Istisna Financing is a mode of sale, at an agreed price, whereby the buyer places an order to manufacture. It is a work in progress or advance payment financing. Istisna/work-in-progress assemble or construct, or cause so to do anything to be delivered at a future date. In Istisna financing, a commodity is transacted before it is manufactured. It is an order to a manufacturer to manufacture a specific commodity for a purchaser/customer of the bank. The manufacturer uses its/his/her own material to manufacture the required goods. In this mode of financing, price must be fixed with consent of all parties involved.
Istisna
mode of financing may be used for financing manufacturing, construction
of buildings, hospitals, schools, universities, farm buildings,
manufacturing of various machines, assembling of vehicles and heavy duty
machines. However, it is invalid for natural and finished products.
The
Majority of Commercial Banks in Ethiopia that provide Islamic finance
request the customer to fulfill the following criteria before processing
of Istisna Financing
- The applicant should have been in the business for at least one year and with a good business track record.
- The applicant shall provide its/his/her business plan.
- Applicants shall provide provisional or audited financial statements.
- Before delivery of asset, the customer shall make a minimum security deposit of 30% of the selling price of to be constructed/manufactured/assembled asset. After delivery, sold asset shall be used as security.
Features of Istisna
Cancellation of the contracts
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After
giving prior notice, either party can cancel the contract before the
manufacturing party has begun its work. Once the work starts, the
contract cannot be cancelled unilaterally
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Amended of the contracts
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The
contract price of an Istisna contract could be amended upwards and
downwards, as a result of intervening contingencies (Force majeure)
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Time of delivery
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It
is not necessary in Istisna that the time of delivery is fixed.
However, a maximum time shall be agreed upon between the parties.
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Delay in delivery
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If
it is agreed between the parties that is case of delay in delivery,
the price shall be reduced by a specified amount per day.
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Early delivery
|
If
manufactured goods are delivered -*before agreed date,
purchaser/customer could accept the same if the goods meet the
specifications. She/he/it can refuse to accept the goods earlier than
the due date, if he/she/it has a justifiable reason.
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Delivery receipt issuance
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The
customer shall satisfy itself as to the quality and quantity of the
goods at the time of delivery and shall issue a delivery receipt.
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Subject-matter
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It
is not permissible that the subject-matter of an Istisna contract be
an existing and identified capital asset. For example, it is invalid
for the Bank to conclude a contract to sell a particular designated
car or factory on the basis of Istisna.
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Parallel Istisna
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A
clear Istisna contract shall be entered between the bank and the
customer, whereby on the other hand, the bank may enter into a parallel
Istisna with the third party manufacturer/contractor, but this
contract shall not be tied up with the first contract.
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Title of the goods
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The
parties (the bank and the customer) can enter into a contract before
the seller/manufacturer assumes the title of the goods to be
manufactured/ constructed.
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Complete specifications
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The
agreement should describe complete specifications of the
goods/assets/services or manufactured items sale price, date and place
of delivery.
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Responsibility of defects
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The
parties may agree for a period during which the manufacturer will be
responsible for any defects or the maintenance of the subject matter.
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The price and mode of payment
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The
price and mode of payment to the manufacturer must be known at the
conclusion of the contract. i.e., the payment of price will be as per
mutual agreement e.g. full in advance, fully deferred to delivery,
partially advance and partially at delivery, in full payment after
delivery. However, all modes of payments are permissible.
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Subcontract
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The manufacturer may enter subcontract agreement with other manufacturers with the consent of the bank.
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Work amendments
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Amendments
and change orders in respect of work, with mutual consent, are
allowed and necessary changes may be agreed in the selling price
accordingly.
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Price adjustment
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Mutually
agreed adjustments in work schedule and payment terms are allowed in
case of force majeure. But no price adjustment should be made in
respect of change in repayment schedule.
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Risks
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Before
delivery, goods will remain at the risk of manufacturer/seller. After
delivery, risk will be transferred to the purchaser/customer.
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Possession of goods
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Possession of goods can be physical or constructive.
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Payment
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The
customer shall pay the installments of the price of the goods
manufactured/ constructed to the bank right from the day when the
contract of Istisna is signed by the parties or upon receipt of a
notice from the bank confirming that the goods are ready for delivery.
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Transfer of rights
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Upon
payment of the price, all rights and claims of the Bank against the
Manufacturer/Supplier on account of warranties pertaining to the goods
shall be transferred to the customer. In case of any defect in the
goods, the customer shall only have a claim against the
manufacturer/supplier to the complete exclusion of the bank.
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