Istisna'
Istisna' is a contract to manufacture or build a specified asset for an agreed price, which may be paid in advance, in instalments or on delivery. It is widely used in project, construction and infrastructure finance.
Also called: istisna · istisnaa · manufacturing finance · construction finance
The buyer commissions something that does not yet exist — a building, a ship, a plant — and the manufacturer undertakes to produce it to specification. Unlike salam, the price need not be paid upfront, which makes istisna' suited to staged payment over a construction period.
In finance the bank usually sits between the two sides through parallel istisna': it agrees to deliver the asset to its customer under one contract and commissions a contractor to build it under another, with the bank's profit being the difference. On completion the customer often pays over time, or the asset is leased to it under an ijarah.
In practice
The two contracts in a parallel istisna' must be independent. The bank remains responsible to its customer for delivery even if the contractor fails, which is the risk that justifies its profit.
Example
A utility needs a US$30 million power substation. Its Islamic bank agrees to deliver it for US$34 million payable over eight years and separately commissions an engineering firm to build it for US$30 million, paid in stages during construction.
Commonly confused with
| Term | How it differs |
|---|---|
| Salam | Salam covers fungible goods with the price paid in full at contract. Istisna' covers manufactured or constructed assets, and payment can be deferred or staged. |
See also
- SalamSalam is a sale in which the buyer pays the full price at the time of contract for goods of a precisely specified type, quantity and quality, to be delivered on a fixed future date.
- IjarahIjarah is an Islamic lease: the owner of an asset transfers the right to use it for an agreed period in return for rent, while keeping ownership and the risks that come with ownership.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.