1. Ijarah / Leasing

2. Ijarah Ijarah is a term of Islamic Fiqh
Literally, it means “To give something on rent”
The term “Ijarah” is used in two situations:
1. It means ‘To employ the services of a person on wages’ e.g.
“A” employs “B” to work at his office, and pays him a salary for his work
“A” hires a porter at the airport to carry his luggage
2. Another type of Ijarah relates to paying rent for use of an asset or property
The 2nd type of Ijarah is relevant to our discussion
This Ijarah is analogous to the English term “Leasing”

3. Rules governing Ijarah

4. Ijarah Rules governing Ijarah are similar to the rules governing sale.
Because in both cases something is transferred from one person to another
The only difference is:
In case of sale, title of property is transferred to Buyer
In case of Ijarah, title remain with the Lessor
Only the use of the property is transferred to Lessee
Leasing is an acceptable transaction under Shariah
The difference between conventional Lease and Ijarah lies in the nature of the contract
The question of whether or not the transaction of leasing is Shariah compliant depends on the terms and conditions of the contract
Several characteristics of conventional agreements may not conform to Shariah thus making the transaction un-Islamic and thereby invoking a prohibition

5. Ijarah
In order to use Leasing as a mode of finance Changes need to be made to the Lease Agreement
Change of name from “Interest” to “Profit” will not suffice
Some basic parameters of the agreement have to be changed to reflect the change in the nature of the transaction

6. Ijarah
Rules of Shariah governing Ijarah
1. Leasing is a contract where the owner of an asset transfers its use to another person against an agreed price
However, ownership of the leased asset remains with the Lessor
Since ownership of the leased asset remains with the Lessor, all rights and liabilities relating to ownership are borne by the Lessor
All rights and liabilities relating to use are borne by the Lessee e.g
“A” gives his house to “B” on rent
Property taxes are to be borne by the owner
Water tax, electricity bill etc are to be borne by the Lessee

7. Ijarah Rules of Shariah governing Ijarah
4. The period of Lease must be determined in clear terms
5. The Lessee is responsible for damage to the asset caused by fraud or negligence
6. Any damage to the asset not caused by the Lessee’s neglect, is to be borne by the Lessor
Normal maintenance is Lessee’s responsibility
The asset to be leased should be clearly identified
9. Lease rentals for the entire lease period must be fixed;
Different amounts of rents can be fixed for different periods, but they must be known.
The rent may be tied to a known benchmark, acceptable to both the parties
The Lessor cannot increase the rent unilaterally
11. The Lessor may receive the rent in advance, but such payment should be recorded as an “on Account” payment since rent can be received only for use of an asset

8. Ijarah Rules of Shariah governing Ijarah
12. The Lease period will start when the asset has been delivered to the Lessee
- in a usable condition
- whether or not the Lessee has started using it
13. If the leased asset is destroyed, the lease will terminate.
If the Lessee is at fault, he is liable to compensate the Lessor for the loss

9. Ijarah Conventional leases are of two types
1. Sale & Leaseback – Where the Lessee has already purchased the asset
The Lessor purchases the asset from the Lessee and leases it back to him
2. Direct lease – Where the Lessee has not already purchased the asset
Lessor purchases the asset from the supplier & becomes its owner, then leases the asset to the Lessee

10. Ijarah Sometimes, the Lessor does not pay the supplier directly
But authorizes the Lessee to purchase the asset on his behalf acting as his agent
Lessee purchases the asset on Lessor’s behalf, paying from his own resources
Lessor pays Lessee for the asset, and acquires its ownership
Then leases the asset to the Lessee
In all the above cases, under conventional Lease
- The Lease rental starts from the date of payment by Lessor Regardless of when the asset is delivered
This means that Lessee has to pay rent before delivery of asset. This is not allowed in Shariah because it is the same as charging rent for money, which is Interest
Under Shariah, the correct way to charge rent is after delivery of the asset to the Lessee. Because rent is charged for use of the asset

11. Ijarah Expenses consequent to ownership
Lessor is the owner of the asset
He is liable to pay all expenses incurred in the process of purchase of the leased asset such as
- Purchase cost
- Import duties
- Transportation to factory
- Installation cost
- Insurance
He may build all these expenses into the asset’s cost
And take them into consideration when calculating the lease rental

12. Ijarah Liability of parties in case of loss to the asset
Lessee is liable for loss to the asset due to his negligence
Can also be made liable for normal wear and tear
But he cannot be made liable for loss caused by factors beyond his control
Conventional Finance Lease agreements do not differentiate between these situations and are therefore not in conformity with Shariah

13. Ijarah Variable rentals in Leases
Lessor would like to get a return on his asset in line with the market
Hence, agreeing on a fixed rent for a long-term lease may not be desirable
Because if returns in the market change, the rent will not change with them and the Lessor will not get a return on his investment in line with the market
This problem can be overcome in two ways
1. The Lease contract may stipulate a regular increase in rent
Say, 5% per year
2. The lease contract may be for a shorter period after which the parties can renew the lease at revised terms with both parties having the right to refuse the renewal

14. Ijarah The Lease rental may be tied-up with a benchmark
A third option is also available
The Lease rental may be tied-up with a benchmark
Which is so well-known that there is no room for dispute
e.g. Inflation index issued by the government of the country
Such that when inflation increases by 5% the rent increases by 5%
Based on the above principle
Some Islamic banks use the market rate of interest as the benchmark
e.g. The SBP Discount Window rate, the T-bill rate etc.
e.g. SBP discount + 3% p.a., T-bill + 5% p.a.
Because they want to earn the same profit rate as the market

15. Ijarah
Objection: By using the Interest Rate as a benchmark the transaction becomes similar to an interest based transaction
Response:
As long as the basic requirements under Shariah are being complied with any benchmark can be used to price the transaction
Benchmarking the transaction’s pricing to an interest-based rate does not render it Haram
The basic difference between an interest-based financing and a valid Lease transaction does not lie in their pricing
The basic difference is:
In case of a lease, the Lessor assumes the full risk of the ownership of the asset. And also cannot charge rental if the asset loses its utility

16. Ijarah
In case of an interest based transaction the financier is not concerned with the asset’s ownership-related risks
And will keep charging its dues even if the asset loses its utility or gets destroyed
As long as this basic difference is maintained
The transaction cannot be classified as an interest bearing transaction No matter how it is priced
Penalty cannot be charged on delay in payment of lease rentals
Reason: Once the lease rent has become due
It is a loan payable by the Lessee to the Lessor and is subject to all rules prescribed for debt.
And therefor cannot be increased to compensate for delay in payment. However, the lessee may be asked to pay a penalty (as charity) to the Lessor which the Lessor should deposit into a charity account.

17. Ijarah Termination of Lease
If the Lessee contravenes any term of the Lease agreement the Lessor may unilaterally terminate the agreement
If there is no contravention, the agreement can only be terminated by mutual consent
Conventional Financial Lease agreements give termination right to Lessor in all cases. This is contrary to Shariah laws
Insurance of the leased assets
Insurance is a cost related to ownership of the assets
And therefore should be borne by the Lessor
However, the Lessor may build this factor into the asset’s cost, while calculating the lease rent and increase the lease rent

18. IJARAH AND IJARAH MUNTAHIA BITTAMLEEK
Process of Ijarah
MECHANICS
Transfer of Title .
VENDOR
ISLAMIC
BANK
Agreement-1
CUSTOMER
Payment of Purchase Price
The customer approaches the Bank with the request for financing and enters into a promise to lease agreement.
The Bank purchases the item required for leasing and receives title of ownership from the vendor
IJARAH AND IJARAH MUNTAHIA BITTAMLEEK
The customer approaches the Bank with the request for financing
The client approaches the Bank showing interest in purchase of the commodity. He will present full description and detailed specification including the source of supply.
The Bank will run a credit valuation, the same way its done in conventional banking.
If the customer is a good risk, then the Murabaha margin (i.e. Bank’s profit on the market-up price) for him will have to be decided. The margin will be quoted, most probably as a per annum flat rate based on the total cost of acquiring the commodity by the Bank including the price and all related expenses.
If the customer agrees, he will be asked to sign a pledge agreement, committing him to buy such commodity once it is under the possession of the Bank. As part of the Murabaha transaction, the client will asked to present some securities to the Bank at the time of signing the pledge. These securities could be in the form of cash or any other liquid asset, equivalent to about 5% to 10% of the value of the deal.
The Bank purchases the item and makes payment to the vendor
The Bank will contact the vendor of the commodity specified by the customer and make arrangements for the acquisition. The Bank will make the required payment to the vendor for receipt of the commodity.
The Bank receives title of ownership from the vendor
The Bank is only able to execute the Murabah deal when the commodity’s ownership is completely transferred over to the Bank from the vendor.
The customer makes payment up-front or on a deferred basis
The customer will either pay the Bank the whole amount of the Murabaha contract (including a mark-up) up-front of make payments on a deferred basis.
The Bank transfers the title over to the customer upon payment
The Bank will transfer the ownership title of the commodity to the customer once the payment is received from the customer.
The Bank makes payment to the vendor

19. IJARAH AND IJARAH MUNTAHIA BITTAMLEEK
Process of Ijarah
MECHANICS
Transfer of Title
Transfer of Title .
VENDOR
ISLAMIC
BANK
Agreement-2
CUSTOMER
Payment of Purchase Price
Payment of Rental Fees
The Bank leases the asset to the customer after execution of lease agreement.
IJARAH AND IJARAH MUNTAHIA BITTAMLEEK
The customer makes periodic payments as per the contract
The customer approaches the Bank with the request for financing
The client approaches the Bank showing interest in purchase of the commodity. He will present full description and detailed specification including the source of supply.
The Bank will run a credit valuation, the same way its done in conventional banking.
If the customer is a good risk, then the Murabaha margin (i.e. Bank’s profit on the market-up price) for him will have to be decided. The margin will be quoted, most probably as a per annum flat rate based on the total cost of acquiring the commodity by the Bank including the price and all related expenses.
If the customer agrees, he will be asked to sign a pledge agreement, committing him to buy such commodity once it is under the possession of the Bank. As part of the Murabaha transaction, the client will asked to present some securities to the Bank at the time of signing the pledge. These securities could be in the form of cash or any other liquid asset, equivalent to about 5% to 10% of the value of the deal.
The Bank purchases the item and makes payment to the vendor
The Bank will contact the vendor of the commodity specified by the customer and make arrangements for the acquisition. The Bank will make the required payment to the vendor for receipt of the commodity.
The Bank receives title of ownership from the vendor
The Bank is only able to execute the Murabah deal when the commodity’s ownership is completely transferred over to the Bank from the vendor.
The customer makes payment up-front or on a deferred basis
The customer will either pay the Bank the whole amount of the Murabaha contract (including a mark-up) up-front of make payments on a deferred basis.
The Bank transfers the title over to the customer upon payment
The Bank will transfer the ownership title of the commodity to the customer once the payment is received from the customer.
Title transfers to the customer at the end

20. Comparison of Ijara and Murabaha
Ijarah
Murabaha
Title Holder
Financier
Customer
Rate
Fixed/Variable
Fixed
Prepayment Allowed
Yes
No/Controversial
Refinance Available No
Asset Risk
Late Payments
Controlable
Loss to the Bank

21. IJARA

25. MUDARABAH

26. Definition
This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise.
The investment comes from the first partner who is called “Rabb-ul-Maal” (Investor) while the management and work is an exclusive responsibility of the other, who is called “Mudarib” (Working Partner) and the profits generated are shared in a predetermined ratio.

27. Types of Mudarabah Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)

28. Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
 Rabb-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).

29. Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Rabb-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah)
However, he is not authorized to:
  a) keep another Mudarib or a partner
b) mix his own investment in that particular Mudarabah without the consent of Rabb-ul Maal.

30. Authority of Rabb-ul-Maal
Rabb-ul-Maal has authority to:
 a)  Oversee the Mudarib’s activities and
b) Work with Mudarib if the Mudarib consents.

31. Different Capacities of the Mudarib
Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust.
Wakeel (Agent) : In purchasing goods for trade, he is an agent of Rabb-ul-maal.
Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rrrrrabb-ul-maal who shares the profit in agreed ratio.

32. 4. Zamin (Liable): If the enterprise suffers a loss due to his negligence or misconduct, he is liabel to compensate the loss.
5. Ajeer (Employee): If the Mudarabah becomes Void due to any reason, the Mudarib is entitled to get a fee for his services.

33. Capital of Mudarabah
The capital in Mudarabah may be either cash or in kind. If the capital is in kind, its valuation is necessary, without which Mudarabah becomes void.

34. Distribution of Profit & Loss
It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled.
They can share the profit at any ratio they agree upon.
However in case the parties have entered into Mudarabah without mentioning the exact proportions of the profit, it will be presumed that they will share the profit in equal ratios.
Some incentives my be given to the Mudarib.

35. Distribution of Profit & Loss
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah.
The Mudarib & Rabb-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital.

36. Distribution of Profit & Loss
EXAMPLE
If the capital is Rs.100,000/-, they cannot agree on a condition that Rs.10,000 out of the profit shall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab-ul-Maal or vice versa.

37. Distribution of Profit & Loss
If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio.

38. Termination of Mudarabah
Mudarabah can be terminated any time by either of the two parties by giving notice.
If Mudarabah was for a particular term, it will terminate at the end of the term.
Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination.

39. Distribution at Termination
If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.
If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual profit may be determined.

40. If there is a profit, it will be distributed between Mudarib and Rab-ul-Maal.
If no profit is left, Mudarib will not get anything.

41. Collective Mudarabah
“Collective Mudarabah” means a joint pool created by many investors and handled over to a single Mudarib who is normally a juristic person.
Collective Mudarabah creates two different relationships:
Relationship between investors inter se, which is Shirkah or Partnership.
Relationship of all the investors with mudarib, which is mudarabah.

42. When Mudarib is a Juristic Person
Who is the Mudarib?
Shareholders?
Management or Directors?
Juristic Person
Expenses of Mudarabah
Direct expenses are borne by the Mudarabah pool.
Indirect expenses are borne by the mudarib.

43. Running Mudarabah Investors come in and go out at different dates
Profits are calculated on daily product basis.
Redemption before maturity
If the assets of mudarabah are in illiquid form, an investor may redeem his share by selling it to the pool..
If the assets are in liquid form, a provisional amount may be given to him subject to final settlement

44. Musharakah

45. Musharakah Musharaka is a form of partnership between two parties
Where each party contributes to the capital of the partnership in equal or varying proportions
Either to establish a new venture
or share in an existing one.

46. Musharakah Principles for Distribution of Profit
Profit of each partner can be agreed as a % of the return from the business.
Profit should be identified as a % of the actual return and not in absolute terms.
Share of active partners can be more than share of sleeping partners.
The share of the sleeping partner cannot be more than the share of the active partner.

47. Musharakah Principle of Loss
Scholars in Islam have a consensus on the principle that in case of a loss the share borne by each partner cannot exceed his share in the investment. Hazrat Ali (RA):
“Profit should be on a mutual basis and loss should be shared in the ratio of investment.”

48. The structure of a Musharaka Contract
Musharakah
The structure of a Musharaka Contract
ISLAMIC
BANK
PARTNER
(Customer)
MUSHARAKA
60% Ownership
40% Ownership

49. Musharaka

50. Diminishing Musharaka

51. DIMINISHING MUSHARAKA
Diminishing Musharaka involves taking share in the ownership of a specific asset and then gradually transferring complete ownership.
Three components
Joint ownership of the Bank and customer
Customer as a lessee uses the share of the bank
Redemption of the share of the Bank by the customer

52. DIMINISHING MUSHARAKA
Joint Ownership
Musharaka
BANK
CUSTOMER
Rent
The customer approaches the Bank with the request for Project/Machinery financing
The Bank enters into a Musharaka (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.
Customer pays rent for the use of banks share in the property

53. Gradual Transfer of Ownership
DIMINISHING MUSHARAKA
Joint Ownership
Musharaka
BANK
CUSTOMER
Gradual Transfer of Ownership
The customer approaches the Bank with the request for Project financing
The Bank enters into a Musharaka (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.
Customer pays rent for the use of banks share in the property
Ownership of the asset is gradually transferred to the customer upon payment of asset price.

54. DIMINISHING MUSHARAKA
Housing Finance
DIMINISHING MUSHARAKA
Offers the most viable solution for housing finance.
As discussed, under this mode, the Financial Institution and client jointly purchase the house. The share of the bank is divided into a number of units and it is agreed that the client will purchase the units of the share of the bank gradually, thus increasing his own share until all the units of the Bank are purchased by him so as to make him the sole owner of the asset after a specified period.
During the financing period bank’s share is leased to the client who pays rent for using bank’s share in the asset

55. Ijarah is an Islamic alternate of Leasing.
Housing Finance
IJARAH
Ijarah is an Islamic alternate of Leasing.
Under the mode, Bank purchases property for the client and give the property on lease to the client for an agreed period against an agreed rent.
After the agreed time period ownership of the asset is transferred to the client.

56. Murabaha is most commonly used mode of finance in Islamic Banking.
Housing Finance
MURABAHA
Murabaha is most commonly used mode of finance in Islamic Banking.
Financing under the mode is simple, Bank purchases property for the client from the market and sells the property to the client after adding profit thereon.
Ownership of the asset is transferred to the client at the inception of the transaction .

57. Comparison of Three Options
Comparison of Housing Finance Products
Comparison of Three Options
 Diminishing Musharaka
Ijarah
Murabaha
 Title Holder
 Joint Title
 Financier
 Customer
Rate
Fixed/Variable
Fixed
Prepayment Allowed
Yes
No/Controversial
Refinance Available No
Asset Risk
Joint
Financier
Customer
Late Payments
Control able
Loss to the Bank

58. Mudaraba

59. Mudaraba
Mudaraba is a partnership agreement in which the investor (the Rab-ul-mal) provides the necessary finance
While the recipient of the funds (the Mudarib or the Manager) provides the know-how towards carrying out the venture
There are 2 types of Mudaraba
Restricted Mudaraba
Unrestricted Mudaraba

60. Mudaraba Restricted Mudaraba:
Types of Mudaraba
Mudaraba
Restricted Mudaraba:
Rubb-ul-maal may specify a particular business for the Mudarib,
Mudarib can invest the money in that particular business only.
Unrestricted Mudaraba:
Rubb-ul-mal gives full freedom to Mudarib to undertake whatever business he deems fit.

61. Distribution of Profit
Mudaraba
Distribution of Profit
It is necessary for the validity of Mudaraba that the parties agree at the time of entering into the contract on the ratio in which the actual profit will be shared
Loss is borne only by Rabbul mal because the Mudarib does not invest anything.
Mudarib’s loss is considered to be wasted effort

76. Salam

77. Salam Basic conditions for validity of sale (Bai’):
1. The asset must exist
2. The seller should own the asset
3. The asset should be in the physical or constructive possession of the seller
All sale transactions should conform to this rule, except the following two exceptions:
1. Bai’ Salam
2. Bai’ Istisna
Both these are sales of special nature and are exceptions to the general rules of sale

78. Salam
Salam is where the seller undertakes to supply some specific goods to the buyer
At a future date
Against an advance price, fully paid at spot
But the supply is deferred
Salam was allowed by the Prophet (SAW) subject to certain conditions
The basic purpose was to meet the needs of small farmers
- Who needed money to grow their crops
- And to feed their families till the time of harvest
- Since, after the prohibition of Riba they could not borrow money on interest.
Hence they were allowed to sell their agricultural products in advance

79. Salam
Salam is beneficial to the seller Since he receives the price in advance
And Beneficial to the buyer since the Salam price is lower than the spot price
Purpose of Salam
To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest.
To meet the need of traders for import and export business.

80. Conditions of Salam
It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effecting the sale.
In the absence of full payment, it will be tantamount to sale of a debt against a debt which is expressly prohibited by the Holy Prophet.
Moreover the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not be achieved.

81. Conditions of Salam
Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified eg. precious stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible.
Salam cannot be effected on a particular commodity or on a product of a particular field or farm e.g.. supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain.
All details in respect to quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute.

82. Conditions of Salam
It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only meaning what is normally weighed cannot be quantified and vice versa.
The exact date and place of delivery must be specified in the contract.
Salam cannot be effected in respect of things, which must be delivered at spot.
The commodity for Salam contract should remain in the market right from day of contract up to the date of delivery or at least till the date of delivery.

83. Conditions of Salam
The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. The period should be long enough to affect prices. But Holy Prophet SAW did not specify any minimum period for the validity of Salam. It is all right to have a earlier date of delivery if the seller consents to it.
Since price in Salam is generally lower than the price in spot sale; the difference in the two prices may be a valid profit for the Bank.
A security in form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller delivers.
The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealing in commodities.

84. Benefits
After purchasing a commodity by way of Salam, the financial institution can sell it through a parallel contract of Salam for the same date of delivery. The period of Salam in the second parallel contract is shorter and the price is higher than the first contract. The difference between the two prices shall be the profit earned by the institution.
The institution can obtain a promise to purchase from a third party. This promise should be unilateral from the expected buyer. The buyer does not have to pay the price in advance. When the commodity is received by the institution, it can be sold at a pre-determined price to a third party according to the terms of the promise.

85. Parallel Salam
In an arrangement of parallel Salam there must be two different and independent contacts; one where the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on the other.
A Salam arrangement can not be used as a buy back facility where the seller in the first contract is also the purchaser in the second. Even if the purchaser in the second contract a separate legal entity but owned by the seller in the first contract; it would not tantamount to a valid parallel Salam agreement.

86. The structure of a Salam Contract
ISLAMIC
BANK
CUSTOMER
COMMODITY
OWNER
Delivery of asset at future
date
Delivery of asset
At future date
Advance payment of purchase price (P)
Advance payment of purchase price
The structure of a Salam Contract

87. Istisna

88. Istisna
Istisna is the second exception where a sale is allowed without delivery of the goods sold
It relates to goods that require manufacturing
If the manufacturer undertakes to manufacture goods with material available with the manufacturer, the Istisna transaction is effected
It is necessary for the Istisna transaction that price is fixed
And necessary specifications of the product are defined

89. Differences between Istisna and Salam
1.Subject of Salam may be anything which fulfils the Salam conditions
1.The subject of Istisna is always something which requires manufacturing
2.Price may be paid under any agreed schedule
2.Price should be paid in full in advance
3.Contract may be cancelled unilaterally before the manufacturer starts work
3.Salam contract, once effected, cannot be cancelled unilaterally
4.Determining the time of delivery is an essential part in Salam
4.Not necessary in Istisna