Islamic Contract – Bay’ al-Istisnā‘: Determination and Revision of Price Based on Cost

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.