Istisna v Final

7/31/2019 Istisna v Final

1/46

Islamic Banking and Finance | Faculty of Management Sciences | International Islamic University Islamabad

Presented by Prof Wasimullah


2/46

Istisna


3/46

Istisna

Conditions of Istisna

Models of Istisna

Application of Istisna

Meezan Bank Istisna Product

Comparisons

Definition and Shariah Legitimacy

Accounting Treatment & Specimens


4/46

Istisna

General Rules of Sale in Islam

Istisna Definition

Existence | Ownership | Possession

Istisna is a sale transaction where commodity is transacted before

it comes into existence. It is an order to producer to manufacture

a specific commodity


5/46

Istisna

Shariah Legitimacy

On Bases of Urf Sharia gives permission to recognize customs that prevailed at the time of

Muhammad (SAW) but were not abrogated by the Qur'an or the Hadis.

Under Qiyas Subject Matter in this contract does not exist but its availability is Certain

Under Istishan Hanfi School of Thought People are Unanimous on its need

Hadis ReferenceThe Prophet (PBUH) required that a pulpit (platform) be built for preaching

[Bukhari 2/908]

The Prophet (PBUH) required that a finger ring be manufactured for Him

[Bukhari 5/220 and Muslim 3/1655]


6/46

Istisna

Subject Matter

Manufacture able PricePrompt , Installments

Deferred

Termination

Unilaterally Before Startof Work.

Time of Delivery.Variable Delivery Time

Differences

IstisnaSimilarities

Subject Matter

Anything PriceFull Advance Payment

TerminationOnce affected cant be

unilaterally cancelled.

Time of Delivery.Fixed Delivery Time

Salam

Non Existence of

Subject Matter

Future Delivery


7/46

Istisna

Subject Matter

Price

Delivery

Security

Termination


8/46

Istisna

Subject Matter

The requirement of a valid contract.Capacity of the contracting parties, offer and acceptance

Subject Matter in accordance with IslamicPrinciples

Manufacture able GoodsConstruction process involving labor

Type, quality, quantity can be clearly

Specifications

To remove factor of Garar

Use of own goods for manufacturing of Istisna

Commodity.

Difference between ijara and istisna


9/46

Istisna

Price

Price fixed with Mutual consent

Price can be Money, Commodity and Usufruct

Payment of Price FlexibleOn Spot , Differed, In Installments

Tier Pricing SystemPrice according to versions in delivery

Installments according to Delivery of Product


10/46

Istisna

Delivery

Time and Place of Delivery

Before Delivery risk associated with Istisna

commodity lies on manufacture

After Delivery risk associated with Istisna

commodity lies on buyer

Possession can be physical or constructive


11/46

Istisna

Security

Right of Security for both Manufacturer and

purchaser

Purchaser has right of option of defect


12/46

Istisna

Termination

After completion of Contract

Can be cancelled with Mutual Consent

Can be cancelled unilaterally before start of

Work


13/46

Istisna

Direct Istisna Sale Model1

Payment of Istisna Price (Always less then market price)

Bank

Market

Manufacturer

Deferred Delivery of Manufacture able goods

Istisna Goods sold to market at market Rate


14/46

Istisna

Parallel Istisna Sale Model2

Specified order of Manufacture able GoodsUsually Higher then Market Price

Bank

Manufacturer

Order to Manufacturer Same Specification Delivery Date Market Price

3rd PartyPayment on Spot OrInstallments on Deferred Basses

Agency Agreement Indirect Delivery on

Behalf of bankRequest for Delivery

Delivery of Istisna Product


15/46

Istisna

House Financing1

BOT Financing3

Working Capital Financing4

Source : Islamic Banking Bulletin, Islamic Banking Department State Bank of Pakistan

Project Financing2


16/46

Istisna

House Financing1

Land

Construction

Use of Parallel Istisna Payment Schedule

Security

Discrepancy

Customer

Order for House

Delivery of House

Ownership of Bank

Parallel Istisna

Installments

Market Price + X

Market Price

Construction of Hous

Industrial Projects

Factory, Machinery

Up gradation

Project Financing2

Bank

Constructor


17/46

Istisna

BOT Financing3

Build Operate and Transfer ,Developmental Projects ,Toll Fee

Financing Agreement

(Period 20 years) Parallel Istisna

ConstructionOwnership

Yearly Contract

Operate Toll Fee

After 20 Years

Ownership Transfer

Constructor

Bank

Government

Highway

Contractor


18/46

Istisna

Murabaha Replacement in Manufacturing Concern

Delivery of Steel Structures

Agency Agreement

Constructive Possession

Financing Requirementfor Steel Structures

Parallel Istisna at Market Price

Working Capital Financing4

SpecificationsMarket Price + X

Date Y

Date: (Y 1 month)Installments

Constructor Bank Ithehad Steel


19/46

Istisna

BankRequirements

Process Flow

ProductDesign

Market Share

FinancingBreakup

Istisna Share

ProductMagnitude Pricing Factors Pricing System

ProductPricing

Default Risk

Delivery Risk

Order CancelationRisk

Option of Defect

Risk of Damage

RiskManagement

Contents


20/46

Istisna

Bank Requirements Process Flow

Product

Design

Confirm Order

Nature of Product

Incompliance with Islamic Principles

Credibility of Manufacturer

Financial Statements, Banking Relationships,

Assets and Liabilities, ECIB (Electronic Credit

Information Beaurue) etc.

Reliability of OrderReliable ordering Source

Market Situation

Easley Marketable product


21/46

Istisna

Bank Requirements

Process Flow

Product

Design

Step 1: Master Istisna AgreementTime, Quantity, Price, Specification, Delivery Date

Step 2: Security

According to the volume of finance required. Step 3:Istisna Price Either Full or in Installments

Step 4: Request for Acceptance of DeliveryIdentification & Separate storage, Goods Receiving Note ,

Risk Transfer

Step 5: Agency AgreementConstructive Possession, Agency Fee

Step 6: Payment Adjustment

Step 7: Order CancellationAgent will sale product in market with Banks mutual consent.


22/46

Istisna

Bank Requirements

Process Flow

Product

Design

Step 1: Master Istisna AgreementTime, Quantity, Price, Specification, Delivery Date

Step 2: Security

According to the volume of finance required. Step 3:Istisna Price Either Full or in Installments

Step 4: Request for Acceptance of DeliveryIdentification & Separate storage, Goods Receiving Note ,

Risk Transfer

Step 5: Agency AgreementConstructive Possession, Agency Fee

Step 6: Payment Adjustment

Step 7: Order CancellationAgent will sale product in market with Banks mutual consent.


23/46

Istisna

Market Share

Financing Breakup Istisna Share

ProductMagnitude

Source: Meezan Bank 2009 Annual Report

Series1,

Murabaha

17080139.0

37%Series1, Ijarah

, 8025530.00,

17%

Series1,

Export

Refinance,

4944295.00,

11%

Series1,

Diminishing

Musharakah ,

10544340.00,

23%

Series1,

Musharakah,

80531.00, 0%

Istisna

8%

Series1,

Tijarah,

665260.00, 1%

Series1,

Salam,

601802.00,

1%

Series1,

Loans and

running

finances,

1041695.0

, 2%

Series1,

Murabaha

14590314.0

37%Series1,

Ijarah ,

9553207.00,

24%

Series1,

Export

Refinance,

3687948.00,9%

Series1,

Diminishing

Musharakah ,

9302583.00,

24%

Series1,

Musharakah,

80531.00, 0%

Istisna

4%

Series1,

Tijarah,

6313.00, 0%

Series1,

Salam,

486449.00,

1%

Series1,

Loans and

running

finances,

463352.00,

1%

Breakup of Financing of

Meezan Bank in Year 2009

Breakup of Financing of Meezan Bank in Year 2008


24/46

Istisna

Market Share

Financing Breakup

Istisna Share

ProductMagnitude

Source: Meezan Bank Annual Report

2009 2008 2007

Istisna Share 3729059000.00 1605460000.00 238,275,000

Total Financing 46716610000.00 40626920000.00 34,576,339,000

Istisna Share in Total Financing Over the Years

8.4 %

4 %0.68%


25/46

Istisna

Pricing System Pricing Factors

Product

Pricing

Based on Kibor Benchmark

Pricing based on K + (1 to 5 %) rate of Return

Suppose 10,000 is required

Order Price:12000

Kibor : 12 %

Return at K+1 (13%) : 11,300 | 1300

Return at K+3 (15%) : 11,500 | 1500

Return at K+5 (17%) : 11,700 | 1700

Profit of Bank is Difference of Istisna Price(price

given by bank) and Sale Price of order.

Istisna Price at K+1 :12000-1300 = 10,700( Manufacturer Profit = 700 | Bank Profit = 1300)

Istisna Price at K+3 : 12000-1500 = 10,500( Manufacturer Profit = 500 | Bank Profit = 1500)

Istisna Price at K+5 : 12000-1700 = 10,300

( Manufacturer Profit = 300 | Bank Profit = 1700)


26/46

Istisna

Pricing System

Pricing Factors

Product

Pricing

Normal Market Price

Istisna Price is Always Less the Market Price so that

bank can earn by selling product in market at

market rate.

Nature of Product

Easily Marketable

Volume of Product

Creditability of Manufacturer

Risk Factor Involved


27/46

Istisna

Security

In accordance with Volume of Financing

Mortgage Property etc

Credibility of Company

Financial Statements, Banking Relationships, Assetsand Liabilities, ECIB (Electronic Credit Information

Beaurue) etc.

Market Dynamics

Default Risk

Delivery Risk Order Cancelation

Risk

Option of Defect

Risk of Damage

RiskManagement


28/46

Istisna

Delivery Delayed

As Istisna is a Manufacture able Product

Confirm Orders

Credibility of The Company is also at stake to fulfillthe original order.

Tier Pricing System

Price is associated with the variation in delivery

date. This is permissible by Islamic Principles.

Default Risk

Delivery Risk Order CancelationRisk

Option of Defect

Risk of Damage

RiskManagement


29/46

Istisna

3rd Party Refuse to buy Product

Reliability of Order is Checked Before Istisna

Agreement

Nature of Product, Easily Marketable , Product

Expiry

Sale to another Customer Through Agent

Default Risk

Delivery Risk

OrderCancelation Risk

Option of Defect

Risk of Damage

RiskManagement


30/46

Istisna

Low Quality, Deviation from Specification

Bank has option to Reject Delivery of Product, and

Demand Adjustment

Even it can liquidate the Security to recover any

loses.

Default Risk

Delivery Risk

Order Cancelation Risk

Option of Defect Risk of Damage

RiskManagement


31/46

Istisna

After Delivery All the Risk lies with Bank.

Risk of Damage is reduced using Takaful

Instrument Default Risk

Delivery Risk

Order Cancelation Risk

Option of Defect

Risk of Damage

RiskManagement


32/46

Istisna

Non Interest

Limitation on Use

of Finance

Surety of Profit

Grace Period inDelivery.

IstisnaComparison

Interest Based

No Limitation

No Surety of Profit

No Grace Period

ContinuousCompounded

Interest.

Conventional Loan


33/46

Istisna


34/46

Istisna

Example Details

At the time of Disbursement

Istisna (Purchase) Price/Cost/Principal 1,000Tenure 1.5 monthsSale Price of the Goods sold to 3rd Party 1,200Total profit on transaction 200Date of Disbursement to the customer 1-Apr-07Date of Delivery 15-May-07Date of Sale by the Bank 20-May-07

1-Apr 2010 Dr Cr

Istisna Financing (A/R) 1000

Pay Order / Party Account/ Cash 1000


35/46

Istisna

At Date of Delivery

At Date of Sale

15- May- 2010 Dr Cr

Asset 1000

Istisna Financing (A/R) 1000

20 - May - 2010 Dr Cr

Cash 1200

Asset 1000

Sale 200


36/46

Istisna

Istisna Model Agreement


37/46

Istisna



38/46

Istisna



39/46

Istisna



40/46

Istisna



41/46

Istisna



42/46

Istisna



43/46

Istisna



44/46

Istisna


45/46

Istisna


46/46

Istisna v Final

Documents

Transcript of Istisna v Final