Istisna is a sale by order of an asset that does not yet exist: the manufacturer or builder undertakes to produce it to precise specifications, for a price fixed at signing that can be paid upfront, in instalments or on delivery.
A sale of something not yet in existence
As a general rule, Sharia forbids selling what one does not own. Istisna is a recognised exception rooted in craftsmen's practice: the item will be shaped by the seller's work, who also supplies the materials, which sets it apart from a plain labour contract.
Specifications as the safeguard against gharar
Because the asset does not exist, its description must be precise enough to rule out excessive uncertainty: dimensions, materials, technical standards, drawings, place and date of delivery. Vague specifications invite disputes and may leave the contract open to challenge.
Price locked at signing, payment kept flexible
The price must be set when the contract is concluded, but settlement can follow the progress of the works. Unlike Salam, no full advance payment is required, so disbursements can be tied to milestones checked by an independent surveyor.
Can the price change during the works?
The AAOIFI standard on Istisna permits an adjustment when the buyer alters the specifications or unforeseen circumstances arise, provided both parties agree. A bank may not, however, raise the price simply because the customer is late in paying.
How banks use parallel Istisna
The bank sells the asset to be built to the customer, then orders the same asset from a contractor under a second, independent contract. Its margin is the difference between the two prices, and it remains liable to its customer even if the subcontractor fails.
Who answers for construction defects?
Under parallel Istisna, the bank cannot escape its obligation by sending the customer to the contractor. It bears defects and delays, then pursues its own recourse against the subcontractor, which is usually backed by performance guarantees.
Late-delivery penalties that scholars accept
The OIC International Islamic Fiqh Academy has upheld, for Istisna, a penalty clause providing agreed compensation for late delivery, except in cases of force majeure. Such a clause targets the defaulting manufacturer, never late payment by the buyer.
Binding contract or mere promise?
The classical Hanafi school allowed the parties to withdraw before performance. The position now adopted by the Fiqh Academy and AAOIFI makes Istisna binding from the moment it is concluded, which gives certainty to long-term project financing.
Istisna followed by Ijara for large projects
For a power plant, road or building, an Istisna during construction is often paired with an Ijara after completion. Rentals start on delivery, the operator repays gradually, and Sukuk can be backed by those cash flows.
Why Istisna Sukuk are not freely tradeable
Before completion, holders' rights mostly amount to a monetary claim on the buyer. Selling a debt at a price other than its face value is contested, so issuers blend these assets with tangible ones or restrict secondary trading.
Risks carried during the manufacturing phase
The bank carries credit risk on the customer, construction risk linked to the contractor, and price risk if material costs rise after the price has been fixed. Prudential standards require each of these to be measured separately.
Questions to ask before signing an order
Ask who bears cost overruns, which milestones trigger payments, what guarantees cover the contractor, how variations are handled and when ownership passes to you. The financier's Sharia board should have approved the full set of documents.
Specialist external source
The IFSB standards set out the prudential treatment of Istisna exposures, including the credit, construction and market risks that Islamic banks are expected to measure.