SS 11 · Trade

SS 11: Istisna'a and Parallel Istisna'a

What this standard is about

Istisna'a is a contract to manufacture or build an asset to agreed specifications, delivered later at an agreed price. Parallel istisna'a is a second, independent contract in which the bank orders the same asset from a builder. The standard covers the bank acting as the ultimate buyer and the bank acting as the manufacturer or builder.

Why it exists

Salam only works for fungible goods like wheat or oil. Construction and manufacturing need their own contract — one that allows staged payments and flexible delivery terms. Istisna'a fills that gap.

The key rules, simply put

The price and the specifications must be fixed at the start. The price can be a lump sum or staged installments tied to milestones.
The buyer does not have to supply the materials.
The bank may sign the istisna'a with the customer before it owns the asset or the materials.
A delivery deadline is not required.
A pre-agreed penalty for late delivery (liquidated damages) is allowed.
If the finished asset matches the specifications, the buyer cannot refuse it.
The two contracts in parallel istisna'a must be independent of each other.
The buyer cannot sell the asset before taking possession of it.

An everyday example

A customer wants a house built. The bank signs an istisna'a to deliver the house in 18 months for $300,000, paid in stages as construction progresses. The bank signs a separate parallel istisna'a with a builder for $270,000. If the builder finishes late, the agreed penalty applies.

Words to know

Istisna'a — a contract ordering the manufacture or construction of an asset.
Liquidated damages — a pre-agreed penalty for delay.
Gharar — excessive uncertainty in a contract. Not allowed in Islamic finance.

Source

AAOIFI Shariah Standard No. 11 — https://islamicmarkets.com/standards/aaoifi-shariah-standards/istisna-a-and-parallel-istisna-a/scope-shariah-ruling-9