Islamic Contract – Bay’ al-Istisnā‘: Definition and Nature of Manufacturing Sale

​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:

• 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.

Specified Asset
The asset must be clearly specified, including:

• quantity;
• quality;
• design;
• measurements; and
• other relevant specifications.

Future Delivery
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.

It is widely used in:

• 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.

The specifications of the house are fully agreed upon, including:

• size;
• number of rooms;
• building materials; and
• design layout.

Analysis

• 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.

This is a valid istisnā‘ contract.


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.

The contract specifies:

• machine capacity;
• technical features;
• materials used; and
• performance requirements.

Analysis

• 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.

Essential Requirements

• Clear specifications.
• Agreed price.
• Agreed delivery timeline.

Payment Flexibility

• Upfront payment allowed.
• Deferred payment allowed.
• Progressive payment allowed.

Common Applications

• Construction projects.
• Infrastructure financing.
• Manufacturing industries.
• Islamic project financing.