Istisna` - MIFC BNM/RH/STD XXXX Islamic Banking and Takaful Department Istisna` Page 2/32 Issued on:...

Issued on: XX XX 2014

Istisna`

BNM/RH/STD XXXX Islamic Banking and Takaful Department

Istisna` Page 2/32


Table of Contents

PART A Overview ........................................................................................ 4

1. Objective ...................................................................................... 4

2. Applicability .................................................................................. 4

3. Legal provisions ........................................................................... 4

4. Effective date ................................................................................ 5

5. Interpretation ................................................................................ 5

6. Related legal and policy documents ............................................. 6

PART B Definition and nature of istisna` .................................................. 7

7. Definition ...................................................................................... 7

8. Nature .......................................................................................... 7

PART C Components of Istisna` ................................................................ 8

9. Contracting parties ....................................................................... 8

10. Offer and acceptance ................................................................... 8

11. Asset ........................................................................................... 9

12. Price and mode of payment ........................................................ 10

13. Istisna` work and delivery ........................................................... 11

PART D Arrangement of istisna` with other contract or concept ......... 18

14. Arrangement of istisna` with assurances .................................... 18

a) Assurance of istisna` through kafalah ............................... 18

b) Assurance of istisna` through takaful coverage ................. 18

c) Assurance of istisna` through rahn .................................... 19

d) Assurance of istisna` through hamish jiddiyyah ................. 20

e) Assurance of istisna` through ùrbun................................. 20

15. Incorporation of rebate (ibra’) in istisna` ...................................... 21

16. Arrangement of istisna` with ijarah mawsufah fi al-zimmah ......... 21

17. Arrangement of istisna` with ta`widh, gharamah and/or syart jaza’i

......................................................................................... 22

PART E Arrangement of parallel istisna` ................................................ 24

18. Parallel istisna` ........................................................................... 24


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PART F Dissolution (fasakh) and completion (intiha’) of istisna` ......... 26

19. Dissolution of istisna` .................................................................. 26

20. Completion of istisna` ................................................................. 27

Appendices ................................................................................................. 28

21. Appendix 1 Legitimacy of Istisna’ ................................................ 28

22. Appendix 2 Glossary .................................................................. 31


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PART A OVERVIEW

1. Objective

1.1 This policy document outlines the Shariah requirements and optional

practices relating to istisna` to be observed by the IFIs in developing

Islamic financial services and products.

1.2 This policy document also covers arrangement of istisna` with other

Shariah contracts or concepts.

1.3 This policy document aims to facilitate the understanding of the

Shariah requirements relating to istisna` that must be adhered to by

IFIs in order to ensure its validity.

2. Applicability

2.1 This policy document is applicable to all Islamic financial institutions as

defined in paragraph 5.2.

3. Legal provisions

3.1 The requirements in this policy document are:

(a) specified pursuant to sections 29 (1) and (2) of the Islamic

Financial Services Act 2013 (IFSA); and

(b) issued pursuant to section 41 and 129(3) of the Development

Financial Institutions Act 2002 (DFIA).


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4. Effective date

4.1 This policy document comes into effect on XX XX XXXX.

5. Interpretation

5.1 The terms and expressions used in this policy document shall have the

same meanings assigned to them in the Financial Services Act 2013

(FSA), IFSA and DFIA, as the case may be, unless otherwise defined

in this policy document.

5.2 For the purpose of this policy document:

“S” denotes a standard, requirement or specification that must be

complied with. Failure to comply may result in one or more

enforcement actions;

“G” denotes guidance which may consist of such information,

advice or recommendation intended to promote common

understanding and sound industry practices which are

encouraged to be adopted.

“Islamic financial institutions” means –

(a) Islamic banks and takaful operators licensed under the IFSA;

(b) licensed banks and licensed investment banks under the FSA

approved under section 15(1)(a) of the FSA to carry on Islamic

banking business; and

(c) prescribed institutions under the DFIA approved under section

129(1) of the DFIA to carry on Islamic banking business or

Islamic financial business.


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6. Related legal and policy documents

6.1 This policy document must be read together with the following legal

and policy documents:

(a) any Shariah Advisory Council (SAC) rulings published by the

Bank1; and

(b) Shariah Governance Framework for Islamic Financial Institutions.

1 Including Shariah resolutions in Islamic Finance, standards, circulars or any directive pertaining to Shariah matter issued by the Bank.


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PART B DEFINITION AND NATURE OF ISTISNA`

7. Definition

S 7.1 Istisna` refers to a contract to sell to a purchaser a non-existent asset

that is to be constructed, built or manufactured according to the agreed

specifications and delivered on a specified future date at a pre-

determined price of the istisna` asset.

8. Nature

S

8.1 The istisna` contract shall be binding on the contracting parties upon

entering into the contract provided that it fulfills all its essential

elements that include specifications of asset and determination of

price, time of delivery and payment modes.

S 8.2 The specific inherent nature of the istisna` contract is the construction,

building or manufacturing of an asset according to the agreed

specifications and its delivery by the seller to the purchaser.

S 8.3 The asset constructed, built or manufactured in accordance to the

agreed specifications and conditions shall be accepted by the

purchaser, and the seller shall be entitled to the price of the istisna`

asset.


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PART C COMPONENTS OF ISTISNA`

9. Contracting parties

S 9.1 The contracting parties in an istisna` contract are the seller (soni`) and

the purchaser (mustasni`).

S

9.2 The contracting parties shall have the legal capacity2 to enter into the

istisna` contract.

G

9.3 The contracting parties in an istisna` contract may be a natural person

or a legal entity.

G 9.4 A party to an istisna` contract may enter into the contract through an

agent.

10. Offer and acceptance

S 10.1 The istisna` contract shall be entered into through an offer and

acceptance between the contracting parties.

G 10.2 The offer and acceptance may be expressed by appropriate

documentation or by any other methods which do not contravene the

Shariah principles including the customary business practice (ùrf

tijari).

2 The legal capacity of a person, from Shariah perspective, is defined as capacity to assume rights and

responsibilities; and capacity to give legal effect to his action. Among the important conditions are that the person must possess sound mind and the capacity to distinguish between what is harmful or beneficial to one’s interests. Legal capacity of a legal entity is defined as eligibility of an entity to acquire rights and assume responsibilities. In Malaysia, the legal capacity is governed under the Contracts Act 1950 and the Age of Majority Act 1971.


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S 10.3 Any term or condition mutually agreed upon which does not contravene

the Shariah shall be binding on the contracting parties.

11. Asset

S 11.1 The istisna` asset refers to the item to be constructed, built or

manufactured by the seller as ordered by the purchaser according to

agreed specifications.

S 11.2 The specifications of the istisna` asset to be constructed, built or

manufactured shall be agreed at the time of entering into the istisna`

contract.

S 11.3 The istisna` asset and the purpose of constructing, building or

manufacturing shall be Shariah compliant.

G 11.4 The istisna` asset may represent a unique or homogeneous asset that

can be constructed, built or manufactured such as a house, vehicle,

garment, aircraft or furniture .

S 11.5 The istisna` asset shall not be an existing or completed asset that has

been specifically identified at the time of entering into the istisna`

contract.

G 11.6 At the time of entering into the istisna` contract, the contracting parties

may agree on a certain degree of variation or tolerance in terms of

expected level of accuracy in meeting the agreed specifications of the

asset as long as it is in line with the acceptable market practice.

BNM/RH/GL/xxx Islamic Banking and Takaful Department

Shariah Standard on Istisna` Page 10/27

RAHSIA

12. Price and mode of payment

S

12.1 The price of the istisna` asset shall be determined at the time of

entering into the istisna` contract.

G 12.2 The price of the istisna` asset may be in the form of money, services or

in kind.

G 12.3 The price of the istisna` asset may be paid at anytime and in any form

agreed by the contracting parties such as spot, progressive or

deferred in the form of installments or bullet payments.

G

12.4 Revision of the price of the istisna` asset after entering into the istisna`

contract and before delivery of the istisna` asset may occur due to the

following situations:

(a) reduction of the cost of constructing, building or manufacturing

of the istisna` asset. In this situation, the giving an amount of

ibra’ is at the discretion of the seller;

(b) increase of the cost of constructing, building or manufacturing of

the istisna` asset. In this situation;

(i) the purchaser may agree to revise the price of the istisna`

asset to effect the transfer of the cost to the purchaser.

(ii) in the event that the purchaser does not agree to the

revision of price, the seller shall bear the increase of

constructing, building or manufacturing cost.

(c) request for a change of specifications by the purchaser. In this

situation, the seller may agree to the request and the

contracting parties may agree on a revised price of the istisna`

asset accordingly.


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G

12.5 Revision of the price of the istisna` asset after delivery of the istisna`

asset may occur due to failure to comply with the agreed

specifications. In this situation, the variation is subject to the

agreement of the contracting parties.

S 12.6 Any additional costs and expenses, such as those arising from

regulatory and legal requirements, during the construction, building or

manufacturing period shall be borne by the seller unless agreed

otherwise by the purchaser.

S 12.7 Notwithstanding paragraph 12.6, it is allowed for the contracting parties

to agree at the time of entering into the istisna` contract to incorporate

a clause that the additional cost due to regulatory and legal

requirements is to be borne by the purchaser.

S 12.8 After entering into the istisna` contract, the extension of the payment

period shall not lead to an increase in the price of the istisna` asset.

13. Istisna` work and delivery

G 13.1 Work to build, construct, transform, convert or process the istisna`

asset to be constructed, built or manufactured may be performed by

the seller and/or by any party appointed by the seller.

G

13.2 The seller may fulfill his obligation to deliver the istisna` asset by

sourcing from the market as long as it fulfills the agreed specifications.

G 13.3 The purchaser may stipulate a condition that the asset is to be

constructed, built or manufactured by the seller himself.


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S

13.4 The time of delivery of the istisna` asset shall be determined and

agreed by the contracting parties at the time of entering into the

istisna` contract.

S 13.5 The istisna` asset meeting the agreed specifications shall be delivered

to the purchaser and the obligation of the seller is discharged upon

acceptance of the delivery by the purchaser.

S 13.6 The ownership in the istisna` asset must be effectively transferred from

the seller to the purchaser.

S 13.7 The transfer of ownership shall take effect by the purchaser taking

possession of the istisna` asset.

S

13.8 The transfer of ownership is effected by the purchaser taking

possession of the istisna` asset in a valid sale and purchase contract

even though there is no legal registration of the ownership, provided

that the sale and purchase is supported by evidence of transaction.

S 13.9 The possession of the istisna` asset is effected by the seller releasing

the asset (takhliyah) resulting in the purchaser having access (tamkin)

and assuming its risk through any mechanism permitted by the Shariah

including the customary business practices (ùrf tijari).

S

13.10 Possession of the asset shall be either in the form of physical

possession (qabd haqiqi) or constructive possession (qabd hukmi).

S 13.11 The seller shall be held liable for any actual loss or damage incurred

by the purchaser due to his failure to observe timely and effective

delivery of the istisna` asset.


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G 13.12 The purchaser may accept the delivery of the istisna` asset in

accordance to the agreed specifications prior to the agreed delivery

date.

G 13.13 In the event that the istisna` asset is not in accordance with the agreed

specifications, the purchaser may exercise the following options:

(a) to reject the delivery of the istisna` asset and the contract is

dissolved:

(b) to accept the delivery of the istisna` asset, as it is at the original

price; or

(c) to accept the delivery of the istisna` asset subject to new terms to

be mutually agreed by the contracting parties such as revision in

the price or extension of time to meet the specifications of the

asset.

G 13.14 In the event that the seller fails to complete and deliver the istisna`

asset, the purchaser may exercise the following options:

(a) to purchase the istisna` asset on as is basis; or

(b) to dissolve (fasakh) the istisna` contract.

S 13.15 Pursuant to paragraph 13.14 (a), the effect is that the purchaser shall

pay the istisna` selling price up to the level of completion of the istisna`

asset and therefore the purchaser owns the istisna` asset. The seller

shall compensate the purchaser for any loss incurred due to the

seller’s failure.

S 13.16 Pursuant to paragraph 13.14 (b), the effect is that the seller shall return

any amount paid to the purchaser and the ownership of the istisna`

asset remains with the seller. The seller shall compensate the

purchaser for any loss incurred due to the seller’s failure.


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S 13.17 The seller shall not stipulate a condition to waive his liability for his

failure to complete the construction of the istisna` asset.

G 13.18 The contracting parties in an istisna` agreement may stipulate certain

warranty on the completed asset in the contract clause as long as it

does not exempt the seller’s liability towards the istisna` asset.

S 13.19 Any defect in the istisna` asset which is discovered and consented to

by the purchaser upon delivery of the istisna` asset shall disqualify the

purchaser from entitlement to the defect option (khiyar al-àyb).

S 13.20 Any defect in the istisna` asset which occurred before delivery of the

istisna` asset but is discovered by the purchaser after acceptance of

the istisna` asset shall entitle the purchaser to the defect option (khiyar

al-àyb).

S 13.21 Pursuant to paragraph 13.20, the purchaser has the right to terminate

the contract. Alternatively, the purchaser may choose to continue the

contract as it is or with any mutually agreed variation of the terms of

the contract.

S 13.22 The seller in the istisna` contract shall not exempt himself from liability

for any material defect after acceptance of the istisna` asset by the

purchaser.

G 13.23 It is permissible to include warranty terms in an istisna` contract and

clauses requiring maintenance work to be carried out after the istisna`

asset is delivered to safeguard the interest of the purchaser against

defects.


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S 13.24 In the event that the istisna` asset is delivered according to the agreed

time and specifications, the purchaser shall accept the delivery of the

istisna` asset and pay its price to the seller.

S 13.25 Pursuant to paragraph 13.24, in the event that the purchaser delays

acceptance of the istisna` asset, the seller is considered as the trustee

of the istisna` asset, and the seller shall not be held liable for the

istisna` asset except in the event of misconduct (taàddi) or negligence

(taqsir). Any cost related to the istisna` asset shall be borne by the

purchaser.

S 13.26 Notwithstanding paragraph 13.25, it is allowed for the contracting

parties to mutually agree to any of the following arrangements:

(a) the seller provides the service to safekeep the istisna` asset

for the purchaser with a certain fee to be paid by the

purchaser. The liability of holding the istisna` asset remains

with the seller in his capacity as the custodian of the istisna`

asset; or

(b) the purchaser appoints the seller as an agent to arrange for

act on behalf of the purchaser to put the istisna` asset in

others’ safekeeping. In this case, the seller may charge the

purchaser for this service. The liability of holding the istisna`

asset remains with the purchaser except in the event of

misconduct (taàddi), negligence (taqsir) or breach of specified

terms (mukhalafah al-shurut) by the seller.


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G 13.27 The istisna` contract may incorporate a clause providing that the seller

shall act as an agent for the purchaser in disposing of the istisna`

asset at fair market value or at a mutually agreed price for the istisna`

asset, should the purchaser fail to accept the delivery within a

reasonable time, or if the purchaser intentionally orders the seller to do

so.

G 13.28 Pursuant to paragraph 13.27, the contracting parties may agree to use

the sale proceeds to settle any outstanding amount of the price of the

istisna` asset and any actual costs and expenses incurred related

thereto.

S 13.29 Any surplus of the sale proceeds shall be refunded to the purchaser

while any shortfall shall be paid by the purchaser.

S 13.30 The purchaser shall not sell the istisna` asset to another party prior to

taking its actual or constructive possession.

G 13.31 The contracting parties may agree, upon entering into or during the

contract, that the purchaser may purchase the istisna` asset under

construction on as is basis. Consequently, the purchaser owns the

istisna` asset and therefore may sell it to another party.

G 13.32 A purchaser in an istisna` contract may enter into another istisna`

contract to sell to another party an asset having similar specifications

with the asset in the previous istisna` contract. This is a parallel istisna`

arrangement.


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G 13.33 A third party may be engaged to provide additional services such as

advisory or consultancy services to the istisna` work. The cost for the

engagement of the additional services may be borne by both or any of

the contracting parties subject to mutual agreement between them.

13.34 G 13.35 Any variation of contract performance due to force majeure may be

agreed between the contracting parties. This may include partial

cancellation of the contract, deferment of performance requirement,

and/or reduction of obligation of the contracting parties.

13.36


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PART D ARRANGEMENT OF ISTISNA` WITH OTHER CONTRACT OR CONCEPT

14. Arrangement of istisna` with assurances

G 14.1 For the purpose of assurances, the istisna` contract may be arranged

with other contract or concept such as kafalah, takaful coverage, rahn,

hamish jiddiyah (security deposit), or ùrbun (earnest money).

a) Assurance of istisna` through kafalah

G

14.2 A third-party guarantee through kafalah may be arranged together with

an istisna` contract to guarantee the followings:

(a) payment of the price of the istisna` asset within the agreed time;

(b) delivery of the agreed istisna` asset by the seller within the

agreed time; and/or

(c) acceptance of the agreed istisna` asset by the purchaser.

b) Assurance of istisna` through takaful coverage

G

14.3 Upon entering into the istisna` contract, the seller may require the

purchaser to subscribe to a takaful coverage to guarantee payment of

the price of the istisna` asset in the event of loss of legal capacity by

the purchaser.

G 14.4 The purchaser may require the seller to subscribe to takaful coverage

to guarantee delivery of the istisna` asset by the seller.


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c) Assurance of istisna` through rahn

S 14.5 Collateral (marhun) in an istisna` contract (if any) shall be a Shariah-

compliant asset.

S 14.6 Notwithstanding paragraph 14.5, interest bearing debt based asset

such as conventional fixed deposit certificate, is allowed to be used as

collateral provided the collateral is valued up to the principal amount.

S 14.7 The collateral shall be utilised as follows:

(a) To recover payment of the outstanding debt amount from the

purchaser; or

(b) To guarantee delivery of the istisna` asset by the seller.

G 14.8 Pursuant to paragraph 14.7 (a), the contracting parties may agree to

include the claim on actual costs incurred for the recovery of the

outstanding debt payment from the collateral.

G 14.9 The seller in the istisna` contract may pledge the istisna` asset to the

purchaser or to any other third party provided that the istisna` asset is

not yet delivered to the purchaser.

S 14.10 The purchaser in the istisna` contract shall not pledge an istisna` asset

prior to its delivery and acceptance by the purchaser.

G 14.11 The contracting parties may agree upon entering into the istisna`

contract that the purchaser may purchase the istisna` asset on as is

basis. Consequently, the purchaser owns the istisna` asset and

therefore may pledge it.


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d) Assurance of istisna` through hamish jiddiyyah

G 14.12 The seller may require the purchaser to place a security deposit

(hamish jiddiyyah) to secure entering into the istisna` contract.

G 14.13 The security deposit may be used to compensate against actual loss

incurred in the event that the purchaser fails to enter into the istisna`

contract.

S 14.14 Pursuant to paragraph 14.13, the excess portion of the security deposit

after compensation against actual loss shall be returned to the

purchaser.

G 14.15 Upon entering into the istisna` contract, the security deposit may be

treated as part of the payment of the price of the istisna` asset for the

istisna` contract.

S 14.16 The security deposit shall be returned to the purchaser if it is not

treated as part of the payment of the price of the istisna` asset.

e) Assurance of istisna` through ùrbun

G 14.17 Upon entering into the istisna` contract, the purchaser may place

earnest money (ùrbun) with the seller, and the purchaser is given a

specified time period to continue with or terminate the contract.

S 14.18 The earnest money shall be treated as part payment of the agreed

price of the istisna` asset if the purchaser exercises the option to

continue with the contract within the specified time.


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S 14.19 In the event that the purchaser fails to exercise the option to continue

with the contract within the specified time, the istisna` contract is

terminated and the seller shall be entitled to the earnest money.

15. Incorporation of rebate (ibra’) in istisna`

G 15.1 In the event of early settlement by the purchaser after completion and

delivery of the istisna` asset, the seller may consider waiving part of the

outstanding debt in the form of rebate (ibra’) to the purchaser.

S 15.2 In the event of early settlement by the purchaser prior to completion

and delivery of the istisna` asset, the ibra’ mechanism is not applicable.

G 15.3 Pursuant to paragraph 15.2, the early settlement by the purchaser may

occur through purchasing of the istisna` asset on as is basis.

S 15.4 A rebate clause shall be incorporated in the istisna` contract provided

that it is a requirement imposed by the authority.

G 15.5 In the event that the istisna` contract involves payment of the deferred

price in instalment, the seller may provide periodic ibra’ based on

certain benchmark agreed by the contracting parties.

16. Arrangement of istisna` with ijarah mawsufah fi al-zimmah

G

16.1 The contracting parties under an istisna` contract may enter into a

forward lease agreement (ijarah mawsufah fi al-zimmah), whereby the

purchaser may lease the istisna` asset under construction to the seller

or to any other party.


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S 16.2 The ijarah mawsufah fi al-zimmah contract shall be entered into

separately from the istisna` contract.

S 16.3 Pursuant to paragraph 16.2, it is allowed for the ijarah mawsufah fi al-

zimmah contract to be incorporated in other legal document such as-

(a) a master agreement provided that master agreement does not

carry the effect of the ijarah mawsufah fi al-zimmah contract; or

(b) in a stand-alone document.

17. Arrangement of istisna` with ta`widh, gharamah and/or syart jaza’i

G 17.1 The contracting parties may agree to include a clause in the istisna`

contract stipulating late payment charges as determined by the

relevant authorities.

S 17.2 Pursuant to paragraph 17.1, the late payment charges shall consist of-

(a) ta`widh (compensation) for actual loss borne by the seller,

which may be recognised as income to the seller; and/or

(b) gharamah (penalty), which shall not be recognised as income.

Instead, it shall be channelled to charitable bodies.

S 17.3 The seller has the right to claim for compensation of the actual cost

incurred in the event that the purchaser decides not to proceed with

the signing of the istisna` contract after he has undertaken to enter into

it through binding wa`d.

G 17.4 The contracting parties may agree, upon entering into or during the

contract, to include a clause to impose a late delivery charge (shart

jaza’i) on the seller in the event of late delivery of the istisna` asset by

the seller and the amount may be recognized as income to the


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purchaser.


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PART E ARRANGEMENT OF PARALLEL ISTISNA`

18. Parallel istisna`

S 18.1 Parallel istisna` consist of two separate and independent istisna`

contracts, which have similar specification of the istisna` asset.

S 18.2 Pursuant to paragraph 18.1, the seller in each istisna` contract is

bound to deliver the respective istisna` asset whereas the purchaser in

each istisna` contract is bound to pay the respective price of the

istisna` asset. The obligation and performance of each istisna` contract

shall not be dependent on the other istisna` contract.

S 18.3 In the event that the purchaser specifies a particular party to construct,

build or manufacture the istisna` asset, the seller is obliged to abide by

the requirement and shall not appoint any other party to construct,

build or manufacture the istisna` asset.

S 18.4 In the event that a purchaser has already contracted to purchase an

istisna` asset from the actual party performing the job, the seller in the

istisna` contract shall establish his ownership of the asset either by the

purchaser terminates the earlier purchase contract and the seller

enters into a new istisna` contract with the actual party performing the

job, or by any other means of transfer of ownership which is in

compliance with Shariah.

G 18.5 The seller may appoint the purchaser as an agent to supervise the

construction, building or manufacturing process of the istisna` asset by

the actual party performing the job to ensure that the istisna` asset

meets the agreed specifications within the agreed time.


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G 18.6 Pursuant to paragraph 18.5, the seller may request the purchaser to

guarantee the performance of the actual party performing the job.

S 18.7 Pursuant to paragraph 18.6, the arrangement of wakalah with kafalah

shall observe the following conditions:

(a) the wakalah contract shall not stipulate as a condition that the

wakil (purchaser) must guarantee the muwakkil (seller); and

(b) the kafalah contract entered into by the wakil as guarantor

shall be independent from his role as wakil to the effect that

validity of the wakalah is not made contingent to the kafalah

contract or vice versa.


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PART F DISSOLUTION (FASAKH) AND COMPLETION (INTIHA’) OF ISTISNA`

19. Dissolution of istisna`

S 19.1 An istisna` contract is dissolved under the following circumstances:

(a) the purchaser in an istisna` arrangement with earnest money

(ùrbun) exercises the option not to continue with the contract

within the specified time period;

(b) the purchaser exercises the option to cancel upon viewing the

manufactured istisna` asset (khiyar fawat al-wasf), where the

istisna` asset does not meet the agreed specifications prior to

its acceptance;

(c) the purchaser exercises the defect option (khiyar al-àyb) to

terminate the istisna` contract;

(d) any of the contracting parties exercises the mutually agreed

options to terminate the istisna` contract within the agreed time

period; or

(e) failure of the seller to deliver the istisna` asset resulting in the

purchaser exercise the option the dissolve the contract.

G 19.2 In the event of demise or dissolution of the seller, the purchaser may

exercise the following options:

(a) to purchase the istisna` asset on as is basis; or

(b) to dissolve the istisna` contract.

S 19.3 Pursuant to paragraph 19.2 (a), the effect is that the purchaser shall

pay the istisna` selling price up to the level of completion of the istisna`

asset and the purchaser owns the istisna` asset.


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S 19.4 Pursuant to paragraph 19.2 (b), the effect is that the purchaser entitles

to claim the istisna` selling price from the legal heir or estate of the

seller.

S 19.5 In the event of demise or dissolution of the purchaser, the istisna`

selling price shall be borne by the legal heir or estate of the seller.

S 19.6 Upon dissolution of the istisna` contract, the ownership of the istisna`

asset remains with the seller, the purchaser’s obligation to pay the

price of the istisna` asset is waived, and with the exception of

paragraph 19.1 (a), any amount paid shall be returned to the

purchaser.

S 19.7 Pursuant to paragraph 19.6, the dissolution of contract shall be

effective provided that the asset can be returned to the seller.

20. Completion of istisna`

S 20.1 An istisna` contract ends under the following circumstances:

(a) acceptance of the istisna` asset by the purchaser whether it

meets the agreed specifications or not; and

(b) full settlement of the selling price.

S 20.2 Upon completion of the istisna` contract, the contracting parties are

free from any contractual obligations.


Istisna` Page 28/32


APPENDICES

21. Appendix 1 Legitimacy of Istisna’

21.1 The legitimacy of istisna` is derived from the Quran and founded on the

Sunnah of the Prophet Muhammad (peace be upon him), and the

consensus of Muslim jurists (Ijma`).

The Quran

21.2 The following verses of the Quran imply the general permissibility of

sales contract including istisna` contract:

i. وأحل الله الب يع وحرم الربا “…whereas Allah SWT has permitted trading and forbidden

usury…” (Surah al-Baqarah, verse 275).

ii. ها الذين آمنوا أوفوا بالعقود يا أي

“O you who believe! fulfil (all) obligations...” (Surah al-Maidah,

verse 1).

The Sunnah of Prophet Muhammad (peace be upon him)

21.3 The following hadiths imply the permissibility of istisna` contract:

i. إن رسول اهلل صلى اهلل عليه وسلم :قال ،اهلل عن نافع عن ابن عمر عن عبيد

فصنع ،فكان جيعل فصه يف باطن كفه إذا لبسه ،من ذهبخامتا اصطنع

إين كنت ألبس هذا اخلامت وأجعل :وقال ،مث إنه جلس على املنرب فنزعه ،الناس


Istisna` Page 29/32


.س خواتيمهمفنبذ النا ،واهلل ال ألبسه أبدا :مث قال ،فصه من داخل فرمى به

Ibn Umar reported that the Prophet (peace be upon him) had a

golden ring made for himself, and when he wore it he used to turn

its stone toward the palm of his hand. So the people too had gold

made for themselves. The Prophet (peace be upon him) then

ascended the pulpit, removed the ring, and he said, "I had it made

for me, but now I will never wear it again." He threw it away, and

then the people threw away their rings too.” (Sahih Bukhari and

Muslim)

ii. ه وسلم أرسل إىل امرأة من أن النيب صلى اهلل علي عن سهل رضي اهلل عنه

،فليعمل لنا أعواد املنرب ،مري عبدك :قال هلا ،املهاجرين وكان هلا غالم جنار

فلما قضاه أرسلت إىل ،فأمرت عبدها فذهب فقطع من الطرفاء فصنع له منربا

أرسلي به :قال صلى اهلل عليه وسلم ،النيب صلى اهلل عليه وسلم إنه قد قضاه

.تمله النيب صلى اهلل عليه وسلم فوضعه حيث ترونفاح ،إيل فجاءوا به

Sahl reported that the Prophet (peace be upon him) sent for a

woman from the emigrants who had a slave who was a carpenter.

The Prophet (peace be upon him) told her, "Order your slave to

prepare wood (pieces) for a pulpit." So she ordered her slave, who

went and cut wood from a tamarisk tree and prepared a pulpit for

the Prophet (peace be upon him). When he finished the pulpit, the

woman informed the Prophet (peace be upon him) that it had been

finished. The Prophet (peace be upon him) asked her to send that

pulpit to him so they brought it. Sahl said, “The Prophet lifted it and

placed it at the place in which you see it now. ” (Sahih al-Bukhari)


Istisna` Page 30/32


The consensus of contemporary Muslim jurists (ijma`)

21.4 Contemporary Muslim jurists have reached ijma` on the permissibility

of istisna`.


Istisna` Page 31/32


22. Appendix 2 Glossary

Terms Definition

Gharamah Penalty.

Hamish jiddiyyah A security deposit placed to secure purchase of an

asset before execution of a certain specified contract.

Hiwalah Assignment of debt from the liability of the original

debtor to the liability of a third person so that the

original debtor becomes free of liability.

Ibra’ Rebate.

Ijarah mawsufah fi al-

zimmah

A lease contract of transferring the usufruct of a

particular asset to be made available in a future agreed

date whereby the lessor undertakes to deliver the

usufruct of the asset based on agreed specifications in

exchange for a rental.

Ijma` Consensus of Muslim jurists.

Istisna` An agreement to sell to a purchaser a non-existent

asset that is to be constructed, built or manufactured

according to the agreed specifications and delivered on

a specified future date at a pre-determined price of the

istisna` asset.

Kafalah Guarantee.

Khiyar al-àyb Option arising from a defect; the option of dissolving

the contract on discovery of a defect in the goods

purchased.

Khiyar fawat al-wasf The right to void a contract due to a missing

characteristic in the subject matter which the

contracting party had stipulated be present in it.

Marhun Collateral.

Mukhalafah al-shurut Breach of terms and conditions.


Istisna` Page 32/32


Muqassah Offsetting.

Parallel istisna` Two separate and independent istisna` contracts,

which have similar specification of the istisna` asset.

Qabd haqiqi Physical possession. It refers to a state where a

person has actual possession and the right to control

an asset.

Qabd hukmi Constructive possession. It refers to a state where a

person does not have actual possession but has the

legal right to control an asset.

Rahn Pledge/Charge.

Shart jaza’i Punitive condition.

Takaful An arrangement based on mutual assistance under

which takaful participants agree to contribute to a

common fund providing for mutual financial benefits

payable to the takaful participants or their beneficiaries

on the occurrence of pre-agreed events.

Takhliyah Relinquishing or abandoning the rights of ownership.

Tamkin Enabling the person who has the ownership of an

asset transferred to him to make full use and assume

liability of the asset.

Ta`widh Compensation.

Ùrbun Earnest money paid to secure purchase of an asset in

an exchange contract; it is considered part of the price

if the buyer decides to continue the contract and is not

refundable.

Ùrf Customary practice.

Ùrf tijari Common business practice which is acceptable by the

community and does not contradict the Shariah rulings.

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