Flow
First Contract
Customer ↔ Islamic Bank
The customer agrees to buy:

• factory building.

Selling Price
RM15,000,000
Customer Payment

• progressive instalments over 10 years.

Second Contract
Islamic Bank ↔ Contractor
The bank appoints contractor to build factory.
Construction Cost
RM12,000,000
Bank Payment to Contractor

• according to construction milestones.

Important Point
The two payment obligations are:

• separate;
• independent.

The customer:

• pays bank.

The bank:

• separately pays contractor.

Q4: Can payment timing be revised later?
Answer
Yes, payment schedules may be revised by mutual agreement.
However:

• price cannot be increased merely because payment is delayed.

Otherwise:

• it may resemble ribā.

Simplified Summary
Istisnā‘ Payment Flexibility
Permissible Payment Timing
✅ Upfront
✅ Progressive
✅ Upon completion
✅ Deferred instalments


Most Common Practice in Islamic Finance
Construction Projects
➡️ Progressive payment
Islamic Home Financing
➡️ Deferred instalments after delivery
Manufacturing Projects
➡️ Milestone-based payments


Important Principle
Istisnā‘ is designed to facilitate:

• long-term construction;
• manufacturing;
• infrastructure financing.

Therefore:
Shariah allows flexible payment arrangements to suit commercial needs.

​

​Islamic Contract – Bay’ al-Salam: Definition and Nature of Forward Sale
Q1: What is Bay’ al-Salam?
Answer
Literally, the word salam means:
“giving in advance.”
Technically, Bay’ al-Salam (hereinafter, salam) refers to:
a sale contract in which the purchaser pays the full purchase price in advance for specific commodities to be delivered in the future.
Thus, salam is:

• a forward sale contract;
• where payment is immediate;
• while delivery of goods is deferred.

Q2: What are the main characteristics of a salam contract?
Answer
The main characteristics of salam are:
1. Full Advance Payment
The purchase price must be:

• fully paid at the contract session.

2. Future Delivery
The commodities are delivered:

• at a future agreed date.

3. Specific Commodities
The goods must be:

• clearly specified;
• measurable;
• standardised.

4. Commodity-Based Contract
Salam usually applies to:

• fungible goods;
• commodities;
• agricultural products.

Q3: Why is salam permitted although the goods do not yet exist?
Answer
Normally, Islamic law prohibits:
selling something that does not yet exist or is not possessed.
However, salam is permitted as:
an exception based on necessity (ḥājah) and public interest.
Historically:

• farmers and traders needed advance financing before harvest or production.

Salam allows:

• producers to obtain immediate capital;
• purchasers to secure future supply of goods.

Q4: What types of commodities are commonly used in salam?
Answer
Salam commonly involves:

• wheat;
• rice;
• dates;
• palm oil;
• sugar;
• agricultural produce;
• standardised commodities.

The goods must be:

• precisely describable;
• measurable by quantity, weight, or volume.

Case Study 1: Agricultural Salam Contract
A farmer requires financing before harvesting rice crops.
A buyer enters into salam contract with the farmer.
Contract Details

• Commodity: 10,000 kg of rice
• Salam price: RM50,000
• Delivery date: 1 December 2027

The buyer:

• pays RM50,000 immediately.

The farmer:

• delivers the rice at the agreed future date.

Analysis

• Full payment made upfront.
• Commodity delivered later.
• Commodity clearly specified.

Result
✅ Valid salam contract.


Case Study 2: Palm Oil Salam Financing
An Islamic bank finances a palm oil producer through salam.
Contract Details

• Commodity: 100 metric tonnes of crude palm oil
• Purchase price: RM400,000
• Delivery period: 6 months

The bank:

• pays RM400,000 immediately.

The producer:

• supplies palm oil after 6 months.

Analysis
The producer benefits because:

• immediate financing obtained.

The bank benefits because:

• future commodity supply secured.

Result
✅ Permissible salam arrangement.


Q5: What is the main difference between salam and istisnā‘?
Answer
Although both involve:

• future delivery of goods,

they differ significantly.


Difference Between Salam and Istisnā‘
Salam
Payment
Full price paid upfront.
Subject Matter
Usually commodities or fungible goods.
Delivery
Deferred.
Example
Rice, wheat, palm oil.


Istisnā‘
Payment
Flexible:

• upfront;
• progressive;
• deferred.

Subject Matter
Manufactured or constructed assets.
Delivery
Deferred.
Example
Buildings, ships, aircraft.


Example Comparing Salam and Istisnā‘
Salam Example
A buyer pays:

• RM100,000 now
  for:
• 50 tonnes of wheat
  to be delivered after harvest.

Istisnā‘ Example
A company commissions:

• construction of factory machinery
  worth:
• RM5,000,000,
  with payment made progressively during manufacturing.

Important Principle
Salam is permitted because:

• it facilitates financing for producers and farmers;
• it fulfils commercial needs;
• it promotes economic activity.

However:

• strict conditions apply to minimise uncertainty (gharar) and disputes.

Islamic Contract – Bay’ al-Salam: Meaning of Fungible Goods
Q1: What are fungible goods?
Answer
Fungible goods are:
goods that are interchangeable with other goods of the same type, quality, and quantity.
This means:

• one unit can replace another identical unit without significant difference in value.

In other words:
the exact individual item is not important,
as long as the replacement has:

• the same specifications;
• same quality;
• same quantity.

Simple Explanation
If you borrow:

• 1 kilogram of rice,

you do not need to return:

• the exact same grains of rice.

You only need to return:

• rice of equivalent type and quality.

That is why rice is:
✅ fungible.


Q2: Why are fungible goods important in salam contracts?
Answer
In salam:

• the goods do not yet exist at the time of contract.

Therefore:

• the goods must be standardised and easily describable.

Fungible goods are suitable because:

• they can be precisely specified by:
  • weight;
  • quantity;
  • grade;
  • quality.

This reduces:

• uncertainty (gharar);
• disputes upon delivery.

Examples of Fungible Goods
Agricultural Commodities

• rice;
• wheat;
• sugar;
• dates;
• palm oil.

Raw Materials

• cement;
• steel bars;
• flour;
• crude oil.

Standardised Goods

• identical bottled water;
• standard fuel;
• generic manufactured items.

Example 1: Fungible Goods in Salam
A buyer enters salam contract for:

• 5,000 kg of Grade A rice.

Analysis
Rice is:

• measurable;
• standardised;
• interchangeable.

The farmer can deliver:

• any rice meeting agreed specifications.

Result
✅ Suitable fungible good for salam.


Example 2: Crude Palm Oil
An Islamic bank purchases:

• 100 tonnes of crude palm oil through salam.

Analysis
Palm oil is:

• standardised by industrial grading;
• measurable by quantity and quality.

Result
✅ Fungible good.


Q3: What are non-fungible goods?
Answer
Non-fungible goods are:
unique items that cannot easily be replaced by identical equivalents.
Each item has:

• distinct characteristics;
• unique value.

Examples of Non-Fungible Goods

• specific artwork;
• antique furniture;
• unique houses;
• rare collectibles;
• customised handmade products.

Example 3: Non-Fungible Asset
A buyer wants:

• a specific painting by a famous artist.

Analysis
The exact painting matters.
Another painting:

• cannot replace it.

Result
❌ Non-fungible good.


Q4: Why are non-fungible goods generally unsuitable for salam?
Answer
Salam requires:

• precise standardisation;
• certainty of specifications.

Unique assets create:

• uncertainty;
• disputes over equivalence and quality.

Therefore:

• salam generally applies to fungible commodities,
  not:
• unique individual assets.

Comparison Between Fungible and Non-Fungible Goods
Fungible Goods
Characteristics

• Interchangeable.
• Standardised.
• Measurable.

Examples

• rice;
• wheat;
• sugar;
• fuel.

Suitable for Salam?
✅ Yes


Non-Fungible Goods
Characteristics

• Unique.
• Individually distinguishable.
• Not interchangeable.

Examples

• artwork;
• antique car;
• unique property.

Suitable for Salam?
❌ Generally no


Important Principle
Salam contracts require:

• certainty;
• standardisation;
• precise specification.

Therefore:
fungible goods are ideal because they minimise uncertainty and contractual disputes.

​