MECHANISM OF ISTISNA IN THE CURRENT PRACTICE

The effect of istisna is the establishment of the right of the buyer over the subject matter and the
establishment of the right of the seller over the agreed price. However, the Hanafi jurists disagreed
on the question as to when exactly it becomes binding on the parties during the different stages of
the contract, as follows :
a) At the time of the contract before the commencement of the work by the manufacturer, all
of them agreed that istisna is not binding at this stage and both parties reserve the right to
revoke the contract.
b) After the commencement of the work and before the delivery to the buyer, they are also in
agreement that it is not binding and any party may cancel the contract and the
manufacturer can sell the goods to another party.
c) In the case of completion of the work and the delivery to the buyer, Imam Abu Hanifah was
of the opinion that the parties still have the option to cancel the contract. However,
according to Imam Abu Yusuf the option would ceased to exist for both parties and the
contract becomes binding with the delivery of the subject of istisna. The opinion of Imam
Abu Yusuf is the preferred view over the other views in order to avoid disputes and injustice
on both parties.
As for the manufacturer, he has the obligation to ensure the compliance of the required
specifications. As for the buyer, he cannot refuse to take delivery as the goods were manufactured
according to his request and specifications, which might suit his own requirements and needs only.
Istisna is actually a sale contract whereby the subject matter could be delivered in future and the
price could be paid according to the terms of agreement between the parties. This flexible feature of
istisna could provide a tool for financing projects to be constructed in the future. For example if the
government wants to construct a highway, it may enter into a contract of istisna with a contractor.
The price of the istisna in this instance might be the right of the construction company to manage
the highway and collect the tolls fora specified period, known as BOT (build-operate-transfer).
Another important mechanism of istisna is that it is possible for the manufacturer to manufacture or
construct the products required or to ask another party to manufacture the products on his behalf.
His obligation is to deliver the products with the agreed specifications and the actual work can be
done by him or by another party, through the operation of parallel istisna.
Istisna therefore provides a proper Shariah-compliant instrument for financing, especially for the
house financing sector, particularly for houses under construction. In this instance, the bank as the
financier has two options :
a) Either to contract an istisna as a buyer with the developer who constructs the house and
upon completion and delivery of the house, sells it to its customer at a higher price.
b) To enter into contract in its capacity as a seller with the customer.
For example, to build a house, and then to have a parallel istisna with the housing developer
according to the specifications required by the customer in the first istisna. On completion of the
project, the developer will deliver the house to the financier and the financier will, in turn, hand over
the property to the buyer (customer). The payment of instalments by the client may start at any
point as agreed by the parties even before the house is completed and continues until the whole
amount is settled. For security purposes, the bank may keep the title deeds of the house or any
other type of guarantee agreed by both parties, until the last instalment is paid by the client.
The independent of both contracts must be maintained in order to avoid riba based on the fact that
the bank solely acts as a financial intermediary between the ultimate buyer and the actual
manufacturer.
Thus, a few conditions must be ful filed in a parallel istisna :
a) The bank as a manufacturer in the first istisna will remain solely responsible for the
execution of its obligations. If the parallel contract (second istisna) does not exist.
Hence, the bank would remain liable for any default, negligence or breach of contract
ensuing as a result of the parallel contract.
b) The manufacturer in the second istisna is accountable to the bank as the buyer in the
parallel contract. He has no direct legal relationship with the buyer in the first istina.
c) The bank as the manufacturer in the first istisna is liable to the (buyer) with regard to
any defects in the execution of the subcontractor and any guarantees arising therefrom.
This liability on the part of the bank indeed justifies the validity of the parallel istisna and
the charging of profits by the bank on the ultimate buyer/customer.