Understanding Islamic Finance - Doha Academy of Tertiary Studies

Forward Sales: Salam and Istisna‘a 275The following could be the flow process:1. Suppose a builder/contractor C has announced a scheme for the construction and saleof apartments costing Rs. 7 million each. (He demands cash and has no financialrelationship with the bank.)2. Client A decides to have an apartment; he has Rs. 2 million and needs financingfrom bank B of Rs. 5 million for ten years.3. A and B create a Musharakah pool of Rs. 7 million under the principle of Shirkatulmilkand jointly enter into Istisna‘a agreements with C for the construction and saleof an apartment of defined specifications and pay Rs. 7 million in four instalments.4. C starts building the apartment as per the requirements of the Istisna‘a contract.5. The bank appoints A its agent to supervise the construction work.6. C hands over the apartment to A; B leases out its part of ownership to A in rent.7. A purchases one unit of the bank’s part every month; the rental starts decreasing aftereach payment and after ten years, the bank’s investment is redeemed and ownershipis transferred to the client. (See the rules of Diminishing Musharakah for the purposeof housing finance in Chapter 12.)Box 10.14:Istisna‘a for Preshipment Export FinanceRs. 110 M(EXPORTPROCEEDS)DeferredBANK Rs. 100 M (ISTISNA‘A) CUSTOMERSpotAgentEXPORT Rs. 110 MHypothetical case study:1. Client A gets an export order for the export of ready-made garments of value Rs. 110million.2. A approaches bank B for financing and indicates that he has the expertise to preparethe consignment.