I left you all last week with the comparison between Salam and Istisnah in that both contracts are done over a non-existent object and that the full price under the Salam contract is paid upfront but this is not the condition for the Istisnah contract where the price may be paid upfront, in piecemeal or even pursuant to the delivery of the Istisnah asset by the seller to the buyer.
There are a couple of other differences between Salam and Istisnah, such as a Salam agreement, once entered, cannot be revoked unilaterally whereas an Istisnah contract could be canceled by either party provided the seller has not started the work on the subject matter of the Istisnah contract. Moreover, the time and place of delivery of the object are prefixed in Salam whereas no such condition is imposed on the seller under the Istisnah contract.
Another major difference between the two is that there can be no penalty amount payable under Salam in the case of delay in delivering the commodity or even a complete non-performance by the seller; however, Shariah principles allow applying liquidated damages on the Istisnah seller in the case of delay in delivering the Istisnah asset. Discussing the justification for such a charge will make more sense once we have covered the subject of Istisnah adequately.
The array of possibilities under Islamic finance is directly correlated to the varying economic needs of the people in a society — rather than on the ‘one-size-fits-all’ phenomenon which is the cornerstone of the conventional financing system.
As such, in the first sale situation discussed in this space, we observed that the goods were readily available but the payment was not, which necessitated the adoption of a Murabahah sales contract. To the contrary, in the second situation we saw that while the payment was available upfront, the goods were absent so the parties entered into a Salam sales contract.
In Murabahah, the buyer places the order and wants to know the extent of the profit the seller will be imposing so the element of transparency is brought in whereby the seller is required to disclose the profit to the buyer — hence the sale is termed as a ‘cost plus profit’ trade transaction (or loss, if the seller is forced to undercut).
Similarly, if the seller does not want to disclose the amount of profit he wants to collect from the buyer, the parameters of Musawwamah are introduced where he haggles with the buyer for a mutually acceptable price.
Then, in Salam, the growers’ liquidity problem is solved by requiring the buyer to arrange the full agreed price to be paid as downpayment. And now we are discussing Istisnah which addresses the manufacturing or developing or construction needs. This shall be followed by Ijarah or leasing which also contributes to economic activity.
Why am I discussing all of these? It is for readers to make a note that all Islamic financing contracts revolve around trading, development and investment activities which are integral parts of a pulsating economy, and that it is beneficial for the health of a society if such needs are met on merit, rather than through the tool of exploitative interest-based lending.
Moreover, while entering into any Islamic financing contract, either party is protected from exploitation or manipulation due to the fact that the contracting principles are laid out in a crystal clear juristic manner, such that in the last 14 centuries no one has been able to succeed in bending them to suite their biased designs.
As commented in earlier articles, the principles and parameters of all trading, investment and service-related contracts currently in use by the contemporary Islamic finance industry were perfected during the lifetime of the holy Prophet Muhammad.
Returning to the explanation on Istisnah, its legitimacy is derived from the command of Prophet Muhammad that a raised platform for the reading of Quran and the learning of Islam is constructed in the Prophet’s mosque. The platform exists to this day.
Another reference is found in Sahih Bukhari where Prophet Muhammad ordered a finger ring to be manufactured for him to be used as his personal stamp on the letters he sent to various rulers inviting them to embrace Islam. In both cases, the objects were non-existent at the time the orders were given.
Istisnah is a binding contract on both parties and it must not be considered as a promise. The International Islamic Fiqh Academy had issued a resolution in 1990 in support of the legitimacy of Istisnah.
It is astounding to note that starting from the said modest application, the Istisnah contract has since evolved to be utilized for large-scale infrastructure and industrial projects and heavy movable assets without introducing any single change to its original parameters which are to date applicable to both parties, ie the seller and buyer of a nonexistent object, no matter how advanced the world has become.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: We shall discuss various parameters of the Istisnah contract.