Istisna is a type of sale transaction where the buyer places an order with the seller to manufacture certain asset and the sale is completed upon delivery of the asset to the buyer. Istisna is used for providing financing facility for transactions where customer is involved in manufacturing or construction.
What is Bai istisna in Islamic banking?
Bai-Istisna: The Istisna’a sale is a contract in which the price is paid in advance at the time of the contract and the objects of sale is manufactured and delivered later. Bai Muajjal: Deferred payment sales. The seller can sell a product on the basis of a deferred payment in installments or in a lump sum payment.
What is difference between Salam and istisna?
Istisna’a is mainly used in the fields of manufacturing (both small scale and large scale), construction, Build, Operate and Transfer (BOT), etc. However, salam is mostly confined to the trading of commodities, particularly those that require from the seller (al-muslam ileihi) no additions or alterations.
What is istisna and parallel istisna?
An istisna’a contract in which the buyer (manufacture orderer, or almustasni’) doesn’t set a condition in the contract obliging the seller (al-sani’) to undertake manufacturing the subject matter (commodity, asset, item, etc) by himself. Parallel istisna’a is also known as back-to-back istisna’a.
How does istisna work?
Istisna is a financial instrument in Islamic finance in which a manufacturer agrees to complete a construction project on a future date for a fixed, agreed-upon price and with product specifications that both parties agree to.
What are the conditions of istisna?
A contract of Istisna is binding on the contracting parties provided that certain conditions are fulfilled, which include: • Specification of the type, kind, quality and quantity of the subject-matter to be produced. Price of the subject-matter must be known and the delivery date must be determined.
What is the purpose of Salam in Islam?
One of the central conditions in Salam contract is related to price payment (ra’su l-mÉl). The price has to be paid before the separation of the two contracting parties. This is because the specific purpose of Salam is to fulfil the instant need of the seller (muslam ilayhi).
What is Tawarruq concept?
Tawarruq is a financing arrangement where customer will be receiving cash at the end of it for his needs through a series of sale transactions. How Tawarruq is done? The bank will purchase commodities from a supplier (first sale) and sells them to customer (second sale).
What is the purpose of Salam?
Through the Salam contract, the essential purpose is realised, not only by serving the needs of the seller, but also serves the buyer by allowing him to buy the goods for a cheaper rate. The buyer would have had to pay more for the same goods in a spot sale.
What does istisna stand for in Islamic finance?
Istisna’ means asking someone to construct, build or manufacture an asset. In Islamic finance, istisna’ is generally a long-term contract whereby a party undertakes to manufacture, build or construct assets, with an obligation from the manufacturer or producer to deliver them to the customer upon completion.
What do you need to know about istisna contracts?
In practice Istisna’ contracts can be arranged with other Sharia’ compliant agreements including: kafalah, takaful; rahn; hamish gedyyah (security deposit), or arbun (down payment). The Islamic underpinning of istisna’ can be found with the following two ahadith:
How is Islamic finance used in Islamic banking?
Islamic financing is a transformation of Lending into Asset Based Financing, within the ambit of Shariah compliant business contracts, called Islamic Modes of Financing. The Islamic banking institutions first take ownership of the goods, which are being sold or rented.
What are the risks of Istisna’a based financing?
For Buildings that will be built and sold according to specifications, the contract of Istisna’a does not specify a particular identified place. Nevertheless, Islamic banks need to take special care in istisna´a-based financing. They face a number of risks. These risks include Settlement Risk, Price Risk, Delivery Risk,…
