Istisna’a Contract in Islamic Finance

Istisna ‘a appears in the literature as follows:

At the request of the client, the bank places an order for the manufacture of some equipment or the construction of some major item as road or water pipeline… When the item is ready, the bank buys it from the manufacturer and sells it to the client at whose behest the order was placed, at a profit, on a deferred payment basis. (Khan 2000: 26-7)

While this is clearly a useful contract and one designed to promote production, it seems to me that it would be more practical and manageable for the bank if it were amended to read that the bank may sign, on the basis of a written request from a client, a civil partnership contract with a contractor for the manufacture of some equipment or the construction of some major items needed by the country.

The item(s) requested by the client should be specified precisely, and the place, delivery, price, and so on have to be predetermined. Immediately after the completion of the manufacture, the item has to be sold to the client on an installment basis. This contract is typically a combination of two contracts: a Civil Partnership between the bank and manufacturer (or contractor), and another between the bank and, most likely, a government entity, for security reasons. The bank is the financier, the client is the final user, and the firm or the contractor is the manufacturer. There are many instances, especially in developing countries, in which there is a need, the financier is available and the contractor has the qualifications to meet the client’s demand. The amended version of the contract can help bring three parties together and enable otherwise- impossible projects to come to fruition. The trilateral agreement paves the way for major projects in which the client lacks the necessary funds.

Source: Prof. Iraj Toutounchian, Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Narrated by Camille Paldi. Republished with permission.