It is a specific kind of a Bai (sale) where the sale of the commodity is transacted before the commodity comes into existence. The legality of Istisna is accepted by the Shariah scholars because it does not contain any prohibition, as far as the financing mode, it has been legalized on the basis of the principles of Istihsan (public interest).

Istisna is an agreement culminating in a sale at an agreed price whereby the purchaser places an order to manufacture, assemble or construct (or cause so to do) anything to be delivered at a future date. It becomes an obligation of the manufacturer or the builder (as the case may be) to deliver the asset of agreed specifications at the agreed period of time. As the sale is executed at the time of entering into the Istisna contract, the contracting parties need not renew an exchange of offer and acceptance after the subject matter is prepared.

After giving prior notice, either party can cancel the contract before the manufacturing party has begun its work. Once the work starts, the contract cannot be cancelled unilaterally.

Business Need

A short-term financing facility for meeting liquidity requirements of the customer.

Istisna can be used for providing the facility of financing the manufacture or construction of houses, plants, projects and building of bridges, roads and highways etc.

Essential Shariah Requirements

• Exception to Normal Sale – Goods do not exist at the time of Sale.
• Nature of goods should be manufactured or processed goods.
• Characteristics of goods must be clearly described / specified at the time of Istisna sale contract.
• Payment may be made in Advance/Partially Advance/Deferred.
• Delivery of goods must be taken constructively or physically
• Settlement should be done through sale proceeds of Istisna goods

What is the difference between Istisna and Ijarah?

Under Istisna, the manufacturer either uses his own material or he arranges for the material himself whereas under Ijarah the material is provided by the customer and the manufacturer uses only his labor and skill meaning that his services will be hired for a specified fee paid to him. Further, under Istisna the purchaser has the right to reject the goods after inspection if these are not according to the specifications agreed at the time of contract whereas under Ijarah this right of inspection does not exist.