BBA 4 SEMESTER (MORNING)

SESSION 2014-2018

SUBMITTED BY :

SHANZA ABID F14-29

ZOYA SAFDAR F14-28

TAYYABA BIBI F14-32

SANIA KHAWAR F14-04

AYESHA AYUB F14-39

KANWAL TAHIR F14-10

SUBMITTED TO :

LECTURER “FINANCIAL MANGEMENT”

“SIR ZAIGHAM ABBAS”

“UNIVERSITY OF PUNJAB JHELUM CAMPUS

“DEPARTMENT OF BUSINESS ADMINISTRATION

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 ISTISNA'A MODE OF FINANCING

 Definition

 Salam and istisna

 istisna; sukuk

 Objectives

 Scope and Eligibility

 Terms and Conditions

 Payment Modalities

 Procurement

 Disbursement

 Application Procedure

 Advantages of Istisna’a

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 Definition

Istisna’a is a contract whereby a party undertakes to produce a

Specific thing which is possible to be made according to certain
Agreed-upon specifications at a determined price and for a fixed date
Of delivery. This undertaking of production includes any process of
Manufacturing, construction, assembling or packaging.
In Istisna’a, the work is not conditioned to be accomplished by the
Undertaking party and this work or part of it can be done by others
Under his control and responsibility.
Istisna’a, an instrument of pre-shipment financing and it is a contract
Where the deal can be referred to something not in existence at the
Time of concluding the contract, while Murabaha is an order to buy
Goods or commodities which are in existence in hand or possible to be
Found in the market.

Salam & Istisna'

It is one of the basic conditions for the validity of a sale in Sharia’s that the
commodity (intended to be sold) must be in the physical or constructive
possession of the seller. There are only two exceptions to this general principle in
Sharia’s. One is Salam and the other is Istisna’. Both are sales of a special nature:

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Salam
Salam is a sale whereby the seller undertakes to supply some specific goods to
the buyer at a future date in exchange of an advanced price fully paid at spot. The
contract of Salam creates a moral obligation on the Salam seller to deliver the
goods. The Salam contract cannot be cancelled once signed.

Istisna'
Istisna’s the second kind of sale where a commodity is transacted before it comes
into existence. It means to order a manufacturer to manufacture a specific
commodity for the purchaser. If the manufacturer undertakes to manufacture the
goods for him with material from the manufacturer, the transaction of istisna’
comes into existence. But it is necessary for the validity of istisna’ that the price is
fixed with the consent of the parties and that necessary specification of the
commodity (intended to be manufactured) is fully settled between them.
The contract of Istisna’ creates a moral obligation on the manufacturer to
manufacture the goods, but before he starts the work, any one of the parties may
cancel the contract after giving a notice to the other. However after the
manufacturer has started the work, the contract cannot be cancelled unilaterally.

Figure 1: Istisna’ Structure

The below diagram shows istisna' structure:

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The above structure is also known as “simple istisna'”, where it is assumed that
the buyer has the required financing to directly coordinate with the manufacturer
on the project. If the buyer does not have the financing, then the below parallel
istisna' structure can be used.

Figure 2: Parallel Istisna’ Structure

The parallel istisna' involves: the customer (the buyer); the Islamic bank (the
seller); and the manufacturer (in some cases it can also involve sub-contractors),
where the buyer can obtain financing from the Islamic bank The following
diagram shows parallel istisna' structure:

Istisna’: Hadith

The Islamic underpinning of istisna' can be found with the following two ahadith:

The Prophet (PBUH) required that a pulpit (platform) be built for preaching
[Bukhari 2/908]
The Prophet (PBUH) required that a finger ring be manufactured for Him [Bukhari
5/220 and Muslim 3/1655]

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IstIsna’ sukuk
Besides financing projects, mainly in infrastructure, istisna’
Sukuk are usually issued for funding large construction
And manufacturing projects such as airports, commercial
Buildings, bridges, power plants, etc. Since the issuance
Of istisna’ sukuk is based on sale contract where the price
Is paid on a future date, the sukuk are issued to represent
investors’ right to the debt owed by the sukuk issuer.
In other word, the sukuk evidence financial obligation of the
Sukuk issuer to make payment to the investors at an agreed
Future date. It is also common that istisna’ sukuk are issued by
Issuers to represent the undivided right and ownership of the
Investors over the underlying asset in the istisna’ transaction
Objectives

The main objective of the Istisna’ a mode of financing is to promote

Manufacturing capability in the IDB member countries. This may
Relate to manufacturing of complete assets in the form of capital
Goods. These goods may benefit the industrial, agricultural or
Infrastructure sector. This mode of financing can also be applied to Long Term
Trade Financing (LTTF) to enhance intra-trade among IDB member countries.

Scope and Eligibility

C. Istisna’ a provides medium term financing to meet financing

Requirement for manufacturing/supplying/sale of identified goods,

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 Such as industrial/construction equipment, machinery, cargo vessels,
Oil tankers, trawlers, dredgers, locomotives, etc., transport equipment,
Pipelines for water and oil distribution, gas and electricity and their
Transmission/ distribution lines, electric generators and transformers,
Telecommunication equipment, oil rigs, hospital equipment, etc.
Under this mode of financing, it is possible to finance intangible
Assets like gas, electricity, etc. It is also possible, unlike under leasing
And installment sale, to finance working capital. Istisna’ a financing
Period is determined by the time required for procurement of
Necessary materials and manufacturing of the goods according to the
Agreed contract.

Terms and Conditions

The following terms and conditions, subject to change, may apply:

 The financing of capital goods shall be for a period not
Exceeding 12 years including a gestation period co-extensive
With the period needed to manufacture and /or deliver the goods
Contracted, but not exceeding 3 years from the date of contract.
 The mark-up currently applicable on IDB's project financing
Shall be either fixed at 5.5% per annum on Islamic Dinar, or
Floating at six months LABOR plus 170 basis points spread.
However in case of Export Financing the terms are: The rate of
Return will be valid for a period of 6 months from the date of
Approval of a project by the Board of Executive Directors. IDB

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Reserves the right to apply a different rate if the Lease
Agreement has not been signed within these 6 months.
 The manufacturer/contractor will provide a performance and
Refinement bond guarantees issued by a commercial bank
Acceptable to IDB, ensuring that the goods to be delivered
Conformed to specifications incorporated in the contract and to
Guarantee refinement of the progress payments made by the
IDB, should the manufacturer/contractor fail to deliver the Goods or if he
delivers non-conforming goods.

 The beneficiary (buyer) shall also furnish a guarantee to IDB

From the Government, a first class commercial bank or any
Other type of guarantee acceptable to IDB to secure the
Repayment of installments on due dates.
The manufacturer will insure the assets under construction/
Manufacturing and IDB shall be named as the loss payee.
 The beneficiary (buyer), in consultation with, and on behalf of
The IDB, shall negotiate and conclude a contract and appoint a
Consultant to supervise the execution of the work of the
Manufacturer/ contractor. Cost of such a consultant will be Included under IDB
financing.
 Repayment installments to be made on due dates by the Beneficiary will
be denominated in Islamic Dinar (ID), and can be paid in a freely
convertible currency acceptable to IDB.

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 Fifteen percent rebate in the applicable mark-up will be applied annually on
the installments repaid on or before the due dates.
 It is permissible to include a penalty clause in an Istisna’ a Contract, if the
parties so agree save for cases of force majeure.

Payment Modalities

The price of the goods in a contract of Istisna’a could be paid

Either in advance or in arrears, and could be paid in one payment or
By installments during the manufacturing of the goods or at future
Dates. The manufacturer is bound and obliged to deliver the goods
Within the agreed time. Failure to deliver within the agreed time will
Make the manufacturer liable to pay the buyer liquidated damages in
Accordance with the contract unless such delay is due to force
Majeure.

Application Procedure

Request for financing by a Government agency or a private entrepreneur under

this mode may be made to IDB through the office of the IDB Governor in the
country concerned.

The official request should accompany a feasibility study or an appropriate project

Document establishing financial and technical feasibility of the Project.

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Advantages of Istisna’ a

Financing under this mode will encourage and facilitate the full use
Of the talent and technical capability in the IDB member countries in
The area of capital goods production. It will enhance intra-trade in
Goods and transfer of technology among the IDB member countries.
Lack of financial capital, thus, may not be an impediment for Production of
capital goods.
This mode will allow financing of intangible assets like gas,
Electricity, etc. It could also finance infrastructure projects like roads,
Buildings, etc. This mode would allow financing of trade and projects,
Thereby establishing linkage between the two in the framework of
Pre-shipment financing which would include financing of working
Capital, which is not otherwise possible under leasing and installment
Sale financing.

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REFRENCES

https://www.blomdevelopment.com/development/subpage.aspx?pageid=106
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https://faculty.fuqua.duke.edu/~charvey/Teaching/BA456_2002/isdb_intisna.
pdf
https://www.islamicbanker.com/education/istisna

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