Istisna’a is a Shari’ah mode of financing widely used by Islamic banks and financial institutions to finance different kind of projects: housing, construction of buildings, plants, roads, etc, manufacturing of aircrafts, ships, machines and equipment, etc. It can also be used for export financing as well as to meet working capital requirements in industries where sale orders are received in advance. Banks may undertake financing based on Istisna´a by getting the subject of Istisna’a manufactured through another such contract. Accordingly, they can serve both as manufacturers and purchasers. However, Istisna´a can not be used for natural things or products that are not manufactured, such as animals, fruits, etc.
ISTISNA'S CONTRACT DETAILS
In particular, Istisna’a can be potentially used by Islamic banks to finance industries where productions can be monitored by measurement and specifications, such as in the food processing industry; or in high technology industries such as the aircraft, locomotive and shipbuilding industries, and to provide financing for the various types of machines produced in big factories or workshops. The Istisna’a contract can also be drawn-up for real estate developments on designated land owned either by the purchaser or the contractor, or on land in which either of them owns the usufruct. It involves the construction of specified buildings such as factories, hospitals, schools and universities. For Buildings that will be built and sold according to specifications, the contract of Istisna’a does not specify a particular identified place.
BUYER REQUEST THE FINANCE
Buyer requests the finance to start the project
BANK PROVIDE FINANCE
Bank will provide finance to the manufacturer or the contractor
CONTRACTOR DEFERRED TITLE TO BANK
Upon completion of the project or asset being manufactured, contractor will deffer the title to the bank
BANK DEFFERED TITLE TO BUYER
Once the project is complete, the bank will deferred the title to the buyer
HOW ISTISNA'S CONTRACT CAN HELP YOU
KEY BENEFITS OF A ISTISNA'S CONTRACT
When the producer is either unable or is unwilling to manufacture the goods during the assigned time, The price can be paid in installments.
INCREASED COST OF PRODUCTION
Producer to handle an increase in costs, unless it is due to an unforeseen event.
In case of producer delivers defected/inferior goods, which is realized by the customer only at the time of delivery. Quality assurance agreement, with the producer to rectify defects.
The above information provides beneficial knowledge about contracts in Islamic finance. The content is provided for information purposes only. For more details, please reach out to one of our Expert Today.