Guide to salam and Istisna: Key similarities and differences

In-Depth Analysis

Having introduced Istisna at the tail end of our previous article, we shall now spend time understanding the key similarities and differences between Salam and Istisna before commencing a dedicated discussion on the Istisna contract. This comparison is essential because both contracts deal with trading in non-existent objects at the time of entering into the contract — a concept that may initially seem contradictory to the Shariah prohibition on Gharar (excessive uncertainty) but is in fact carefully regulated by the scholars. The first and most fundamental similarity is that both Salam and Istisna are sale contracts under Shariah for objects that do not exist at the time of contracting. In the case of Salam, the object is a fungible commodity — grains, oils, metals, textiles — that will be produced or sourced at a future date. In the case of Istisna, the object is a tangible asset — a building, a ship, a factory, a piece of machinery, an aircraft — that will be manufactured, constructed, or developed over time. The distinction is crucial: Salam deals with commodities that are interchangeable and indistinguishable, whereas Istisna deals with bespoke assets that are built to specific, detailed specifications. The second similarity is that both contracts require the complete specifications of the subject matter to be agreed upon at the outset. In Salam, the type, quality, quantity, weight or volume, and delivery date must be precisely defined. In Istisna, the specifications may run to hundreds of pages covering architectural drawings, engineering standards, materials, finishes, and performance criteria. The principle is the same — elimination of ambiguity — but the degree of specification detail in Istisna is substantially greater. The most significant difference lies in the payment structure. Salam mandates 100% upfront payment by the buyer at the time of entering into the contract (with a scholars-approved extension of two to three days for fund transfer). Istisna, by contrast, permits flexible payment arrangements. The buyer may pay the full price upfront, pay in installments commensurate with the progress of construction or manufacturing, or even pay the entire price upon or after delivery of the completed asset. This flexibility makes Istisna particularly suitable for large-scale construction and infrastructure projects where the total cost may be substantial and the development timeline may span years. Another key difference is the subject matter itself. Salam commodities must be fungible and must not be linked to a specific origin (as we discussed extensively in earlier articles). Istisna assets, however, are by definition linked to a specific project and location — a tower being constructed on a particular plot of land, a vessel being built in a specific shipyard, or machinery being manufactured in a designated factory. The non-fungibility and specificity of the Istisna asset is not a deficiency but rather an inherent characteristic of construction and manufacturing contracts. The practical implications for Islamic banking are substantial. Salam is primarily used for commodity financing and short-to-medium-term liquidity provision, while Istisna is the contract of choice for real estate development financing, infrastructure projects, ship financing, aircraft financing, and industrial equipment procurement. Many Islamic banks use Istisna as their primary tool for construction financing — a critical function given that real estate development is one of the largest sectors in Islamic finance. In the upcoming articles, we shall explore the applications of the Istisna contract in detail, including the concepts of Musataha (the right to build on another's land), parallel Istisna, and the uniquely permissible concept of financial compensation for delays.