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Salam & Istisna

Both Salam and Istisna are sales of a special nature, and in this section, the concept of these two kinds of sale and the extent to which they can be used for the purpose of financing will be explained.


Salam and Istisna – Background

It is one of the basic conditions for the validity of a sale in Shariah that the commodity (intended to be sold) must be in the physical or constructive possession of the seller.

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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.

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Salam - Explained

Here the price is cash, but the supply of the purchased goods is deferred. The buyer is called “rabb-us-salam”, the seller is “muslam ilaih”, the cash price is “ra’s-ul-mal” and the purchased commodity is termed as “muslam fih”, but for the purpose of simplicity, I shall use the English synonyms of these terms.

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Salam - Mode of Financing

It is evident from the foregoing discussion that salam was allowed by Shariah to fulfil the needs of farmers and traders. Therefore, it is basically a mode of financing for small farmers and traders. This mode of financing can be used by the modern banks and financial institutions, especially to finance the agricultural sector.

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Parallel Salam - Explained

In an arrangement of parallel salam, the bank enters into two different contracts. In one of them, the bank is the buyer and in the second one the bank is the seller. Each one of these contracts mustbe independent of the other. They cannot be tied up in a manner that the rights and obligations of one contract are dependant on the rights and obligations of the parallel contract. Each contract should have its own force and its performance should not be contingent on the other.

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Istisna – Mode of Financing

Istisna can be used for providing the facility of financing in certain transactions, especially in the house finance sector. If the client has his own land and he seeks financing for the construction of a house, the financier may undertake to construct the house at that open land, on the basis of istisna, and if the client has no land and he wants to purchase the land also, the financier may undertake to provide him a constructed house on a specified piece of land.

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Istisna – Time of Delivery

As pointed out earlier, it is not necessary in istisna that the time of delivery is fixed. However, the purchaser may fix a maximum time for delivery which means that if the manufacturer delays the delivery after the appointed time, he will not be bound to accept the goods and to pay the price.

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Istisna vs. Salam

Keeping in view this nature of istisna there are several points of difference between istisna and salam which are summarized below: (i) The subject of istisna is always a thing which needs manufacturing, while salam can be effected on anything, no matter whether it needs manufacturing or not

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Ijarah vs. Istisna

It should also be kept in mind that the manufacturer, in istisna, undertakes to make the required goods with his own material. Therefore, this transaction implies that the manufacturer shall obtain the material, if it is not already with him, and shall undertake the work required for making the ordered goods with it. If the material is provided by the customer, and the manufacturer is required to use his labour and skill only, the transaction is not istisna.

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Istisna as a mode of finance

Istisna is a contract on which Shari’ah scholars significant Ijtihad over the centuries and particularly during the Ottaman rule. Al-Majjallah, which was the Ottaman’s code based on the Hanafi school included a reformed form of Istisna. Hanafi Scholars made an important departure from the original Istisna form by permitting price to be paid not up-front, as in Salam but to be deferred. Some scholars even permitted seller to buy from the open market and need not himself be a manufacturer. It is because of these two points, Istisna is, now, attracting the attention of Islamic bankers.

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