Understanding Islamic Finance - Doha Academy of Tertiary Studies

270 Understanding Islamic FinanceAs a whole, risks in Istisna‘a would be mitigated by taking proper collateral, performancebonds, technical expertise in the relevant areas for timely and effective marketing and forensuring cost effectiveness, by resorting to suitable Takaful policies, by choosing good clientsand by adopting suitable capital budgeting and liquidity management policies. Mitigationfor some of the risks is shown in Box 10.9. As little is available so far on the practicalapplication of Istisna‘a, we shall also give a number of hypothetical case studies.Box 10.9:Risk Mitigation in Istisna‘aOwnership of materialThe Islamic bank is not the owner of the materialsin the possession of the manufacturer for thepurpose of producing the asset. It can have no claimon it in the case of any nonperformance.Delivery riskThe bank may be unable to complete themanufacturing of goods as scheduled due to latedelivery of completed goods by the subcontractor inParallel Istisna‘a.Sale not permissible before deliverySale of Istisna‘a goods is not allowed before takingphysical possession. This may lead to asset, priceand marketing risk.Quality riskThe Islamic bank gets delivery of inferior qualitymanufactured goods, which also may affect theoriginal contract.Security is available withthe bank.On the basis of the rule of“Shart-e-Jazāi”, the bankcan put in the Istisna‘aagreement a clause to reducethe Istisna‘a price in thecase of delay.The bank can take a“promise to purchase” froma third party and can makearrangements for salethrough agency.The bank can obtain aguarantee of quality fromthe original supplier.Box 10.10:Differences between Istisna‘a and Salam and Ijarah (Ujrah)Istisna‘a1. The subject of Istisna‘a is always a thingwhich needs manufacturing.2. The price in Istisna‘a does notnecessarily need to be paid in full inadvance.Salam1. The Salam subject can be eithernatural products or manufacturedgoods.2. The price has to be paid in full inadvance.