Due to the significant changes in the size and value of projects required by the development needs, whether implemented by Governments or those that are assigned to the private sector, and in the light of the scarcity of liquidity and the inadequacy of funding sources for the implementation of these projects, as well as the lack of expertise needed to implement them, there is a need An urgent new funding formula that conforms to legitimate concepts. Therefore, Istisna’a contracts have become a sales contract that can be used in Islamic banking to meet the needs and desires of groups of customers, whether they are groups or individuals, which cannot be financed by other sales contracts.

2. Definition Of Istisna’a

The word Istisna (استصناع) is a derivative from the root word ‘Sa na’a (صنعة), which means to manufacture or to construct something. Istisna is a contract of sale of specified items to be manufactured or constructed with an obligation on the part of the seller to deliver them to the purchaser upon completion.

3. Legitimacy Of Istisna’a

The legitimacy of Istisna is based on the Hadith narrated by Jabir (May Allah be pleased with him):

A woman said, “O Allah’s Apostle! Shall I get something constructed for you to sit on as I have a slave who is a carpenter?” He replied, “Yes, if you like.” So she had that pulpit constructed. (Al Bukhari, Book #8, Hadith #440)

4. Principles Of Istisna’a :

Istisna’a Contract Parties:

The conditions for the contracting parties for Istisna’aare the same as those of a regular sale contract. Thus the contracting parties must be competent by having legal capacity, i.e. they must be :

• adult
• mature
• sane.

Under this contract the Seller is called “San’e” (الصانع) while the buyer is described as “Mustasne” (المستصنِع).

Istisna subject matter:

The subject matter of Istisna contract includes the object and the price.

1.Object:

The object for an Istisna’acontract must be identified raw materials that can be transformed from their natural state by a manufacturing or construction process involving labour with unique descriptions. The object of Istisna cannot be an identified existing capital asset or goods. The Istisna goods can be produced by the seller using its own resources or resources of the other manufacturer or producer, but according to the specifications and within the period agreed upon with the Mustasene (purchaser).

The Istisna contract can be drawn for real estate development on designated land owned either by one of the two contracting parties or by both.

2.Price:

The price for Istisna goods must be known at the conclusion of the contract. The price could be in cash or tangible goods or the usufruct of an asset for a particular duration. Even the usufruct of Istisna goods themselves could be the price of the contract. Moreover, the price may be deferred or paid in installments within a certain period of time according to phases or stages of completion of work.

The seller (San’e) can demand an upfront payment (Urboun عربون)and guarantee from the purchaser (Mustasne) against its fulfillment of the payment obligations. In turn, the purchaser (Mustasne) may demand from the seller to provide with the performance guarantee, or the advance payment guarantee if any amount of Istisna’a price is paid in advance.

Conclusion of Istisna’a contract:

An Istisna contract can be concluded by offer and acceptance between the seller (San’e) and a purchaser (mustasne) even before the seller (San’e) assumes the title to the Istisna goods to be sold to the purchaser (mustasne).

Since a contract of Istisna is binding, the parties to the contract are inevitably bound by all obligations and consequences flowing from their agreement and the contract can only be terminated by mutual agreement of the parties. If the Istisna work, however, has not commenced, either party may terminate the Istisn’a contract unilaterally.

The seller (San’e) cannot stipulate in the contract that it is not liable for defects. After the conclusion of the Istisna contract, the seller (San’e) and the purchaser (mustasne) can mutually agree on amending and introducing new specifications and the Istisna’a price previously agreed upon. A contract of Istisna, by mutual consent of the parties, can include a clause to the effect that if any additional conditions
are inserted into the contract at a later date, the extra expenses will be borne by the purchaser (mustasne).

Supervision of the execution of Istisna’a contract:

A technically experienced consulting firm can be appointed by the purchaser (mustasne) for ensuring whether the Istisna’a goods conform to the contractual specifications. The additional costs of supervision can be borne by either party as mutually agreed.

5. Delivery and disposal of Istisna’a contract:

Delivery of Istisna’a goods can take place before the due date or on the due date, or may take place through constructive possession by enabling the purchaser (mustasne) to take control over the subject matter after the completion of the production process. If the Istisna’a goods do not conform to the
contractual specifications at the time of delivery, the purchaser (mustasne) has the right to reject them. The seller (San’e) is discharged from liability once the Istisna’a goods are delivered.

Operational procedure of Istisna :

1. A Customer who is in need to build a house approaches the Islamic Bank and applies for finance through Itisna based finance transaction.
2. The Islamic Bank assesses the customer’s credit worthiness, analyses the real estate market condtion, evaluates the price of the materials of subject property and approves the request.
3. The Islamic Bank as San’e (seller) and the Customer as Mustasne (purchaser) execute the Istisna contract whereby the specification of the subject of Istisna, Istisna price, the mode of payment and the delivery of the property are stipulated in a very clear form.
4. If the financing is not approved for the 100% value of the Istisna’a cost the Bank asks the Customer to pay certain amount as advance payment which is adjusted in the Istisna purchase price.
5. The islamic Bank, in turn, executes another Istisna’a contract called (parallel Istisna’a) being purchaser (Mustasne) with any contractor (San’e) on the same terms and conditions of the Istisna agreement signed with the customer in the first place except the Istisna price. In the parallel Istisna contract, the islamic Bank may ask the contractor to provide with a Performance Guarantee and in case of any advance payment, the Advance Payment Guarantee.
6. Under the Parallel Istisna’a contract, the islamic Bank as Mustasne pays the Istisna price to the contractor i.e. San’e, as per agreed upon terms in the agreement. The payment is generally linked to the progress of construction.
7. A consultant is appointed either on the cost of the contractor or the customer to supervise the construction works.
8. The Contractor as a San’e delivers the property on the delivery date to the islamic Bank (mustasne) under the parallel Istisna’a contract.
9. The islamic Bank being San’e delivers the property under the first Istisna’a contact to the Customer (mustasne) on the relevant delivery date.
10. The Customer pays the Istisna purchase price to the islamic Bank as per agreed upon terms in the contract which generally starts after the delivery of the property to the Customer in the form of Equated Monthly Installment (EMI).

As most of the Islamic Banks are not involved directly in contracting business they adopt the structure of “Parallel Istisna” to satisfy their customers’ need who seek the home finance through Istisna contract. It is a duty of the Islamic bank to ensure that the purpose of Istisna is not repugnant to Shariah priciples.

Since the Istisna is a kind of Sale contract, no penalty or extra amount over the Istisna purchase price shall be charged to the customer (purchaser / mustasne) in case of any delay in the payment or for
any deferral in the payment granted by the Bank (seller / San’e) to the Customer. Contrary to this the Customer (mustasne), however, may impose specific penalty against the Bank (San’e) for any delay in the delivery of the property

5.Parallel Istisna’a

Parallel Istisna (al-Istisna al-Muwazi الإستصناع الموازي). It takes effect through two separate contracts. In the first contract, the Islamic Bank acts in the capacity of Seller (San’e) and concludes the contract with the customer who is the buyer (Mustasne). In the second contract, the Bank acts in the capacity of a buyer (Mustasne)and concludes the contract with a seller (San’e) in order to fulfill its contractual obligations towards the customer in the first contract. By this process, a profit is realised through the difference in price betweenthe two contracts.

Istisna’a has many advantages. It is suitable for financing large projects with high budgets that other forms can not finance. It also contributes to the optimal utilization of skills to reduce unemployment rates by providing jobs as Istisna’a usually requires the use of certain skills (craftsmen).

Istisnaa also helps the buyer (Mustasne) to meet his needs as he often lacks the necessary expertise to evaluate the project or the time needed to follow up or the money required to finance it, as well as the role played by this formula in moving the wheel of economic growth because Istisna involve real projects that generate money and increase demand.