An Istisna sukuk is a certificate that funds the manufacture or construction of an ordered asset, with holders advancing the building cost and later receiving a higher sale price paid by the client according to an agreed schedule.
Ordering an asset that does not exist yet
Istisna is an exception to the ban on selling what one does not own: the manufacturer undertakes to deliver a precisely described asset on a fixed date for a price set in the contract. The sukuk scales this contract up to a large infrastructure project.
The two contracts in a parallel Istisna
The holders' special purpose vehicle sells the future asset to the end client, for example a ministry, under a first Istisna. It then orders construction from a building contractor under a second Istisna, separate and not conditional on the first.
Worked example: a 400 million power plant
The contractor bills 400 million, paid in instalments over three years from the holders' funds. The vehicle sells the plant to the client for 460 million, settled in annual payments after delivery. The 60 million difference is the profit distributed to investors.
Why the price must be fixed at signing
Unlike a floating-rate construction loan, the Istisna price is known and cannot rise with the repayment period. Late payment by the client generates no extra income for holders; any penalties are paid to charity.
Contractor failure and the holders' exposure
Towards the client, the vehicle remains responsible for delivering a compliant asset. It passes this risk to the contractor through the second contract, but if the contractor fails, holders are exposed to cost overruns, which clearly sets the deal apart from a simple secured loan.
Penalty clause for late delivery
AAOIFI standards allow an Istisna to include a clause setting compensation per day or month of delay by the manufacturer, provided the delay is not due to force majeure. This clause protects holders against works that drag on.
Technical specifications and acceptance of the works
The contract describes the asset precisely enough to avoid gharar: floor areas, capacities, building codes, materials. An independent engineer monitors progress, approves each drawdown and certifies final acceptance before the price receivable starts to run.
Change orders during construction
If the client requests modifications, an amendment sets the corresponding extra price. The parties cannot agree an automatic revision linked to the cost of money; only a real, costed and accepted change to the asset can alter the amount due.
A certificate that cannot trade at market price
Once funds have been paid to the contractor, holders mainly own a receivable from the client, payable after delivery. A debt can only be transferred at face value, so a pure Istisna sukuk is usually held to maturity by banks or funds.
The Istisna then Ijara combination
To make the certificate tradable, many structures keep the completed asset in the holders' ownership and lease it to the client on delivery. Advance rents may be collected during construction, then the Ijara phase turns the certificate into one backed by a real asset.
Advance rents: a regulated practice
Collecting rent before an asset is delivered is accepted only if those sums are treated as advance payments, adjusted if the asset is never delivered or arrives late. Sharia boards require this refund so that holders are not paid for use that never existed.
Which issuers and which projects?
These certificates suit governments, public authorities and infrastructure developers: energy, social housing, transport, airports. They require a solid technical file and a reliable contractor; most issues are placed with institutional investors in the Gulf and Asia.
Specialist external source
AAOIFI's published standards include one dedicated to Istisna and parallel Istisna, as well as the investment sukuk standard that governs how such certificates are issued.