Overview

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

This condition has three implications:

First, the commodity must be existing; a commodity that does not exist at the time of sale cannot be sold.

Second, the seller should have acquired the ownership of that commodity. If the commodity exists but the seller does not own it, he cannot sell it to anybody.

Third, mere ownership is not enough. It should have come in the possession of the seller, either physically or constructively. If the seller owns a commodity, but he has not acquired its delivery by himself or through an agent, he cannot sell it.

There are only two exceptions to this general principle in Shariah. One is Salam and the other is Istisna. Both are sales of a special nature, and by the present article

       Definition of Istisna

Istisna is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacture undertakes to manufacture the goods for him, the transaction of Istisna comes into existence. But it is necessary for the validity of Istisna that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.

The contract of Istisna creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. But after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

       Difference between Istisna and Salam

Keeping in view this nature of Istisna there are several points of difference between Istisna and Salam which are summarized below:

• The subject of Istisna is always a thing that needs manufacturing,  while Salam can be effected on anything, no matter whether it needs manufacturing or not.

• It is necessary for Salam that the price is paid in advance, while it is not necessary in Istisna.

• The contract of Salam, once effected, cannot be cancelled unilaterally, while the contract of Istisna can be cancelled before the manufacturer starts the work.

• The time of delivery is an essential part of the sale in Salam while it is not necessary in Istisna that the time of the delivery is fixed.

       Difference Between Istisna and Ijarah

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 customer provides the material, and the manufacturer is required to use his labor and skill only, the transaction is not Istisna. In this case it will be a transaction of Ijarah whereby the services of a person are retained for a specified fee paid to him.

When the seller has manufactured the required goods, he should present them to the purchaser. But there is a difference of opinion among the Muslim jurists whether or not the purchaser has a right to reject the goods at this stage. Imam Abu Hanifah is of the view that he can exercise his "option of seeing" (Khiyar-ur-ru'yah) after seeing the goods, because Istisna is a sale and if somebody purchases a thing which is not seen by him, he has the option to cancel the sale after seeing it. The same principle is applicable to Istisna.

However, Imam Abu Yousuf says that if the commodity conforms to the specification agreed upon between the parties at the time of the contract, the purchaser is bound to accept the goods and he cannot exercise the option of seeing.

This view has been preferred by the jurists of the Ottoman Empire, and the Hanafi law has been codified according to this view, because it is damaging in the context of modern trade and industry, that the manufacturer exerts all his resources to prepare the required goods, and the purchaser cancels the sale without assigning any reason, even though the goods are in full conformity with the required specifications.

       Time of Delivery

It is not necessary in Istisna that the time of delivery is fixed. However, the purchaser may fix a maximum time for delivery that means that if the manufacturer delays the delivery after the appointed time, he will not be bound to accept the goods and pay the price.

In order to ensure that the goods will be delivered within the specified period, some modern agreements of this nature contain a penal clause to the effect that in case the manufacturer delays the delivery after the appointed time, he shall be liable to a penalty which shall be calculated on a daily basis. Can such a penal clause be inserted in a contract of Istisna according to Shariah? Although the classical jurists seem to be silent about this question while they discuss the contract of Istisna, yet they have allowed a similar condition in the case of Ijarah. They say, if a person hires the service of a tailor to tailor his clothes, the fee may be variable according to the time of delivery. The hirer may say that he will pay $100/- in case the tailor prepares the clothes within one day and $80/- in case he prepares it after two days.

On the same analogy, the price in Istisna may be tied with the time of delivery, and it will be permissible if it is agreed between the parties that in case of delay in delivery, the price shall be reduced by a specified amount per day.

       Istisna as a Mode of Financing

Istisna can be used for providing the facility of financing in certain transactions, especially in the sector of house financing.

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 on 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 the specified piece of land.

Since it is not necessary in Istisna that the price is paid in advance, nor is it necessary that it is paid at the time of the delivery, rather, it may be deferred to any time according to the agreement of the parties, therefore, the time of payment may be fixed in whatever manner they wish. The payment may also be in installments.

On the other hand, it is not necessary that the financier himself construct the house. He can enter into a parallel contract of Istisna with a third party, or may hire the services of a contractor (other than the client). In both cases, he can calculate his cost and fix the price of Istisna with his client in a manner that may give him a reasonable profit over his cost. The payment of installments by the client may start, in this case, right from the day when the contract of Istisna is signed by the parties, and may continue during the construction of the house and after it is handed over to the client. In order to secure the payments of installments, the financier as a security may keep the title deeds of the house or land, or any other property, until the client pays the last installment.

The financier, in this case, will be responsible for the construction of the house in full conformity with the specifications detailed in the agreement. In case of discrepancy, the financier will undertake such alternation on his own cost as may be necessary for bringing it in harmony with the terms of the contract.

The instrument of Istisna may also be used for project financing on similar lines. If a client wants to install a machinery plant in his factory, and the plant needs to be manufactured, the financier may undertake to prepare the plant through the contract of Istisna according to the aforesaid procedure. The same principles will be fully applicable to the construction of a building for the industry.