Understanding Islamic Finance - Doha Academy of Tertiary Studies

Forward Sales: Salam and Istisna‘a 269this account. The orderer (purchaser) has the right to obtain collateral from the manufacturerfor the amount he has paid and as regards delivery of the commodity with specificationsand time of delivery.A voluntary rebate for prepayment is permissible, provided it is not agreed in the contract.Delivery and Disposal of the Subject Matter1. Before delivery of the asset to the purchaser, it will remain at the risk of the seller; any lossto the raw material or to the item in the process of manufacturing will be borne by him.2. After delivery, risk will be transferred to the purchaser.3. Possession of goods can be physical or constructive, depending upon the nature ofthe asset and transfer of ownership/risk. Transferring risk and delegating authority ofuse and utilization/consumption are the basic ingredients of constructive possession.For this, there should be a demarcation line between handing over and taking over ofpossession. 574. If a manufactured asset is delivered before the agreed date, the purchaser should acceptit if the asset meets the stipulated specifications. He can refuse to accept the goods ifthese are not as per the agreed specifications or there is some other genuine justificationfor not accepting before the agreed date (Istisna‘a Standard, clauses 6/1 to 6/3).5. If the condition of the subject matter does not conform to the contractual specificationsat the date of delivery, the ultimate purchaser has the right to reject the subject matter orto accept it in its present condition, in which case the acceptance constitutes satisfactoryperformance of the contract.10.11.10 The Potential of Istisna‘aIslamic banks can use Istisna‘a for manufacturing of high technology goods like aircrafts,ships, buildings, dams, highways, etc. It can also be used for housing and export financing,meeting working capital requirements in industries where sale orders are received inadvance. 58 Potential areas are given below:• financing the construction industry – apartment buildings, hospitals, schools anduniversities;• development of residential/commercial areas and housing finance schemes;• financing high technology industries such as the aircraft industry, locomotive and shipbuildingindustries.10.11.11 Risk Management in Istisna‘aBanks could face the following risks in Istisna‘a-based financing:• settlement risk;• price risk;• delivery risk;• possession risk;• market risk.57 AAOIFI, 2004–5a, Standard on Istisna‘a, clause 6/4, p. 185.58 For the potential of Istisna‘a, see Zuhayli, 2003, pp. 278, 279.