Practical uses of the Istisnah contract

In-Depth Analysis

The Istisna contract can be entered into between a buyer and seller over an immovable tangible asset or a movable tangible asset. In legal and Shariah terms, an immovable tangible asset is the one which is permanently fixed to the earth surface either below or above the surface or both, and which cannot be taken from place to place. As for a movable tangible asset, it is defined as the asset which is freely mobile, portable or which is attached to the earth but can be dismantled relatively easily and moved from one place to another. Examples of immovable tangible assets are land, houses constructed on a plot of land, multistory buildings, bridges, tunnels, road networks, etc. To the contrary, a moveable tangible asset is anything which is not permanently fixed to the earth, for example, all types of vehicles, trains, planes, ships, cranes, etc. At times, plant and machinery (also referred to as 'plant and equipment' in accounting terms) are taken in either sense, depending on their nature. For example, an individual machine that may be attached to the land as part of an integrated production system and which could not be removed without substantial demolition of the system shall be considered as an immovable tangible asset. Similarly, an individual machine which is not supporting the whole system and can be taken out from the edifice without disturbing any surrounding infrastructure shall be termed as a movable tangible asset. An example from everyday life for both could be the central air-conditioned system with compressors, fans, pipes and other parts which are integrated to produce cool air as a single unit, and then there are the individual air-conditioned units (also called window air-conditioners in the UAE) where if one is taken out (or moved), the others continue to function. In the case of an immovable tangible asset, there is an option in Shariah that the seller under an Istisna contract may construct the required asset along with the land, or the asset is developed on the land owned by the buyer or even by a third party. Hence, the question arises as to how the seller is able to protect its interest in case the Istisna asset is built on the plot of land owned by the buyer or a third party. As per UK Law of Property Act 1925, when the land is sold or transferred (legal term: 'conveyance'), it includes fixtures attached to it, which could well be a building with plant and equipment, or a factory or warehouse, etc. However, in Shariah it is possible that the land is owned by one party and the structure is constructed over the land by another party and the construction is carried out for the benefit of yet another party. It is important that we refresh the Shariah definition of ownership before moving on. When it comes to the ownership of a tangible asset, there are two important aspects: the title and the possession. If both are owned by one person, he or she will be considered to have 'complete ownership' over the asset. However, if a person simply owns the title but does not have possession or if a person merely owns possession but does not have the title, this will be considered 'incomplete ownership'. Both types of ownership are important and are recognized in Shariah. Here, readers should note that such Shariah flexibility opens the door for numerous trading and investment opportunities compared to the static position in English law. Now, let us try to comprehend an Istisna contract with an immovable property. Imagine, a client comes to the Islamic bank and declares that he owns a plot of land on which he wants to build a tower but does not have the funds to do so. The customer requests the Islamic bank to finance the construction of the tower. After having completed the required due diligence process, the Islamic bank shall enter into an Istisna contract with the customer whereby it will sell the tower to the customer. In the Istisna contract, the Islamic bank shall be the seller whereas the customer shall be the buyer of the tower. As discussed earlier, the subject matter of the Istisna contract (in this case the tower) does not physically exist when the parties enter into the Istisna contract. However, it will be described in detail so that there is no ambiguity as to what type of asset is being traded. Such a description will form an integral part of the Istisna contract. So, at the time of signing the Istisna contract, the parties shall also enter into a Musataha agreement. A Musataha agreement creates a right which entitles the beneficiary of the agreement to construct a building on the plot of land belonging to another party for a certain agreed period of time with or without any compensation.