Understanding Islamic Finance - Doha Academy of Tertiary Studies

Forward Sales: Salam and Istisna‘a 267of contemporary Sharī´ah scholars, Civil Law in some Muslim countries like Jordan andSudan, the “Unified Arab Law” proposed by the League of Arab Countries and the FiqhCouncil of the OIC treat Istisna‘a as a “binding contract” provided that certain conditionsare fulfilled. If the asset conforms to the specifications agreed at the time of the Istisna‘acontract, the purchaser is bound to accept the asset and he cannot exercise the option ofinspection (Khiyar al Ro‘yat). He, however, has the “option of defect” (Khiyar al ‘Aib) andthe option of specified quality, meaning that if the asset has any proven defect or lacks theagreed specifications, the purchaser has the right to be indemnified.10.11.6 GuaranteesThe bank, acting either in the capacity of the manufacturer or of the ultimate purchaser,can give or demand security, collateral or a performance bond to ensure that the work isperformed within the agreed time and as per specifications. It can also get ‘Arbūn, which willeither be part of the price if the contract is fulfilled, or forfeited if the contract is rescinded.However, it is preferable that the amount forfeited be limited to an amount equivalent to theactual damage suffered. 5310.11.7 Parallel Contract – SubcontractingIstisna‘a is not confined to what the manufacturer himself makes, and if the contract issilent or it expressly allows such, the seller/supplier can get it manufactured as per thespecifications given in the contract from anyone else. Financial institutions, as sellers, wouldcontract with someone else to manufacture the same. This could be a case of a ParallelIstisna‘a contract.An Istisna‘a contract shall be entered into, on the one hand, between the bank and acustomer, while on the other hand, the bank may enter into a Parallel Istisna‘a with a thirdparty (contractor) for preparation of the subject matter of the first Istisna‘a. The deliverydate of the parallel contract must not precede the date of the original Istisna‘a contract.In one contract, the bank will be the buyer and in the second, the seller. Ownershiprelatedrisks of the two contracts will remain separate and will have to be borne bythe respective parties so long as the asset is not transferred to the other. 54 Each of thetwo contracts shall be independent of the other. They cannot be tied up in a mannerwhereby the rights and obligations of one contract are dependent on the rights and obligationsof the other contract. Further, Parallel Istisna‘a is allowed with a third partyonly.It is permissible for the bank to buy items on the basis of a clear and unambiguousspecification and to pay, with the aim of providing liquidity to the manufacturer, the pricein cash when the contract is concluded. Subsequently, the bank may enter into a contractwith another party in order to sell, in the capacity of manufacturer or supplier, items whosespecifications conform to the wishes of that other party, on the basis of Parallel Istisna‘a,and fulfil its contractual obligation accordingly.53 AAOIFI, 2004–5a, clause 3/3, p. 182.54 AAOIFI, 2004–5a, clauses 7/1, 7/3, pp. 182, 186.