Islamic Contract – Bay’ al-Istisnā‘: When Does the Customer Make Payment?

Islamic Contract – Bay’ al-Istisnā‘: When Does the Customer Make Payment?
Q1: When does the customer pay in an istisnā‘ contract?
Answer
In an istisnā‘ contract, payment is very flexible.
The customer may pay:

1. fully in advance;
2. progressively during construction;
3. upon completion and delivery; or
4. on a deferred instalment basis.

Unlike salam contracts:

• full upfront payment is NOT required in istisnā‘.

This flexibility is one of the reasons why istisnā‘ is widely used in:

• construction financing;
• infrastructure projects;
• Islamic banking.

Q2: What are the common payment methods in istisnā‘?
1. Upfront Payment
The purchaser pays the entire price at the beginning of the contract.


Example
A customer orders customised furniture.
Contract Price
RM100,000
Payment

• RM100,000 paid immediately upon signing.

Delivery
Furniture delivered after 6 months.


2. Progressive Payment (Most Common)
The purchaser pays according to stages of completion.
This is commonly used in:

• housing construction;
• infrastructure projects;
• manufacturing industries.

Example
Construction of a house.
Contract Price
RM500,000
Payment Structure

• RM100,000 upon signing;
• RM200,000 when structure completed;
• RM200,000 upon final delivery.

Analysis
Payments follow construction progress.


3. Payment Upon Completion
The purchaser only pays after the asset is completed and delivered.


Example
A factory orders machinery.
Contract Price
RM2,000,000
Payment
Full payment made:

• after machinery delivered.

4. Deferred Instalment Payment
The purchaser pays over time after delivery.
This structure is commonly used in:

• Islamic banking financing.

Example
An Islamic bank constructs a house through istisnā‘.
Construction Cost
RM400,000
The bank delivers completed house to customer.
The customer pays:

• RM2,500 monthly instalments for 20 years.

Analysis

• House constructed first.
• Customer repays gradually after delivery.

Q3: In parallel istisnā‘, who pays whom and when?
Answer
Parallel istisnā‘ involves:

• two separate contracts.

Thus:

• payment flows separately.

Example of Parallel Istisnā‘ Payment Flow
First Contract
Customer ↔ Islamic Bank
The customer agrees to buy:

• factory building.

Selling Price
RM15,000,000
Customer Payment

• progressive instalments over 10 years.

Second Contract
Islamic Bank ↔ Contractor
The bank appoints contractor to build factory.
Construction Cost
RM12,000,000
Bank Payment to Contractor

• according to construction milestones.

Important Point
The two payment obligations are:

• separate;
• independent.

The customer:

• pays bank.

The bank:

• separately pays contractor.

Q4: Can payment timing be revised later?
Answer
Yes, payment schedules may be revised by mutual agreement.
However:

• price cannot be increased merely because payment is delayed.

Otherwise:

• it may resemble ribā.

Simplified Summary
Istisnā‘ Payment Flexibility
Permissible Payment Timing
✅ Upfront
✅ Progressive
✅ Upon completion
✅ Deferred instalments


Most Common Practice in Islamic Finance
Construction Projects
➡️ Progressive payment
Islamic Home Financing
➡️ Deferred instalments after delivery
Manufacturing Projects
➡️ Milestone-based payments


Important Principle
Istisnā‘ is designed to facilitate:

• long-term construction;
• manufacturing;
• infrastructure financing.

Therefore:
Shariah allows flexible payment arrangements to suit commercial needs.

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