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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.




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