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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:
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
Furniture delivered after 6 months.
2. Progressive Payment (Most Common)
The purchaser pays according to stages of completion.
This is commonly used in:
Example
Construction of a house.
Contract Price
RM500,000
Payment Structure
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:
4. Deferred Instalment Payment
The purchaser pays over time after delivery.
This structure is commonly used in:
Example
An Islamic bank constructs a house through istisnā‘.
Construction Cost
RM400,000
The bank delivers completed house to customer.
The customer pays:
Q3: In parallel istisnā‘, who pays whom and when?
Answer
Parallel istisnā‘ involves:
Example of Parallel Istisnā‘ Payment Flow
First Contract
Customer ↔ Islamic Bank
The customer agrees to buy:
RM15,000,000
Customer Payment
Second Contract
Islamic Bank ↔ Contractor
The bank appoints contractor to build factory.
Construction Cost
RM12,000,000
Bank Payment to Contractor
Important Point
The two payment obligations are:
Q4: Can payment timing be revised later?
Answer
Yes, payment schedules may be revised by mutual agreement.
However:
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:
Shariah allows flexible payment arrangements to suit commercial needs.
Q1: When does the customer pay in an istisnā‘ contract?
Answer
In an istisnā‘ contract, payment is very flexible.
The customer may pay:
- fully in advance;
- progressively during construction;
- upon completion and delivery; or
- on a deferred instalment basis.
- full upfront payment is NOT required in istisnā‘.
- 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.
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.
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.
- House constructed first.
- Customer repays gradually after delivery.
Q3: In parallel istisnā‘, who pays whom and when?
Answer
Parallel istisnā‘ involves:
- two separate contracts.
- payment flows separately.
Example of Parallel Istisnā‘ Payment Flow
First Contract
Customer ↔ Islamic Bank
The customer agrees to buy:
- factory building.
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.
- pays 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.
- 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.
Shariah allows flexible payment arrangements to suit commercial needs.
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