What Is Istisna?
Istisna (استصناع), meaning “to request manufacturing” in Arabic, is an Islamic contract specifically designed for commissioning the production of an asset. A buyer orders a specific item to be built or manufactured according to agreed specifications, at an agreed price, for delivery at a defined future date. The manufacturer undertakes to produce the item using their own materials and labour. Istisna is one of the most commercially flexible Islamic finance contracts because, unlike salam, it does not require the full price to be paid upfront — payments can be tied to project milestones.
Parallel istisna mechanism: In Islamic banking, the bank uses parallel istisna to finance construction projects. It enters a primary contract with the customer (agreeing to deliver a completed asset at a higher price with milestone-linked payments) and a separate contract with the builder (to construct at a lower price). The bank's profit is the spread between these two prices. The two contracts are legally independent of each other.
How Istisna Works Step by Step
Customer Specifies Requirements
The customer describes the asset to be built in precise detail: dimensions, materials, specifications, quality standards, and delivery date. The more detailed the specification, the clearer the contract and the lower the risk of disputes.
Bank Enters Primary Istisna
The Islamic bank contracts with the customer to deliver the completed asset at an agreed sale price, payable in milestone-linked installments. This is the primary istisna contract; the bank is the seller and the customer is the buyer.
Bank Contracts Builder (Parallel Istisna)
The bank enters a separate istisna contract with a builder or manufacturer to construct the asset at a lower price. This is the parallel istisna. The bank bears the risk that the builder delivers as specified; the customer is insulated from this construction risk.
Milestone Payments
As construction progresses and milestones are certified as complete, the customer makes payments to the bank. The bank simultaneously pays the builder under the parallel contract. Milestone weights reflect cost intensity at each stage.
Delivery and Handover
On completion and final inspection, the asset is delivered to the customer. Any defects must be remedied by the bank under its warranty obligations. Once accepted, the customer takes full ownership and the istisna contract is fulfilled.
Common Use Cases
Construction
Residential buildings, commercial properties, and industrial facilities financed through milestone-linked istisna contracts, with payments tied to construction stages.
Shipbuilding
Vessels commissioned to precise specifications with payment milestones aligned to keel laying, launch, sea trials, and delivery — one of the original uses of istisna in Islamic finance.
Infrastructure
Roads, bridges, power plants, water treatment facilities, and airports financed through istisna and sukuk structures, widely used across the GCC and Southeast Asia.
Bespoke Manufacturing
Custom industrial machinery, aircraft interiors, technology systems, and purpose-built equipment where the asset must be produced to precise buyer specifications.
Istisna vs Salam
Istisna
- Price paid in milestone installments
- For manufactured/constructed items
- Asset built to buyer's specifications
- Specifications can be adjusted by agreement
- No full upfront payment required
Salam
- Full price must be paid upfront
- For fungible commodities only
- Goods sourced from any supplier
- Terms fixed rigidly at contract signing
- Upfront payment is a strict requirement
“Whoever pays in advance for a thing must do so for a specified measure, a specified weight, and a specified time.”