Major Principles in Islam: Seeking the Halal (part 7) Istisna contract

 

Istisnaʿ is a sale contract where a buyer (the mustasniʿ) requests a manufacturer or seller (saniʿ) to produce or construct a specific item according to agreed specifications, for an agreed price and delivery time.

In the previous session, we mentioned that the salam contract originally began in an agricultural society. Farmers usually lacked cash or large capital, yet they needed to care for their farms, families and other responsibilities. They would therefore sell their next season’s produce before it was due. In return, they received cash in hand to look after their affairs and maintain their farms.

As we stated before, one of the main conditions of salam is that the payment must be made in full and in cash at the time the contract is agreed. The buyer must hand over the money on the spot. The delivery time must be clearly specified, along with the quality and quantity of the goods. Everything should be clearly defined, with no major ambiguity. Minor uncertainty can be overlooked, but excessive ambiguity is unacceptable and invalidates the contract.

This ambiguity, known in Arabic as gharar, occurs when details are unclear. For example, I may think something while you think something else, and when the time of delivery arrives, I am surprised because I was expecting a certain specification that was never clarified. Such uncertainty is not acceptable and may nullify the contract.

Manufacturing

Now, we will look at istisna‘. The term istisna‘ is related to manufacturing, from the Arabic word sana’a which means “to make something”. For example, when we read on a product “Made in the UK”, “Made in China”, or “Made in Turkey”, in Arabic we would say suni‘a fi al-mamlakah al-muttahidah, suni‘a fi al-Sin, and so on. So istisna‘ refers to making or manufacturing something.

The contract, therefore, concerns the manufacturing of goods. It is a contract on something that is yet to be made, something not yet in existence. If the product already exists, we do not use an istisna‘ contract; we simply use a normal sale contract, because the item is present, can be examined, tested and sold immediately. Istisna‘, on the other hand, deals with goods that are to be produced in the future.

For instance, you may say, “This is a sample, and I will make one hundred machines like this.” That is acceptable, as the sample represents what will be made. If the one hundred items have not yet been manufactured, the transaction falls under Istisna‘.

Istisna‘ is a type of sale contract, as is salam. Both involve a sale agreement between a buyer and a seller. For example, I may be the buyer and ask you to make me a table, a kitchen, a bed, or a car. This would be an Istisna‘ contract.

It also includes manufacturing goods or undertaking construction projects, such as building a house, a block of flats, a playground, a bridge, or a ship, all of these in the modern world fall under Istisna‘. It is a sale contract, but because the product is not yet in existence, it is treated as an Istisna‘ contract.

Clarity

As with any contract, clarity is essential. There should be no ambiguity. Specifications must be clearly determined, for example: “Build me a house with an area of 100 or 200 square metres, with four bedrooms and two bathrooms.” The plan must detail every aspect, each room, each window, colours, and so on. All these details have to be agreed upon by both parties.

Specification

Sometimes Istisna‘ involves producing customised goods such as uniforms, dresses, jackets, shoes, or any similar items. All of these fall under the Istisna‘ contract. The two parties, the seller and the buyer, must agree on the specifications and conditions to ensure the contract’s validity.

In this contract, the seller is the one who makes, produces, manufactures, or constructs the item. He undertakes to produce the item, he is the seller. The buyer is the one who places the order. For example, I may wish to buy a bed and go to a shop where I browse through a catalogue. I choose a particular design, colour, fabric, and type of wood, and they manufacture it for me. They may tell me that it will take two months, three months, or six months, and then it will be delivered to my house. These specifications, the colours, materials, and all the details, are discussed and agreed upon before signing the contract. This is an example of Istisna‘.

Sale agreement

We need to know the object of the contract. It could be something like printing a book, which does not yet exist. You hand over your manuscript, and the printer works on it and produces five thousand copies. You agree on the colour of the cover, what is to be written on it, the number of pages, and all related specifications. You must also agree on the price and the delivery date.

Materials

Depending on the nature of the item, the manufacturer may use his own materials or use materials provided by you. Both are permissible, but naturally the price will differ greatly between the two. If he uses his own materials, the price will include their cost; if you supply the materials, the price will be lower.

Scheduling payments

As mentioned previously regarding the salam contract, the full price must be paid in advance. However, Istisna‘ and salam are like twins, similar, yet not identical. The difference between them is that, in istisna‘, it is not a condition to pay the full price in advance before leaving the meeting where the contract is concluded. Payment can be made later, partially, or in instalments. You can pay a down payment now and schedule further payments every one month, two months, three months, or six months, depending on what is agreed.

There must be an agreed payment plan and schedule. These conditions exist to minimise injustice and to prevent unfair treatment of any party. Istisna‘ is similar to salam, the future contract, and also shares some similarity with ijarah, which is leasing, either leasing services or leasing assets. This is because Istisna‘ is based on work rather than an existing item. The item is the outcome of the work, so in a sense you are leasing the worker’s service. This makes Istisna‘ somewhat similar to ijarah, which we will cover later in this series.

There are therefore similarities between these contracts. In modern financial applications, Istisna‘ is widely used. During the time of the Prophet ﷺ there was a carpenter among the Companions who made a minbar, a pulpit, for the Prophet ﷺ to stand upon. This was an Istisna‘ contract. Likewise, salam contracts also existed at that time. These are not new practices; people have always needed manufacturing and production of items not yet ready or available.

Projects which can be financed by Istina

In today’s world, Istisna‘ is used for project finance, such as in the construction of buildings, factories, roads, bridges, and railways. All of these come under the Istisna‘ contract. It is also used for manufacturing finance, for example the production of aircraft, ships, equipment, cars, trains, and bicycles, any form of manufacturing can be financed through Istisna‘, provided it aligns with Shariah guidelines and avoids doubtful matters.

It can also be applied to infrastructure development, such as electricity projects, water networks, and similar developments, all of which can be financed through istina‘.

In practice, as we mentioned before with salam and parallel salam, the same applies here: Istisna‘ and salam are like twins but not identical. There is a form known as parallel istina‘.

Here is how it works: imagine I am a bank and you are the customer. The government wants to build a new bridge, for example. They enter into a contract with the bank under Istisna‘. The government approaches the bank and says, “We want to construct a bridge in this area, and it will cost around fifty million.” The bank will prepare a business plan, conduct viability studies, assess risks, and perform due diligence. If the bank finds the project viable, it will agree to take it on and finance it.

The bank will then tell the government, “We will deliver the bridge for fifty million.”

In this contract, the seller is the one who makes, produces, manufactures, or constructs the item. He undertakes to produce the item; he is the seller. The buyer is the one who places the order. For example, I may wish to buy a bed. I visit a shop and browse through a catalogue. I look at designs for sitting rooms or bedrooms and say, “I like this one; I like this colour; I like this fabric; I like this type of wood.” They then manufacture it for me, telling me that it will take two, three, or six months, after which it will be delivered to my home. These specifications, colours, materials, and all the details, are discussed in full before the contract is finalised. This is an example of Istisna‘.

It is essential to know the object of the contract. It could, for instance, be printing a book. The book does not yet exist, you hand over a manuscript, and the printer produces five thousand copies of it. You specify the colour and design of the cover, what should be written on it, and how many pages it will have. All these details must be agreed upon.

The price and delivery date must also be agreed. Depending on the nature of the item, the manufacturer may use his own materials or those provided by you. Both are permissible, but the price will naturally differ. If he uses his own materials, the cost will be higher; if you supply the materials, the cost will be lower.

In some cases, a business may not be a manufacturer itself but may act as an intermediary. It has good relationships with factories or manufacturers. Such a business places an order for goods, specifying the required product and its features. It then signs a contract with a customer, agreeing to deliver the product for ten thousand. The intermediary then signs another contract with the manufacturer to produce it for seven thousand. The manufacturer agrees, and the intermediary earns a profit of three thousand.

Again, these are two separate contracts. Usually, the delivery dates are almost the same, perhaps a one-day or one-month difference, depending on the product or item. Sometimes they are even on the same day.

All of this must be taken into account when structuring a halal business contract. There may also be issues that arise during construction or production, and these should be mentioned in the contract as far as possible. Risk assessments should consider factors such as price inflation, floods, wars, or other unforeseen circumstances. Of course, no matter how detailed a contract may be, unexpected events can still occur. One must do their best to account for the normal situation and some reasonable exceptions.

Istisnaʿ Contract (عقد الاستصناع)

1. Definition

الاستصناع هو عقدٌ على مبيعٍ في الذمة يُشترط فيه العمل، أي هو عقد يُطلب فيه من الصانع صنع شيءٍ معيّنٍ بمواصفاتٍ محددةٍ بثمنٍ معلومٍ.

Istisnaʿ is a sale contract where a buyer (the mustasniʿ) requests a manufacturer or seller (saniʿ) to produce or construct a specific item according to agreed specifications, for an agreed price and delivery time.

It is essentially a contract for manufacturing goods or construction projects that do not yet exist at the time of the contract.

2. Explanation

3. Main Parties

Arabic Term	English Equivalent	Role
المصنِّع (al-sāniʿ)	Manufacturer / Seller	Undertakes to produce the item
المستصنِع (al-mustasniʿ)	Buyer / Client	Orders the item and pays the price

4. Key Conditions

5. Distinction from Similar Contracts

Contract	Nature	Existence of Subject	Example
Salam	Advance payment for future goods	Goods do not exist	Buying 100kg of wheat for future delivery
Istisnaʿ	Order to manufacture a good	Goods do not exist, but manufactured	Ordering a tailor to make clothes
Ijarah	Leasing of service or asset	Service or asset exists	Hiring a builder to construct using owner’s materials

6. Shariah Authentication (Sources & Evidences)

Although Istisnaʿ is not directly mentioned in the Qur’an or Sunnah, it is authenticated by juristic analogy (qiyas) and consensus (ina) among scholars based on practical necessity (hahah).

a. Qur’anic Basis (Indirect):

“…and give full measure and weight in justice…”
(Surah al-Anʿām 6:152)
This implies the legitimacy of transactions based on measure and specification.

b. Sunnah (Indirect Evidence):
The Prophet ﷺ allowed Salam (forward sale), and jurists extended that permissibility by analogy to Istisnaʿ, since both involve future delivery of goods defined by specification.

c. Scholarly Consensus:

7. Modern Financial Application

In Islamic finance, Istisnaʿ is widely used for:

Parallel Istisnaʿ:
The financier enters into two back-to-back Istisnaʿcontracts — one with the client (buyer) and another with the manufacturer (supplier). These two contracts must remain independent (non-linked).

8. Example

A government wants a new bridge.

9. Summary Table

Aspect	Description
Nature	Contract to manufacture or construct goods
Object	Nonexistent, defined by specifications
Payment	Lump sum or installments
Delivery	Future, as agreed
Basis	Custom and necessity, juristic consensus
Modern Use	Infrastructure, manufacturing, project finance

Contemporary Issues

• When payment is made in stages, the total price may or may not be higher than if it were paid in full upfront, depending on the agreement and market context.
  • For example, when purchasing a flat under construction, instalments are usually spread over the building period. The final price may be lower than its market value upon completion, as the buyer has taken on risk and provided early funding.
  • However, if the product is already ready and being paid for over time (such as through a leasing arrangement), the total price is often higher, which is acceptable as long as it is free from interest (riba).
• Payment by instalment in itself does not involve interest. Islamic contracts remain valid as long as the additional amount or payment structure is clearly agreed upon and not tied to time-based interest.
• Islamic banks often include a penalty clause for late payment (ta’khir al-sadād).
  • This is a deterrent mechanism to prevent deliberate default or exploitation.
  • The penalty amount is donated entirely to charity.
  • It is forbidden for the bank to keep or profit from these penalties.
  • Sharia supervisory boards monitor this process closely to ensure compliance.
• Leasing contracts (Ijarah) are permissible provided that:
  • The contract is free from interest.
  • The lease terms and ownership arrangements are clear.
  • Some large companies now offer zero-interest car leases and similar instalment plans, which are halal if no riba or hidden charges are involved.
• Down payments (‘Urbun) are permissible when clearly stated in the contract.
  • If the buyer completes the purchase, the down payment forms part of the total price.
  • If the buyer withdraws, the seller may retain the down payment.
  • Transparency is essential to avoid misleading the buyer.
• In salam contracts, the price paid in advance is typically lower than the market price at the time of delivery.
  • This is logical since the buyer provides capital upfront and assumes risk before receiving the goods.
  • Paying more in advance for less later would contradict commercial sense and Sharia principles of fairness.
• If unforeseen events such as floods or crop failure occur, these fall under force majeure conditions.
  • Such risks should be addressed in the contract.
  • In modern contexts, takaful (Islamic cooperative insurance) is used to mitigate such risks, alongside re-takaful for further protection.
• Islamic banks operate as businesses but are governed by Sharia principles.
  • They undertake full due diligence, financial viability studies, and risk assessments.
  • They may allow payment holidays for genuine financial hardship but penalise deliberate default.
• Insurance in Islam:
  • Conventional insurance is not halal due to the presence of interest (riba) and excessive uncertainty (gharar).
  • Takaful insurance is permissible because it is based on cooperation (ta‘āwun) and shared responsibility.
  • Participants contribute to a collective fund that supports members in need.
  • Conventional insurance profits from risk; takaful shares risk ethically.
• Currently, takaful options in the UK are limited.
  • Efforts to establish them began more than a decade ago but faced management and structural challenges.
  • Some business-oriented schemes exist, but there are no widely accessible retail takaful products yet.
• Future directions:
  • Islamic financial products continue to evolve.
  • A future session will explore practical halal investment options, Islamic mortgages, takaful, and other Sharia-compliant financial products currently available in the market.
  • The aim is to provide practical guidance for Muslims seeking lawful financial solutions in modern economies.

References

1. 1. Al-Kāsānī, Badā’iʿ al-Ṣanā’iʿ, vol. 5, p. 2
      2. Ibn ʿĀbidīn, Radd al-Muḥtār, vol. 4, p. 176
      3. Al-Māwardī, Al-Ḥāwī al-Kabīr, vol. 5, p. 230
      4. Ibn Qudāmah, Al-Mughnī, vol. 4, p. 340
      5. AAOIFI Shariah Standard No. 11: Istisnaʿ and Parallel Istisnaʿ
      6. Usmani, M. Taqi, An Introduction to Islamic Finance, p. 104–108

Based on the talk delivered to the Convert Club on 15th October 2025

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