​Islamic Contract – Bay’ al-Istisnā‘: Types of Istisnā‘

Q1: What are the types of istisnā‘ contracts?
​Answer:
The istisnā‘ contract is generally categorised into two types:

1. Ordinary Istisnā‘
2. Parallel Istisnā‘

Q2: What is Ordinary Istisnā‘?
Answer:
Ordinary istisnā‘ involves only two contracting parties:

• the purchaser (mustaṣni‘); and
• the manufacturer (ṣāni‘).

Under this arrangement:

• the purchaser requests the manufacturer to construct or manufacture an asset according to specified descriptions;
• the parties agree on the contract price;
• payment may be made:
  • upfront,
  • progressively, or
  • on a deferred basis; and
• delivery takes place on an agreed future date.

The manufacturer is directly responsible for producing the asset requested by the purchaser.

Case Study 1: Ordinary Istisnā‘
A restaurant owner orders customised kitchen equipment from a manufacturer.
Contract Details

• Asset: Industrial kitchen equipment
• Contract price: RM150,000
• Manufacturing period: 6 months
• Payment arrangement:
  • RM50,000 upfront;
  • RM50,000 during production;
  • RM50,000 upon delivery.

The purchaser directly contracts with the manufacturer to produce the equipment according to agreed specifications.
Analysis

• Only two parties are involved:
  • purchaser (mustaṣni‘);
  • manufacturer (ṣāni‘).
• The manufacturer directly produces the asset.
• Delivery occurs in the future.

This is an example of ordinary istisnā‘.

Q3: What is Parallel Istisnā‘?
Answer:
Parallel istisnā‘ involves:

• three contracting parties; and
• two separate istisnā‘ contracts.

First ContractBetween:

• the ultimate purchaser (mustaṣni‘); and
• the seller (ṣāni‘).

Under this contract:

• the seller agrees to deliver a specifically described asset to the ultimate purchaser.

Second Contract (Parallel Istisnā‘)Between:

• the seller (who now becomes the mustaṣni‘); and
• the actual manufacturer (ṣāni‘).

In this second contract:

• the seller appoints another party to manufacture or construct the asset.

Importantly:

• the two contracts must remain separate;
• one contract must not be legally contingent upon the other.

This separation ensures Shariah compliance and avoids combining contractual obligations improperly.

Case Study 2: Parallel Istisnā‘
An Islamic bank provides financing for the construction of a factory.
First Istisnā‘ ContractBetween:

• Customer (ultimate purchaser); and
• Islamic bank.

Contract Details

• Factory construction price: RM5,000,000
• Delivery period: 24 months

The Islamic bank agrees to deliver the completed factory to the customer.

Second Istisnā‘ Contract (Parallel Istisnā‘)Between:

• Islamic bank; and
• construction company.

Contract Details

• Construction cost payable by bank to contractor: RM4,200,000
• Construction period: 24 months

The construction company undertakes the actual construction work.

Analysis

• Two separate contracts exist.
• The customer has no contractual relationship with the contractor.
• The Islamic bank acts as intermediary.
• The bank profits from the difference between:
  • selling price to customer = RM5,000,000;
  • construction cost = RM4,200,000.

Profit Calculation[
RM5,000,000 - RM4,200,000 = RM800,000

The bank’s profit from the parallel istisnā‘ arrangement is RM800,000.

Notes: Differences Between Ordinary Istisnā‘ and Parallel Istisnā‘Ordinary Istisnā‘

• Involves only two parties.
• Purchaser directly contracts with manufacturer.
• Single istisnā‘ contract.
• Manufacturer personally produces the asset.

Parallel Istisnā‘

• Involves three parties.
• Consists of two separate istisnā‘ contracts.
• Seller may subcontract manufacturing to another party.
• Commonly used in Islamic banking and project financing.
• Contracts must remain legally independent.

Important Shariah Principle in parallel istisnā‘:

• each contract must stand independently;
• performance of one contract cannot be made legally conditional upon the other;
• this preserves contractual certainty and Shariah compliance.