Salam & Istisna

2. Salam & Istisna By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE)

3. Istisna There are three basic conditions about the subject matter for the validity of a sale in Shariah. • The purchased commodity must be existing • The seller should have acquired the ownership of that commodity, • The commodity must be in the physical or constructive possession of the seller. There is one exception to this principle in Shariah • Salam • Istisna

4. Basic Conditions About the Subject Matter There are three basic conditions about the subject matter for the validity of a sale in Shariah. • The purchased commodity must be existing • The seller should have acquired the ownership of that commodity, • The commodity must be in the physical or constructive possession of the seller. There is one exception to this principle in Shariah • Salam • Istisna

5. Meaning of Salam Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. • Here the price is cash, but the supply of the purchased goods is deferred. • The buyer is called “rabb-us-salam”, the seller “muslam ilaih”, • the cash priceis “ra’s-ul-mal” and the purchased commodity is termed as “muslam fih”,

6. Benefits of the Salam • Salam was beneficial to the seller, because he received the price in advance, and it was beneficial to the buyer also, because normally, the price in salam used to be lower than the price in spot sales.

7. Definition: Definition • Istisna is a sale transaction where a commodity is transacted before it is manufactured. • It is in order to a manufacturer to manufacture a specific commodity for a purchaser.

8. Mechanism

9. Mechanism • Client sells commodity X to Bank on forward basis and receives price P in time period 0; • At time period t, Client delivers X to Bank; • Bank sells X in the market at time period t or later and realizes S. The amount S-P constitutes profit for the bank.

10. ISTISNA

11. Basic rules Subject Matter: • Istisna contract is valid for objects that can be manufactured. It is invalid for natural products whose sale on liabilities is a Salam not Istisna. • The specifications demanded by the buyer are the most important as the commodity subject of contract is a liability debt. • The manufacturer uses his own material to manufacture the required goods.

12. Mode of payment & Price Mode of payment In the Istisna contract, the price may be advanced or deferred in lump sum or in installments as agreed in the time of contract. Price • Istisna contract has a fixed price and any profit and loss relates to the manufacturer. • A contract of Istisna cannot be drawn up on the basis of Murabaha sale. For example. By determining the price of Istisna on cost plus basis. • In Istisna price must be fixed with consent of all parties involved.

13. Delivery • Before delivery, goods will remain at the risk of seller. • After delivery risk will be transfer to the purchaser. • Possession of goods can be physical or constructive. • Transferring of risk in authority of use and utilization /consumption are the basic ingredients of constructive possession. • If manufactured goods are delivered before agreed date, purchaser can refuse to accept the goods.

14. Penalty • Penalty clause may be inserted stipulating an agreed amount of money for compensating the purchaser adequately if the manufacturer is late in delivering asset. • Such compensation is permissible only if the delay is not caused by intervening contingencies (force majure) how ever; it is not permitted to stipulate a penalty clause against the purchaser for default in payment.

15. Flow of Istisna transaction • The purchaser expresses his desire to purchase an asset from bank and in Istisna sale contract is entered between banks an purchaser in which the bank promises to deliver the commodity on a specific future date. • The bank and the purchaser inter into a contract to sell the asset to be delivered on a specified due date. • The bank inters in a parallel Istisna contract with manufacturer to manufacture an asset to be delivered at a due date in conjunction with the first Istisna contract. • The seller delivers the asset either to the bank or purchaser, if authorized by the bank. Incase the seller deliver directly to the purchaser an agency agreement is entered into between bank a purchaser.

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