Islamic Contract – Bay’ al-Istisnā‘: Transfer of Ownership of Istisnā‘ Asset Under Construction

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:

• ownership and risk remain with the manufacturer or seller until delivery and possession occur.

This is because:

• the asset is still incomplete;
• the purchaser has not yet taken possession.

However, modern Islamic finance standards discuss whether:
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.

As a result:

• 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.

Once possession occurs:

• ownership risk transfers to the purchaser;
• the purchaser may subsequently:
  • use;
  • transfer; or
  • sell the under-construction asset to another party.

This provides greater commercial flexibility in modern project financing.


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

Before completion:

• building remains under ownership and risk of developer.

The purchaser:

• cannot yet sell the exact unfinished building because possession has not transferred.

Analysis
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

The contract states:
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

Profit Calculation
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.

Thus:
✅ 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.

It allows:

• transfer of commercial interests during construction;
• greater liquidity in project financing.

However:

• 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.

BNM Position

• 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,

the purchaser may generally:

• transfer or sell the asset,

even if:

• construction is not yet fully completed.