Understanding Islamic Finance - Doha Academy of Tertiary Studies

404 Understanding Islamic Financeof aluminium on the basis of Salam at a future date. At the same time, BIB appoints thegovernment its agent to market the aluminium at the time of delivery through its channelsof distribution at a price which provides a return to the security holders. Such short-termSukuk can be developed on the basis of commodities being heavily traded, like crude oiland cotton, and the produce of big industrial projects having firm demand.So far, secondary market trading of Salam Sukuk is considered impermissible on thegrounds that the certificates represent a share in the Salam debt, in which case they aresubject to the rules of debt trading. The issue needs further analysis in respect of resellingthe goods purchased under Salam before taking possession by the original buyer, especiallyin the situation when he maintains inventory of that kind of goods, in which case bankswould be selling those goods out of the stock maintained by them without specifying anyunits of the goods.The Salam seller is bound to deliver the goods at the agreed date/time. The possibilityof a change in price of tangible goods during the Salam contract/the delivery period givesrise to a business risk needed for getting a return through sale. Secondly, Salam deals havebeen allowed as an exception from the general rule of not selling goods without having theirownership and possession by dint of some conditions that are put in place to avoid excessiveGharar in transactions. If it is allowed, the Salam Sukuk may be negotiable. The purchaserof Sukuk would be the owner of the commodity to be delivered at the specified date and theprice of Sukuk would be determined by the market, depending upon the demand and supplyof the underlying commodity.Istisna‘a SukukIstisna‘a is a contractual agreement for manufacturing goods, allowing cash payment inadvance and future delivery or a future payment and future delivery of the goods manufactured,as per the contract. It can be used for providing the facility of financing themanufacture or construction of houses, plant, projects, bridges, roads and highways. Byway of a Parallel Istisna‘a contract with subcontractors, Islamic banks can undertake theconstruction of any project/asset and its sale for a deferred price, and subcontract the actualconstruction to any specialized firms.In Istisna‘a, full ownership of the constructed item is immediately transferred upon deliveryof the item to the purchaser, against the deferred sale price that normally covers not only theconstruction costs but also profits, which could legitimately include the cost of tying fundsfor the duration of the repayment period. The payable deferred price can be documentedin the form of Sukuk (certificates of indebtedness), known as Istisna‘a Sukuk, which aredocuments that carry equal value and are issued with the aim of mobilizing the funds requiredfor producing a certain item. The issuer of the certificates is the manufacturer (seller), whilethe subscribers or certificate holders are the buyers of the item to be produced.It is permissible to trade in or redeem Istisna‘a certificates if the funds have been convertedthrough business or trade into assets owned by certificate holders during the operation ofIstisna‘a, as the Sukuk represent properties that can be disposed of. If the realized fundsare immediately paid as a price in a Parallel Istisna‘a contract or the manufactured item issubmitted to the ultimate purchaser, then trading in Istisna‘a certificates is subject to the