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​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.

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