Istisna-II

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ISTISNA

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Istisnaa is a contract of sale of specified items to be manufactured (or

constructed), with an obligation on the part of the manufacturer (or

contractor) to deliver them to the Customer upon completion.

Istisnaa is the second exception to the rules of sale where a sale is

allowed without immediate delivery of the goods sold .

ISTISNA

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An Istisnaa contract is permitted only for raw

materials that can be transformed from their

natural state by a manufacturing or construction

process involving labor.

It is not permissible that the subject matter of an

Istisnaa contract be an existing and identified

capital asset.

ISTISNA

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If complete specifications (such as type, kind,

quality and quantity) of the subject matter have

been given to the manufacturer along with the

contract price, then the manufacturer is bound to

manufacture the Asset and cannot terminate the

contract unilaterally.

The ultimate purchaser cannot be regarded as the

owner of the materials in the possession of the

manufacturer for the purpose of producing the

ISTISNA

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The time of delivery of goods does not necessarily

have to be fixed in Istisnaa however, a maximum

time may be agreed upon between the parties.

The delivery of the subject matter may take place

through constructive possession. At this point, the

liability of the manufacturer in respect of thesubject matter comes to an end and the liability of

the ultimate purchaser begins.

ISTISNA

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It is necessary for the validity of Istisnaa that the

price is fixed with the consent of the parties.

The Istisnaa price can either be paid in advance,

or in installments or at the time of delivery of

goods.

The price of Istisnaa transactions may vary in

accordance with variations in the delivery date.

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It is permissible to amend the contract price of an

Istisnaa contract upwards or downwards, as a

result of intervening contingencies (Force

Majeure).

It is permissible if it is agreed between the parties

that in the case of delay in delivery, the price shall

be reduced by a specified amount per day.

ISTISNA

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Unlike Murabaha where only raw material can befinanced, Istisnaa can be easily utilized to

facilitate payment of overheads etc. in addition to

the purchase of raw material.

It is also to be noted that amount paid out as

Istisnaa price to the manufacturer can be used bythe manufacturer anywhere he deems fit. It doesnt

have to be utilized exclusively for the production

process.

ISTISNA

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Sale on Cash Basis

1. After necessary credit and Shariah Approvals, MBL & Customerwill enter into a Master Istisna Agreement to manufacturegoods from time to time at an agreed price.

2. MBL would then enter into an Istisna transaction with theCustomer for the production of specific Goods. At this timequantity, price, specification and delivery date of Goods will beagreed. The delivery of goods could be lump sum or intrenches.

3. MBL could pay the Istisna price to the Customer either in fullor in installments.

4. After manufacturing, the Customer will inform MBL and willrequest for acceptance of delivery. A Bank representative willaccept the delivery after physical inspection of the goods at

the site. This delivery could be through identification andseparate storage of MBL goods (so that they are not mixed

Prdouct Structure for ISTISNA

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5. MBL will also enter into a separate Agency Agreement withthe Customer for sale of goods on Cash basis to crediblebuyers on behalf of MBL in a specified number of days. In thismanner the Agent will be responsible for recovery of Sale

price and its payment to MBL.6. MBLs ownership and risk in goods remains until the Agent

sells these goods to the Buyer in the market. Takaful may beobtained to cover this risk.

7. MBL Agent will sell the goods in the market and will pay theprice to MBL.

8. The Agent (Manufacturer) will be entitled to a specifiedAgency Fee for providing such services . MBL may also give acertain incentive to its Agent for timely selling and payment to

MBL.


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Manufactu

rer

1. Istisnaa Agreement

MBL2. Delivery of Goods

3. Agency Agreement

LocalBuyer

4. Sale of Goods

6. Sale Proceeds (net of AgencyFee)

5. SaleProceeds


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The package comprises of the following:

1. Master Istisnaa Agreement

1. Agency Agreement

1. Corporate Guarantee

Legal Documentation

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1. Master Istisnaa Agreement

This agreement sets out the terms & conditions upon whichthe Bank, from time to time, orders the Customer to

manufacture the Goods

Components :

A. Written Offer for Manufacture of Goods: Description of Goods including quantity, quality, deliverydate, cost price, place of delivery etc.

B. Goods Receiving Note:

Legal Documentation in ISTISNA

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2. Agency Agreement

The Bank appoints the manufacturer (customer) its Agent tosell the manufactured goods.

Components :

A. Notice of Appointment

The Bank authorizes the Agent to sell the Assetsas its undisclosed Agent details of which are

mentioned.

B. Schedule of Agency Fee


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3. Corporate Guarantee

The Customer guarantees payment obligation of theultimate purchasers if they default to makepayment on time


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RISKS

MITIGANTS

1 DeliveryRisk

Delay in delivery of goods fromthe manufacturer to MBL atmaturity

Istisnaa price can be reducedon daily basis to penalize themanufacturer

2Non-

performance

The Manufacturer may not beable to manufacture the goodsduring assigned time andrefuses to carry on theresponsibility further.

MBL can terminate the Istisnaagreement and demand theprice back from themanufacturer. Alternatively,the price may be paid by MBLin installments after beingsatisfied with the performance.

3 QualityRisk

The Manufacturer deliversdefected/inferior goods, whichis realized by MBL only whenthe ultimate purchaser points

out to that.

The manufacturer can beasked to rectify the defect.

Risk Mitigation

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4

Increasedcost of

Manufacturing

Cost incurred bymanufacturer turns out to behigher than anticipated earlier

causing manufacturer todefault on performance

Increased cost will be borne bymanufacturer unless caused bysome force majeure events inwhich case Istisna price maybe increased with mutualconsent.

RISKS MITIGANTS

5 Storage Risk

The goods once delivered byManufacturer will be at MBL'srisk before the same are soldto the ultimate purchaser

This may be covered throughTakaful of the goods and byminimizing the time durationbetween acceptance of delivery under Istisna anddelivery to the ultimatepurchaser. The Agent is askedto procure Takaful as part of

his services

Risk Mitigation

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Jazak Allahu Wa Ahsanal Jaza

Documents

Istisna-II