ACCOUNTING FOR ISTISNA

AND PARALLEL ISTISNA

INTRODUCTION
 Humans often need something that may not be available in the market so
that to get it, they have to do an order first. This activity of selling and
buying is called Istisna. Unlike Salam that are often used for agricultural
products, Istisna is usually used for advance technology industries, in
manufacturing of equipment such as aircrafts, automobiles, ships, factory
equipment and house financing.
 The word Istisna is derived from the word Sana'a which literally means
making, manufacturing or constructing something. Istisna is defined as a
sale and purchase contract in the form of making certain goods with
certain criteria and requirements agreed upon between the buyer and
seller. Items that are traded are usually manufactured goods. In the case of
payment, Istisna transactions can be made in advance, through
installments or deferred until a time in the future
TYPES OF ISTISNA CONTRACTS

a) Classical Istisna
The classical istisna contract has been discussed by the jurists and Shariah scholars
in fiqh literature. This type of istisna involves only two contracting party namely the
buyer (also known as mustasni) and the seller (also known as manufacturer
and sani).
The classical istisna has the following mechanism:
1. The buyer approaches the seller to construct a specified asset for him. They
agree on specifications of the asset, the price and the date of delivery at the
time of contract execution.
2. The buyer pays the price to manufacture in cash or installments according to
their agreement.
3. After the completion of manufacturing process, the seller delivers the
completed asset to buyer on delivery date.
TYPES OF ISTISNA CONTRACTS
b) Parallel Istisna
The parallel istisna contract involves three parties and It consists of two separate contracts. The
first contract is between the ultimate purchaser (customer) and the seller (Islamic bank),
where the Islamic bank as seller is responsible to deliver the asset to customer according to
given specifications. The second istisna contract is between the Islamic bank (as buyer) and
the manufacturer of the asset.
The following steps are involved in parallel istisna contract:
1. The buyer wants to purchase the certain assets to be manufactured or constructed (for
example house) and approaches the financing institution.
2. The financing institution (as seller) enters into istisna contract with buyer. The price is
determined as cost plus profit margin.
3. The financing institution enters into the parallel istisna (second istisna) contract with the
contractor to construct the asset as the agreed specifications with buyer.
4. The Financing institution pays the cost of construction to the contractor in the
second istisna contract.
5. After the completion of manufacturing process, the financing institution delivers the asset
to the buyer upon the delivery date. Sometimes, the Financing institution appoints the
contractor its agent to deliver the asset to the buyer on its behalf.
PILLARS THAT INVOLVED IN ISTISNA
CONTRACT

 Sani : person who makes product (seller)

 Mustani : person who causes it to be made (buyer)
 Masnu : the thing made
ISTISNA CONTRACT ENDS WHEN:

 Fulfillment of obligations normally by both parties

 Approval of both parties to terminate the contract
 Cancellation of contract law. This happens if there is a reason that
makes sense to prevent a contract or settlement from being carried
out and each party can claim the cancellation.