What is Istisna?
Istisna is a Sharia-compliant contract under which one party (the manufacturer or contractor) commits to produce, manufacture, or construct a specified asset to be delivered to the buyer at a future date for an agreed price, payable either upfront, in installments, or on delivery. It is commonly used in Islamic finance for project finance, real estate development, and industrial procurement.
How It Works
- Buyer and seller agree on the specifications of the asset to be made.
- Price, payment schedule, and delivery date are fixed in the contract.
- Manufacturer produces or constructs the asset.
- On delivery, ownership transfers to the buyer.
- Parallel Istisna allows the financier to subcontract production to a third party.
Saudi Context
Saudi Islamic banks structure real estate development financing using Istisna and parallel Istisna, particularly for housing projects under the Sakani program and large-scale Vision 2030 infrastructure. The financier (bank) signs an Istisna with the developer for the customer’s benefit, then engages a contractor under a parallel Istisna. SAMA and Sharia boards oversee compliance.
Example
A bank enters into an Istisna with a homebuyer to deliver a villa in 18 months for SAR 1,800,000, payable in 240 monthly installments. The bank simultaneously contracts a developer (parallel Istisna) to build the villa for SAR 1,500,000. The bank’s margin (SAR 300,000) is the spread, structured as compensation for project risk and financing.