​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.

​Islamic Contract – Bay’ al-Istisnā‘: Legality of Istisnā‘
Q1: What is the legal basis for the permissibility of istisnā‘?
Answer:
According to Muslim jurists, the legality of the istisnā‘ contract is established through various Islamic legal sources, including:

• the Sunnah;
• ijmā‘ (consensus);
• qiyās (analogy); and
• istihsān (juristic preference).

These sources collectively support the permissibility of istisnā‘ as a valid Islamic commercial contract.


Q2: What evidence from the Sunnah supports the legality of istisnā‘?
Answer:
The legality of istisnā‘ is supported by a narration reported by Nāfi‘:
“Abdullāh ibn ‘Umar reported that Prophet Muhammad (SAW) requested that a ring be manufactured for him.”
(Ahmad, 2001, hadith no. 12360)
This hadith demonstrates that:

• the Prophet (SAW) requested the manufacture of an item according to specifications; and
• the manufactured item was to be produced in the future.

Jurists regard this narration as a clear basis for the permissibility of istisnā‘ contracts in Islam.


Q3: How does ijmā‘ support the legality of istisnā‘?
Answer:
According to Hanafi jurists, istisnā‘ is also legitimised through:
ijmā‘ (consensus of Muslim jurists).
They argue that:

• people have continuously practised istisnā‘ transactions throughout different periods of Islamic history;
• scholars did not object to this widespread commercial practice.

This continuous acceptance and practice constitute implied consensus regarding the permissibility of istisnā‘.


Q4: What is the role of qiyās and istihsān in legitimising istisnā‘?
Answer:
Qiyās (Analogy)
Jurists use analogy to compare istisnā‘ with other recognised sale contracts involving future delivery and specified assets.
Istihsān (Juristic Preference)
Hanafi jurists particularly rely on istihsān because:

• strict analogy may initially disallow selling something not yet in existence;
• however, commercial necessity and public interest justify allowing istisnā‘.

Thus, istisnā‘ is permitted to facilitate:

• manufacturing;
• construction; and
• economic activities essential for society.

Case Study 1: Manufacturing of Custom Furniture
A hotel owner contracts a furniture manufacturer to produce 200 customised chairs.
Contract Details

• Total contract price: RM80,000
• Manufacturing period: 4 months
• Specifications:
  • wood type;
  • dimensions;
  • colour;
  • design.

Analysis

• The chairs do not yet exist at the time of contract.
• The manufacturer agrees to produce them according to specifications.
• The transaction reflects the essence of istisnā‘.
• Its permissibility is supported by the Sunnah and customary commercial practice.

This is a valid istisnā‘ contract.


Case Study 2: Construction of a Commercial Building
A company appoints a contractor to construct a warehouse under an istisnā‘ arrangement.
Contract Details

• Construction price: RM2,500,000
• Completion period: 24 months
• Payment schedule:
  • RM500,000 upfront;
  • RM1,000,000 during construction;
  • RM1,000,000 upon completion.

Analysis

• The building will be constructed in the future.
• Specifications and delivery timeline are predetermined.
• Payment arrangement is flexible.
• The contract reflects established customary practice accepted by Muslim jurists.

This arrangement is permissible under Islamic law through:

• Sunnah;
• ijmā‘;
• qiyās; and
• istihsān.

Notes: Legal Basis of Istisnā‘
Sunnah

• Prophet Muhammad (SAW) requested manufactured items.
• Hadith supports permissibility of manufacturing contracts.

Ijmā‘

• Continuous practice of istisnā‘ accepted by Muslim jurists.
• No significant objection from scholars historically.

Qiyās

• Analogy with other valid commercial contracts.

Istihsān

• Juristic preference based on commercial necessity and public interest.

Important Principle
Istisnā‘ is permitted because it facilitates:

• trade;
• manufacturing;
• infrastructure development; and
• societal economic needs within Shariah principles.