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BAY' AL-ISTISNA'

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					MAHYUDDIN KHALID      emkay@salam.uitm.edu.my
                             CONTENT
               DEFINITION
 DEFINITION
               EVIDENCE
  EVIDENCE     PILLARS OF AL-ISTISNA’
               TYPES OF AL-ISTISNA’
    PILLARS
               CONDITION OF AL-ISTISNA’
 CONDITION
               DIFFERENCES BETWEEN AL-ISTISNA’ AND
                BAY’ AL-SALAM
COMPARISON     MODERN APPLICATION

APPLICATION




    2
                                   DEFINITION
               Literally:
 DEFINITION
                  The word istisna’ derived from the arabic verb
                   “istasna’a” which is mean to request someone to
  EVIDENCE
                   manufacture an asset.

    PILLARS
               Technically:
                  Bay’ al-istisna’ is defined as a contractual agreement
 CONDITION
                   with manufacturer to produce items with specified
                   description at a determined price, and manufactured
                   from his own materials with his own effort.
COMPARISON



APPLICATION
                                  DEFINITION
               The Majallah al-Ahkam al-Adliyyah (Ottoman code
 DEFINITION
                of Islamic civil law) defines istisna’ as
                 A contract with the maker, (manufacturer) on the
  EVIDENCE
                  specific task that is liable to complete.
    PILLARS
               Malaysian Accounting Standards Board (MASB)
                defines the istisna’ as:
 CONDITION       A contract of exchange whereby an IFI, at the request of
                  the customer, acquires an asset for purchase or
COMPARISON        construction based on specifications by the customer.
                  The payment of acquisition price to manufacturer,
APPLICATION
                  developer or vendor of the asset is made up-front by
                  determined future date.
                                   DEFINITION
               It is an order to producer to manufacture a specific
 DEFINITION
                commodity for the purchaser.
               The emphasis in istisna is the specificity of subject
  EVIDENCE
                matter to avoid gharar (uncertainty) ensuring that the
                seller cannot transact with something that cannot be
    PILLARS
                accurately described; one can describe equipment, a
                factory or an industrial plant, but not fish in the sea prior
 CONDITION
                catching them since their type and volume is unknown.
               Upon delivery, the IFI sells it to the customer at a
COMPARISON
                prevailing market price comprising original acquisition
                price and a margin of profit.
APPLICATION
               The customer repays by installments within a period
                and in the manner agreed between the IFI and the
                customer.
                                   EVIDENCE
               According to jurist, the legality on an istisna’
 DEFINITION
                contract is established from different legal sources
                such as the Sunnah, ijma’, qiyas and istihsan.
  EVIDENCE
               There is no differences of opinion on its
    PILLARS     permissibility. It clearly can be seen from hadith:
                  Indeed that the Prophet s.a.w booked the making of a
 CONDITION         golden ring
               The istisna’ contract is legitimate on the basis of the
COMPARISON      people’s customary practice of this contract in all
                periods of time without any objection, which in turn
APPLICATION
                constitutes a legal consensus.



    6
                              PILLARS OF ISTISNA’
               Mustasni’
 DEFINITION
                 Customer
  EVIDENCE     Sani’
                 Manufacturer
    PILLARS    Ra’s al-Mal
                 The Price
 CONDITION
               Masnu’
COMPARISON
                 The Product
               Sighah
APPLICATION      Ijab (Offer)
                 Qabul (Acceptance)


    7
                       FLOWS OF ISTISNA’
                                  1) Ijab (Offer)
 DEFINITION


                            3)
                                 Ra’s al-Mal
  EVIDENCE
                                   (Price)

    PILLARS


               Mustasni’                                Sani’
 CONDITION
              (Customer)                            (Manufacturer)
COMPARISON


                                  Masnu’
APPLICATION                4)
                                 (Product)


                           2) Qabul (Acceptance)
    8
                     TYPES OF ISTISNA’ CONTRACT

 DEFINITION
                  Classical Istisna’            Parallel Istisna’
  EVIDENCE    • The normal                 • Contractual agreement
                istisna’contract that        consists of two series of
    PILLARS     involves two                 seperate istisna’
                transacting parties; the     contracts whereby the
 CONDITION      customer (mustasni’)         first istisna’ contract is
                and the manufacturer         between the ultimate
COMPARISON      (sani’)                      purchaser (customer)
                                             and the seller (bank),
APPLICATION
                                             who is responsible for
                                             delivering the specified
                                             asset to the purchaser.

    9
                          CONDITION OF ISTISNA’

 DEFINITION
              Conditions of subject matters (masnu’)
  EVIDENCE    • The object to be manufactured must be precisely determined
                in its type, kind, quantity and quality, considering that
    PILLARS
                istisna’ contract is a form of sale of the non-existence.
              • The object of an istisna’ contract must be something that the
                people are familiar with to contract it on the basis of
 CONDITION
                manufacture and construction process.
              • Istisna’ contract always associated with the risk of
COMPARISON      uncertainty of the deliverability of the subject matter which
                can be mitigated through the above said mechanism.
APPLICATION   • If the subject matter does not conform to the contractual
                specifications at the time of delivery, the purchaser has the
                right to either refuse or accept it.
                              CONDITION OF ISTISNA’

              Conditions of time of delivery
 DEFINITION
               • The best view to fix the delivery time to avoid dispute even though it is not a
                 requirement.
  EVIDENCE     • The time of delivery of the manufactured object must be clearly specified to
                 avoid uncertainty and ambiguity which may lead to a later dispute among
                 the transacting parties.
    PILLARS
               • The customer permitted to penalize the manufacturer if the latter fails to
                 deliver the work on specified date.
 CONDITION
              Conditions of price for istisna’
               • Price of istisna may be in the form of money, commodity and usufruct.
COMPARISON     • Price of istisna may be spot and differed therefore istisna is applicable where
                 salam is not applicable.
APPLICATION
               • Price of istisna is can be paid in installments.
               • The installments may be tied up with different stages of projects.
               • When the required goods have been manufactured by the manufacturer
                 purchaser can exercise his option of defect, but he cant use his option of
                 seeing.
                 DIFFERENCES BETWEEN AL-ISTISNA’ AND SALAM

              BAY AL-ISTISNA’                       BAY’ AL-SALAM
 DEFINITION
              The subject of istisna’ is always a   The subject can be any thing,
              thing which needs                     whether need manufacturing or
  EVIDENCE    manufacturing.                        not
              The price in istisna’ does not      The price has to be paid in full in
    PILLARS   necessarily need to be paid in full advance.
              in advance.
 CONDITION    Time of delivery of istisna’      Time of delivery is an essential
              product does not have to be fixed part of the sale
COMPARISON    The contract can be cancelled         The contract cannot be cancelled
              before the manufacturer starts        unilaterally.
              working.
APPLICATION




    12
                                 APPLICATIONS
               In contemporary Islamic finance, an istisna’ contract
 DEFINITION
                is applicable to various industrial productions
                which can be constructed or manufactured and
  EVIDENCE
                supervised by specification.
    PILLARS    Customers are able to apply for the istisna’
                financing facility and other product offered by
 CONDITION      Islamic bank using istisna’ contract such as:
                 Parallel istisna’ (Istisna’ Mawazi)
COMPARISON       Hybrid Istisna’
                 Sukuk istisna’
APPLICATION




    13
              PARALLEL ISTISNA’ (ISTISNA’ MAWAZI)
                                  2
 DEFINITION


                                          3        Bank
  EVIDENCE



    PILLARS



 CONDITION

                 Customer
COMPARISON    Also as developer
                                      4
                                              Original Seller/
APPLICATION                                     Developer
                                                 (Builder)
                           1


    14
                PARALLEL ISTISNA’ (ISTISNA’ MAWAZI)
               Parallel salam takes effect through two separate contract.
 DEFINITION
               In the first contract the IFI act in the capacity as
                manufacturer, builder or supplier and concludes a
  EVIDENCE
                contract with the customer.
               In the second contract the IFI act in the capacity of a
    PILLARS
                purchaser and concludes another contract with a
                manufacturer, builder or supplier in order to fulfill its
 CONDITION
                contractual obligations towards the customer in the first
                contract.
COMPARISON
               By this process a profit is realized through the difference
APPLICATION
                in price between the two contracts and in most cases,
                one of the contract is concluded immediately and the
                second contract concluded later.

    15
              END OF CHAPTER

 DEFINITION



  EVIDENCE



    PILLARS



 CONDITION         
COMPARISON



APPLICATION




    16

				
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