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Islamic Contract – Bay’ al-Istisnā‘: Definition and Nature of Manufacturing Sale
Q1: What is Bay’ al-Istisnā‘?
Answer:
The word istisnā‘ is derived from the Arabic verb istaṣna‘a, which means:
“to request the manufacture of an asset.”
Technically, Bay’ al-Istisnā‘ (hereinafter, istisnā‘) refers to:
a contractual agreement with a manufacturer to produce or construct an asset with specified descriptions at a pre-determined price to be delivered on an agreed future date.
In an istisnā‘ contract:
Q2: What are the main characteristics of an istisnā‘ contract?
Answer:
The main characteristics of istisnā‘ are as follows:
Manufacturing or Construction Basis
The contract involves:
The asset must be clearly specified, including:
The manufactured asset is delivered at a future agreed date.
Pre-Determined Price
The contract price must be agreed upon at the beginning of the contract.
Flexibility of Payment
Payment may be:
Q3: What types of assets are commonly subject to istisnā‘?
Answer:
Istisnā‘ is commonly used for assets requiring manufacturing or construction, such as:
Case Study 1: Construction of a House
Ahmad enters into an istisnā‘ contract with a construction company to build a house.
Contract Details
Case Study 2: Manufacturing of Industrial Machinery
A factory owner orders specialised machinery from a manufacturer through istisnā‘ financing.
Contract Details
Notes: Important Features of Istisnā‘
Nature of Contract
Q1: What is Bay’ al-Istisnā‘?
Answer:
The word istisnā‘ is derived from the Arabic verb istaṣna‘a, which means:
“to request the manufacture of an asset.”
Technically, Bay’ al-Istisnā‘ (hereinafter, istisnā‘) refers to:
a contractual agreement with a manufacturer to produce or construct an asset with specified descriptions at a pre-determined price to be delivered on an agreed future date.
In an istisnā‘ contract:
- one party requests the manufacture or construction of an asset;
- the manufacturer agrees to produce it according to agreed specifications; and
- delivery takes place in the future.
Q2: What are the main characteristics of an istisnā‘ contract?
Answer:
The main characteristics of istisnā‘ are as follows:
Manufacturing or Construction Basis
The contract involves:
- manufacturing;
- construction; or
- production of an asset.
The asset must be clearly specified, including:
- quantity;
- quality;
- design;
- measurements; and
- other relevant specifications.
The manufactured asset is delivered at a future agreed date.
Pre-Determined Price
The contract price must be agreed upon at the beginning of the contract.
Flexibility of Payment
Payment may be:
- made upfront;
- deferred; or
- paid progressively according to stages of completion.
Q3: What types of assets are commonly subject to istisnā‘?
Answer:
Istisnā‘ is commonly used for assets requiring manufacturing or construction, such as:
- houses;
- buildings;
- ships;
- aircraft;
- roads;
- machinery;
- furniture; and
- customised products.
- Islamic project financing;
- infrastructure development; and
- construction financing.
Case Study 1: Construction of a House
Ahmad enters into an istisnā‘ contract with a construction company to build a house.
Contract Details
- Type of asset: Double-storey house
- Contract price: RM500,000
- Construction period: 18 months
- Payment structure:
- RM100,000 upfront;
- RM200,000 during construction;
- RM200,000 upon completion.
- size;
- number of rooms;
- building materials; and
- design layout.
- The house does not yet exist at the time of contract.
- The manufacturer (contractor) agrees to construct it.
- Delivery will occur in the future.
- Price and specifications are predetermined.
Case Study 2: Manufacturing of Industrial Machinery
A factory owner orders specialised machinery from a manufacturer through istisnā‘ financing.
Contract Details
- Machinery price: RM1,200,000
- Manufacturing period: 12 months
- Payment arrangement:
- 30% upon signing;
- 40% during production;
- 30% upon delivery.
- machine capacity;
- technical features;
- materials used; and
- performance requirements.
- The machinery will be manufactured according to specifications.
- Delivery occurs in the future.
- Payment is structured progressively.
- The contract satisfies the requirements of istisnā‘.
Notes: Important Features of Istisnā‘
Nature of Contract
- Manufacturing or construction contract.
- Asset may not yet exist at contract formation.
- Clear specifications.
- Agreed price.
- Agreed delivery timeline.
- Upfront payment allowed.
- Deferred payment allowed.
- Progressive payment allowed.
- Construction projects.
- Infrastructure financing.
- Manufacturing industries.
- Islamic project financing.
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