UAE Laws and Islamic Finance

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Archive for Parallel Istisnaa

Islamic Project Financing via Parallel Istisna’a (Al- Istisna’a Al Muwazi)

Istisna’a’a

‘Istisna’a is a contract of exchange with deferred delivery applied to specified made-to-order items.  General agreement upon principles of practice can generally be stated as:

a.)  The nature and quality of the item to be delivered must be specified;

b.)  The manufacturer must make a commitment to produce the item as described;

c.)   The delivery date is not fixed.  The item is deliverable upon completed by the manufacturer;

d.)  The contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms;

e.)   Payment can be made in one lump sum or in instalments and at anytime up to or after the time of delivery;

f.)    The manufacturer is responsible for the sourcing of inputs to the production process.

Istisna’a differs from Ijarah in that the manufacturer must procure his own raw materials.  Istisna’a’a differs from bay salam in that the subject matter of the contract is always a made-to-order item, the delivery date need not be fixed in advance, full advance payment is not required, and the istisna’a’a contract can be cancelled but only before the seller commences manufacture of the agreed items.

Parallel Istisna’a Project Financing

Parallel Istisna’a’ is based on two parallel contracts of Istisna’a.  In the first contract, the Islamic Financial Institution acting as a manufacturer/contractor concludes a contract with the customer who is the ultimate purchaser/buyer.  In the second contract, the IFI acting in the capacity of the purchaser concludes another contract with the ultimate manufacturer/contractor to acquire the same item as per the first contract specification. (AMANIE)

‘The bank:  Expresses its desire to order the manufacture of the commodity it has undertaken to manufacture in the first Istisna’a contract (with the same specification as in the first contract) and agrees with the maker on the price and the date of delivery.

The seller: Puts herself under obligation to manufacture the specific commodity and to its delivery on the due date agreed upon.’

http://www.barakaonline.com/default.asp?action=article&id=42

Parallel Istisna’a  Contractual Relationship

السؤال : هل يمكن استخدام صيغة الاستصناع في عمليات يدخل فيها البنك وسيطاً بين العميل والمقاول أو الصناع الفعلي؟

الجواب : لا مانع شرعاً من إبرام عقد استصناع بين البنك والعميل وإبرام عقد استصناع آخر (الاستصناع الموازي) بين البنك والمقاول أو الصانع الفعلي ، أو بالعكس بأن يبدأ بالتعاقد مع المقاول أو الصانع الفعلي ، ثم التعاقد مع العميل ، حسبما يراه البنك مناسباً ، ويشترط في الحالتين عدم الربط بين العقدين ، فتكون هناك علاقة عقدية مستقلة بين البنك والعميل ، وعلاقة عقدية أخرى مستقلة بين البنك والمقاول أو الصناع الفعلي . ويتبين من هذا أن في الاستصناع والاستصناع الموازي ثلاثة أطراف واحد منها مشترك في العقدين وهو البنك ، إذ يكون صانعاً في عقد الاستصناع مع العميل ، ومستصنعاً في عقد الاستصناع الموازي مع المقاول أو الصانع الفعلي . وتكون الشروط متماثلة في العقدين إلا في الثمن لتحقيق هامش ربح للبنك ، وزمن التسليم لتمكين البنك من التسلم ثم التسليم ، ويجوز للبنك أن يوكل العميل (في الاستصناع الموازي) بتسلم المصنوع من المقاول أو الصانع الفعلي ، بعد تمكن البنك من القبض الحكمي . وإذا كانت هناك ضمانات صيانة للمعدات المصنوعة لمدة محددة حصل عليها البنك من المقاول أو الصانع الفعلي فيجوز للبنك أن ينقلها إلى العميل ، مع بقاء مسئولية البنك تجاه العميل إن حصل إخلال بتحمل الضمانات من المقاول أو الصانع الفعلي ، وذلك باعتبار البنك صانعاً وضامناً لعيوب المصنوع وهي مما لا يجوز التبرؤ منها ، بخلاف التبرؤ من العيوب في البيع العادي

المصدر : بنك المؤسسة العربية المصرفية الإسلامي

Question:

“Is it possible to conclude a manufacturing contract to formalize an arrangement, whereby the Bank acts as an intermediary between the customer and the manufacturer?

Answer:

In Islamic law, nothing prevents the Bank from concluding a contract of manufacturing between themselves and the customer and concluding another contract of manufacturing (parallel manufacturing) between themselves and the constructor or actual manufacturer, or vice versa.

So, firstly, the Bank concludes a contract with the actual manufacturer. Then, the second contract is concluded with the customer, according to what the bank sees is suitable. The two contracts are separate contracts. Hence, there will be a contractual relationship between the Bank and the manufacturer (1st contract) and a contractual relationship between the Bank and the customer (2nd contract).

It is obvious from this that in a parallel manufacturing contract, there are three parties. One of them is the Bank, which is involved in two separate manufacturing contracts, in different capacities. In the first contract, the Bank enters the contract as a mustasni’an (customer). In the second contract, the Bank enters the contract as a manufacturer. The conditions for the two contracts are same, except in the price (in the second contract, it includes a margin for the Bank), period of delivery, and receipt and delivery for the Bank.

It is also permissible for the Bank to appoint the customer as their agent, to receive/take possession of the manufactured asset on their behalf. If there are guarantees of maintenance of manufactured asset for a specific period that the Bank has obtained from the manufacturer, it is permissible for the Bank to transfer it to the customer.

However, the Bank is still responsible if the manufacturer does not perform his duties, as agreed. This is because the Bank entered into the second contract while assuming the role of a manufacturer. Thus, the Bank is responsible for defects and cannot acquit themselves from it.”

Issued by the Arab Institute of Islamic Banking.  http://www.isra.my/fatwas/commercial-banking/financing/istisna’a/211-parallel-istisna’a-contractual-relationship.html

Istisna’a  http://www.barakaonline.com/default.asp?action=article&id=42

Istisna’a  http://www.iefpedia.com/english/wp-content/uploads/2009/11/ISTISNAA-MODE-OF-FINANCING.pdf

Istisna’a Financing of Infrastructure Projects  http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IRTI/CM/downloads/IES_Articles/Vol%204-2..Anas%20Zarqa..ISTISNA%20FINANCING…dp.pdf

 

Istisna’a Construction Financing

http://www.kantakji.com/fiqh/Files/Markets/a%20(111).pdf

 

 

Fatwa on Istisna’a, Contracting, and Salam  http://www.albaraka.com/ar/media/pdf/Research-Studies/fatwa-istisna%20.pdf

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