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Istisna - Appendices

Yahya Massoud
By Yahya Massoud
1 month ago
Istisna - Appendices

Ijma`, Islamic banking, Kafalah, Khiyar, Qabd, Sunnah, Takaful

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  1. BNM /RH/PD 028-1 Istisna` Islamic Banking and Takaful Department Page 36 / 44 APPENDICES Appendix 1: Legitimacy of istisna` contract 1. The legitimacy of istisna` contract is derived from the Quran and founded on Sunnah of the Prophet Muhammad (peace be upon him) and the consensus of muslim jurists (Ijma`). The Quran 2. The following verses of the Quran imply the general permissibility of sales contract including istisna` contract: ‫الربَا‬ ِّ ‫َح َّل اللّهُ الْبَ ْي َع َو َحَّرَم‬ َ ‫َوأ‬ .i “…whereas Allah SWT has permitted trading and forbidden usury…” (Surah al-Baqarah, verse 275). ِ ‫يا أَيُّها الَّ ِذين آمنُواْ أَوفُواْ بِالْع ُق‬ ‫ود‬ ُ ْ َ َ َ َ .ii “O you who believe! fulfil (all) obligations...” (Surah al-Maidah, verse 1). Sunnah of Prophet Muhammad (peace be upon him) 3. The following hadiths imply the permissibility of istisna` contract: ‫ إن رسول اهلل صلى اهلل عليه وسلم‬:‫ قال‬،‫عن عبيد اهلل عن نافع عن ابن عمر‬ ‫ مث‬،‫ فصنع الناس‬،‫ فكان جيعل فصه يف باطن كفه إذا لبسه‬،‫اصطنع خامتا من ذهب‬ ‫ إين كنت ألبس هذا اخلامت وأجعل فصه من‬:‫ وقال‬،‫إنه جلس على املنرب فنزعه‬ .‫ فنبذ الناس خواتيمهم‬،‫ واهلل ال ألبسه أبدا‬:‫ مث قال‬،‫داخل فرمى به‬ Issued on: 23 December 2015 .i
  2. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 37 / 44 Ibn Umar reported that the Prophet (peace be upon him) had a gold ring made for himself, and when he wore it he used to turn its stone toward the palm of his hand. So the people too had gold made for themselves. The Prophet (peace be upon him) then ascended the pulpit, removed the ring, and he said, "I had it made for me, but now I will never wear it again." He threw it away, and then the people threw away their rings too.” (Sahih Bukhari and Muslim) ‫عن سهل رضي اهلل عنه أن النيب صلى اهلل عليه وسلم أرسل إىل امرأة من املهاجرين‬ .ii ‫ فأمرت عبدها‬،‫ فليعمل لنا أعواد املنرب‬،‫ مري عبدك‬:‫ قال هلا‬،‫وكان هلا غالم جنار‬ ‫ فلما قضاه أرسلت إىل النيب صلى اهلل‬،‫فذهب فقطع من الطرفاء فصنع له منربا‬ ،‫ أرسلي به إيل فجاءوا به‬:‫ قال صلى اهلل عليه وسلم‬،‫عليه وسلم إنه قد قضاه‬ .‫فاحتمله النيب صلى اهلل عليه وسلم فوضعه حيث ترون‬ Sahl reported that the Prophet (peace be upon him) sent for a woman from the immigrants who had a slave who was a carpenter. The Prophet (peace be upon him) told her, "Order your slave to prepare wood (pieces) for a pulpit." So she ordered her slave, who went and cut wood from a tamarisk tree and prepared a pulpit for the Prophet (peace be upon him). When he finished the pulpit, the woman informed the Prophet (peace be upon him) that it had been finished. The Prophet (peace be upon him) asked her to send that pulpit to him so they brought it. Sahl said, “The Prophet lifted it and placed it at the place in which you see it now. ” (Sahih al-Bukhari) The consensus of contemporary muslim jurists (ijma`) 4. Contemporary muslim jurists have reached ijma` on the permissibility of istisna`. Issued on: 23 December 2015
  3. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 38 / 44 Appendix 2: Glossary Terms Definition Gharamah Penalty Hamish jiddiyyah A security deposit placed to secure an undertaking to purchase of an asset before execution of a certain specified contract Ibra’ Rebate Ijarah A contract that transfers the ownership of a usufruct and/or service for a specified period in exchange for a specified consideration Ijarah mawsufah fi al- A contract that transfers ownership of a usufruct for a zimmah specified duration in the future based on an agreed specification by the contracting parties at the inception of the ijarah contract Ijma` Consensus of the Muslim jurists Kafalah A contract where the guarantor conjoins the guaranteed party in assuming the latter’s specified liability. Khiyar al-`ayb Option arising from discovery of a defect in the asset purchased which entitles the option holder to either dissolve or continue with the contract Khiyar fawat al-wasf Option to void characteristic in a contract the subject due to matter a missing which the contracting party had stipulated to be present in it Marhun Collateral Mukhalafah al-shurut Breach of specified terms Muqassah Offsetting Parallel istisna` Two separate and independent istisna` contracts, which have similar specifications of the istisna` asset Qabd haqiqi Physical possession. It refers to a state where a Issued on: 23 December 2015
  4. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Terms Istisna` Page 39 / 44 Definition person has actual possession and the right to control an asset Qabd hukmi Constructive possession. It does not refer to an actual possession, but it is a presumptive possession based on the right of the owner towards an asset Rahn Pledge/Charge Shart jaza’i Punitive condition Takaful An arrangement based on mutual assistance under which takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the takaful participants or their beneficiaries on the occurrence of pre-agreed events Takhliyah Relinquishing the possession of an asset Tamkin Enabling the person who has the ownership of an asset transferred to him to make full use and assume liability of the asset Taqsir Negligence Ta`widh Compensation `Urbun Earnest money paid to secure purchase of an asset in an exchange contract which is considered part of the price if the purchaser decides to continue the contract and is not refundable `Urf tijari Common business practice which is acceptable by the community and does not contradict the Shariah principles Wa`d mulzim A binding promise Issued on: 23 December 2015
  5. BNM /RH/PD 028-1 Istisna` Islamic Banking and Takaful Department Appendix 3: Illustration on structures of istisna` products Istisna` STEP 1 IFI buys property under construction from contractor through istisna` contract IFI 1 (purchaser) Contractor (seller) STEP 2 IFI sells the completed istisna` asset to customer IFI 2 (seller) Customer (purchaser) Flow of money Flow of asset Istisna` with wakalah and kafalah STEP 1 Customer buys property under construction from IFI through istisna` contract Customer (purchaser) 1 IFI (seller) STEP 2 IFI appoints customer as its agent to appoint contractor who will undertake the istisna` project IFI (principal) a Customer (agent) Customer (IFI’s agent) appoints contractor to undertake the istisna` project Customer (agent) b Contractor STEP 3 Customer or third party provides guarantee (kafalah) to IFI on contractor’s performance Customer or third party (guarantor) Flow of money Flow of asset Issued on: 23 December 2015 3 IFI Page 40 / 44
  6. BNM /RH/PD 028-1 Istisna` Islamic Banking and Takaful Department Istisna` with ijarah STEP 1 Customer buys property under construction from contractor through sales and purchase agreement Customer (purchaser) 1 Contractor STEP 2 Customer sells property under construction to IFI through istisna` contract Customer (seller) 2 IFI (purchaser) STEP 3 Upon accepting completed property, IFI leases it to customer through Ijarah Muntahia Bitamleek IFI (lessor) Flow of money Flow of asset Issued on: 23 December 2015 3 Customer (lessee) Page 41 / 44
  7. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 42 / 44 Appendix 4: Illustration on possible legal instruments to effectively transfer ownership of istisna` asset from customer to IFI No. Legal instruments that transfer ownership of istisna` asset from customer to IFI 1. Agency agreement (a) Agreement reflects/confirms that the customer acts as an agent, on behalf of the IFI, when the customer executed the sale and purchase agreement (S&P) with contractor. 2. Novation agreement (a) The customer’s rights, interest & liabilities under the S&P will be transferred to the IFI as the ‘owner’. 3. Assignment of rights, interest and liabilities (a) The customer assigns his rights, interest and liabilities under the S&P to the IFI. Issued on: 23 December 2015
  8. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 43 / 44 Appendix 5: Illustration on trigger events that require IFI’s intervention and potential actions taken No. Trigger Event 1. Performance-specific trigger events (a) (a) The Action Taken IFI discontinues the Progress of istisna` project is disbursement of the funding to the lagged and behind the agreed contractor until the istisna` asset schedule is completed as per the agreed schedule (b) The IFI appoints an alternative contractor in the event where the earlier contractor has failed to make the necessary rectification to meet the agreed schedule 2. Organisation-specific trigger events (a) Financial position of contractor is deteriorating (a) In the event where the weak the financial position of the contractor potentially leads to the non- delivery of the istisna` asset, the IFI must appoint an alternative contractor. Issued on: 23 December 2015
  9. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 44 / 44 Appendix 6: Illustration of options for customer due to nondelivery of istisna` asset and corresponding implication No. Options Implications Istisna` asset is not completed and not delivered 1. Take possession of (a) Customer (purchaser) must pay the selling price up the istisna` asset on to the stage of completion of the istisna` asset. as-is basis (b) IFI (seller) must compensate customer (purchaser) for loss incurred due to non-completion of the istisna` asset. 2. Terminate the istisna` contract (a) IFI (seller) must refund all amount paid by the customer (purchaser). (b) IFI (seller) must compensate customer (purchaser) for loss incurred due to non-completion and nondelivery of the istisna` asset. Istisna` asset is delivered but not meeting agreed specifications 1. (a) Ownership of istisna` asset remains with the IFI Reject delivery (seller). (b) Customer (purchaser)’s obligation to pay istisna` selling price is waived. (c) IFI (seller) must refund all amount paid by the customer (purchaser). 2. Accept delivery and (a) Customer (purchaser) agrees to pay the agreed selling price of istisna` asset. pay original price (b) IFI (seller) must deliver the istisna` asset to the customer based on as-is basis. 3. Accept delivery at (a) Customer (purchaser) agrees to take possession of new terms agreed by the istisna` asset on as-is basis and pay the the revised selling price. contracting parties (b) IFI (seller) must deliver the completed istisna` asset to customer on the revised delivery date. Issued on: 23 December 2015