'Istisna' is the kind of sale where a commodity is transacted before it comes into existence.

It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna comes into existence. But it is necessary for the validity of istisna that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.

The contract of istisna creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. However after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

It is not necessary in istisna that the time of delivery is fixed. However, the purchaser may fix a maximum time for delivery which means that if the manufacturer delays the delivery after the appointed time, he will not be bound to accept the goods and to pay the price. In order to ensure that the goods will be delivered within the specified period.

Istisna can be used for providing the facility of financing in certain transactions, especially in the house finance sector. If the client has his own land and he seeks financing for the construction of a house, the financier may undertake to construct the house at that open land, on the basis of istisna, and if the client has no land and he wants to purchase the land also, the financier may undertake to provide him a constructed house on a specified piece of land.

Since it is not necessary in istisna that the price is paid in advance, nor is it necessary that it is paid at the time of delivery, (it may be deferred to any time according to the agreement of the parties), therefore, the time of payment may be fixed in whatever manner they wish. The payment may also be in installments.

It is not necessary that the financier himself constructs the house. He can enter into a parallel contract of istisna with a third party, or may hire the services of a contractor (other than the client). In both cases, he can calculate his cost and fix the price of istisna'with his client in a manner which may give him a reasonable profit over his cost. The payment of installments by the client may start, in this case, right from the day when the contract of istisna is signed by the parties, and may continue during the construction of the house and after it is handed over to the client. In order to secure the payment of the installments, the title deeds of the house or land, or any other property of the client may be kept by the financier as a security, until the last installment is paid by the client.

The financier, in this case, will be responsible for the construction of the house in full conformity with the specifications detailed in the agreement. In the case of any discrepancy, the financier will undertake such alteration at his own cost as may be necessary for bringing it in harmony with the terms of the contract.

The instrument of istisna may also be used for project financing on similar lines. If a client wants to install an air-conditioning plant in his factory, and the plant needs to be manufactured, the financier may undertake to prepare the plant through the contract of istisna'according to the aforesaid procedure. Similarly, the contract of istisna'can be used for building a bridge or a highway.

Istisna involves various construction-related risks and risk of nonconformity to specifications. In order to mitigate such risks (except for natural causes) the agreement may contain a penalty clause. Another alternative for the bank is to nominate the client as an agent to oversee satisfactory completion of the job. If considered necessary, the bank may hire the services of an independent surveyor to monitor the progress of the project. Like other financing mechanisms, istisna involves risk of default and delinquencies and a bank can take various measures such as mortgage on land on which the asset is being built, any other property or personal or third party guarantee to mitigate such risk.

Istisna as a mode of financing

Istisna can be used for providing the facility of financing in certain transactions, especially in the house finance sector. If the client has his own land and he seeks financing for the construction of a house, the financier may undertake to construct the house at that open land, on the basis of istisna, and if the client has no land and he wants to purchase the land also, the financier may undertake to provide him a constructed house on a specified piece of land.

Since it is not necessary in istisna that the price is paid in advance, nor is it necessary that it is paid at the time of delivery, (it may be deferred to any time according to the agreement of the parties,1), therefore, the time of payment may be fixed in whatever manner they wish. The payment may also be in installments. On the other hand, it is not necessary that the financier himself constructs the house. He can enter into a parallel contract of istisna' with a third party, or may hire the services of a contractor (other than the client). In both cases, he can calculate his cost and fix the price of istisna with his client in a manner which may give him a reasonable profit over his cost. The payment of installments by the client may start, in this case, right from the day when the contract of istisna is signed by the parties, and may continue during the construction of the house and after it is handed over to the client. In order to secure the payment of the installments, the title deeds of the house or land, or any other property of the client may be kept by the financier as a security, until the last installment is paid by the client.

The financier, in this case, will be responsible for the construction of the house in full conformity with the specifications detailed in the agreement. In the case of any discrepancy, the financier will undertake such alteration at his own cost as may be necessary for bringing it in harmony with the terms of the contract.

The instrument of istisna may also be used for project financing on similar lines. If a client wants to install an air-conditioning plant in his factory, and the plant needs to be manufactured, the financier may undertake to prepare the plant through the contract of istisna according to the aforesaid procedure. Similarly, the contract of istisna can be used for building a bridge or a highway.

The modern BOT (Buy, Operate and Transfer) agreements may also be formalized on the basis of istisna. If a government wants to construct a highway, it may enter into a contract of istisna with a builder. The price of istisna, in this case, may be the right of the builder to operate the highway and collect tolls for a specified period.

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