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Islamic Contract – Bay’ al-Istisnā‘: Transfer of Ownership of Istisnā‘ Asset Under Construction
Q1: What happens to ownership of an istisnā‘ asset while it is still under construction?
Answer:
Generally, in an istisnā‘ contract:
the purchaser may take possession of the asset even before completion.
Q2: What is the AAOIFI position regarding transfer of ownership of an under-construction istisnā‘ asset?
Answer
The AAOIFI Shariah Standard is:
silent on this issue.
This means:
Q3: What is the BNM position regarding under-construction istisnā‘ assets?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 15.6):
Q4: What does “as-is basis” mean?
Explanation
“As-is basis” means:
the purchaser accepts the asset in its current incomplete condition.
The purchaser:
Case Study 1: Traditional Position (No Transfer Before Completion)
A developer constructs an office building under istisnā‘.
Contract Details
This reflects:
Case Study 2: BNM Approach — Transfer During Construction
An Islamic bank finances construction of an apartment tower under istisnā‘.
Contract Details
purchaser may take possession of the project on an “as-is basis” during construction.
The purchaser:
Subsequent Sale by Purchaser
After taking possession:
RM120,000,000 - RM100,000,000 = RM20,000,000
120,000,000 - 100,000,000 = 20,000,000
Analysis
Under BNM:
✅ permissible under BNM framework.
Q5: Why is this important in Islamic finance?
Explanation
This flexibility is important for:
Comparison Notes: AAOIFI vs BNM
AAOIFI Position
Important Shariah Principle
The key issue is:
possession and ownership risk.
Once:
Q1: What happens to ownership of an istisnā‘ asset while it is still under construction?
Answer:
Generally, in an istisnā‘ contract:
- ownership and risk remain with the manufacturer or seller until delivery and possession occur.
- the asset is still incomplete;
- the purchaser has not yet taken possession.
the purchaser may take possession of the asset even before completion.
Q2: What is the AAOIFI position regarding transfer of ownership of an under-construction istisnā‘ asset?
Answer
The AAOIFI Shariah Standard is:
silent on this issue.
This means:
- AAOIFI does not expressly provide rules allowing or prohibiting transfer of possession of the unfinished asset during construction.
- classical general principles regarding possession and ownership continue to apply.
Q3: What is the BNM position regarding under-construction istisnā‘ assets?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 15.6):
- the contracting parties may agree that the purchaser takes possession of the istisnā‘ asset on an “as-is” basis while construction is still ongoing.
- ownership risk transfers to the purchaser;
- the purchaser may subsequently:
- use;
- transfer; or
- sell the under-construction asset to another party.
Q4: What does “as-is basis” mean?
Explanation
“As-is basis” means:
the purchaser accepts the asset in its current incomplete condition.
The purchaser:
- acknowledges ongoing construction status;
- assumes ownership risks from that stage onward.
Case Study 1: Traditional Position (No Transfer Before Completion)
A developer constructs an office building under istisnā‘.
Contract Details
- Construction price: RM50,000,000
- Completion period: 3 years
- building remains under ownership and risk of developer.
- cannot yet sell the exact unfinished building because possession has not transferred.
This reflects:
- traditional istisnā‘ principles;
- consistent with AAOIFI’s silence on early transfer.
Case Study 2: BNM Approach — Transfer During Construction
An Islamic bank finances construction of an apartment tower under istisnā‘.
Contract Details
- Total project price: RM100,000,000
- Construction progress: 60% completed
purchaser may take possession of the project on an “as-is basis” during construction.
The purchaser:
- accepts current construction status;
- assumes ownership risks from that point.
Subsequent Sale by Purchaser
After taking possession:
- purchaser sells the under-construction apartment project to another investor for:
- RM120,000,000
RM120,000,000 - RM100,000,000 = RM20,000,000
120,000,000 - 100,000,000 = 20,000,000
Analysis
Under BNM:
- purchaser already took possession;
- ownership risk transferred;
- purchaser may now sell the under-construction asset.
✅ permissible under BNM framework.
Q5: Why is this important in Islamic finance?
Explanation
This flexibility is important for:
- property development financing;
- infrastructure projects;
- large-scale construction financing.
- transfer of commercial interests during construction;
- greater liquidity in project financing.
- possession and ownership transfer must be genuine;
- contractual responsibilities must be clearly documented.
Comparison Notes: AAOIFI vs BNM
AAOIFI Position
- Silent regarding transfer during construction.
- Traditional ownership principles continue to apply.
- Allows purchaser to take possession on “as-is basis.”
- Purchaser may sell under-construction asset after possession.
- Greater commercial flexibility.
Important Shariah Principle
The key issue is:
possession and ownership risk.
Once:
- genuine possession transfers;
- and purchaser assumes ownership risk,
- transfer or sell the asset,
- construction is not yet fully completed.
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