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An Example of Istisnaa` Contract

Answered according to Shafi'i Fiqh by Darul Iftaa Jordan
Is it permissible for a financial institution to conclude a contract with a certain contractor, where the latter is required to deliver the finishing works of a certain building, and, at the same time, conclude a parallel Istisnaa`(Manufacture) contract with the owner of that building(Customer) against payments made in installments, knowing that the property is originally registered in the name of the customer himself?

Answer:
All perfect praise be to Allah, The Lord of The Worlds, and may His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.

It is permissible for a financial institution to conclude an Istisnaa` contract with a customer for delivering him/her a commodity that has certain specifications stipulated in the contract itself. At the same time, it is permissible for the institution to conclude a parallel Istisnaa` contract with a contractor for delivering that same commodity. This is provided that the two contracts are separate since the Messenger of Allah, may Allah bless him and grant him peace, forbade two sales in one sale.

It is worth warning that if the customer had concluded an Istisnaa` contract with the contractor first, then the financial institution wanted to conclude a parallel Istisnaa` contract with that same contractor, it is imperative that the institution makes sure that the first contract-between customer and contractor-is terminated. This is in order to avoid Riba(Usury) and to ensure the legality of the financing process. When that contract is terminated, it becomes permissible for the institution to conclude an Istisnaa` contract with the customer in which it delivers the finishing works of that building , and , at the same time, conclude a parallel Istisnaa` contract with the contractor to deliver that same work.

Resolution{4/2/2} by the Accounting and Auditing Organization for Islamic Financial Institutions states, "It is permissible to conclude a new Istisnaa` contract to complete the work of a pervious manufacturer. But, the contract that was concluded with that previous manufacturer must be terminated and the customer is liable for covering any debts or other obligations. After doing so, it is permissible for the financial institution to conclude a new Istisnaa` contract with the customer without having to use the services of that same manufacturer. Rather, it has the right to finish the job by whatever means it sees fit."

In conclusion, it is imperative upon the above financial institution to terminate the previous contract concluded between the contractor and the customer. And Allah knows best.

*Istisna’ means asking someone to construct, build or manufacture an asset. In Islamic finance, istisna' is generally a long-term contract whereby a party undertakes to manufacture, build or construct assets, with an obligation from the manufacturer or producer to deliver them to the customer upon completion. In practice, the key advantage of an istisna’ contract is that it can provide flexibility to the customer, where payments can be made in installments linked to project completion, at delivery or after project completion. In contrast to istisna', for salam contract the payment has to be made in full, in advance.

This answer was collected from the official government Iftaa Department of Jordan.

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