- Istisna, in Arabic, means to build, develops or manufacture.
- Istisna is adopted to purchase the construction of building, and manufacturing of vessels, aircrafts, etc.`
- Istisna can also be used for setting up green-field industrial projects.
- Islamic bank agrees to build asset / project as per a given description and enters into istisna contract with client. Here, Islamic bank is sani or seller and client is mustasni or buyer.
- Title to "Described Asset " is passed to the client upon entering into istisna contract.
- Contrary to general perception, to fix does not require a separate contract to be signed for transfer of title upon completion and delivery of the istisna asset to the client.
- Price, payment terms and specifications are agreed between client and Islamic bank in the istisna contract.
- Price may be paid in cash or in phases, as job progresses.
- Client ( buyer ) is obliged to take delivery of the asset upon completion.
- An Islamic bank will have complied with its obligations under istisna contract if the asset is completed according to agreed specifications and the client ( buyer ) will be obliged to receive the asset as per contract.
- Client can claim damages if the asset has not been developed as per agreed specifications and client want to fix the shortfalls.
- To avoid such risk, Islamic bank may seek the client to choose the contractor to whom Islamic bank will award the work under a parallel istisna contract. This also provides satisfaction to the client as to the competence of the contractor.
- When an Islamic bank enters into a parallel istisna contract with the client’s selected contractor, the terms of the main istisna contract are mirrored in the parallel istisna contract.
- Nevertheless, both istisna contracts are considered totally independent of each other in the eyes of sharia.
- Although title to described istisna asset is passed to purchaser upon signing the contract, purchaser does not assume any ownership risks till delivery of completed asset by the seller.
- This is to protect the interest of the purchaser and is as per sharia principles.