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informabank.com > Blog > Financial System > Application of Istishna in Modern Islamic Finance
Financial System

Application of Istishna in Modern Islamic Finance

8 Min Read 61.7k Views

Istishna, is an integral concept in Islamic finance, which plays an important role in shaping the financial landscape for Muslims throughout the world. This term comes from the Arabic word “sana’a,” which means “to produce” or “make,” while Istishna itself is a contract involving the initiation, design, and production of a particular item. This is a concept that is firmly rooted in Islamic principles and functions as the main tool for financing various projects, especially in the construction and manufacturing sectors.

The Istishna concept is based on the principles of partnership, cooperation and justice which are the basic principles in business based on Islamic law. This concept emphasizes the importance of agreements that are mutually beneficial for the parties involved and encourage economic development while adhering to Islamic ethical standards.

Understanding the Principle of Istishna.

To understand the ins and outs of the Istishna concept, we must first understand the basic principles that guide this concept. Istishna is a business concept based on the principles of mutual consent, transparency and justice. This means that all parties involved in the Istishna contract must enter into an agreement voluntarily, where all parties have full knowledge and understanding of the terms and conditions. In addition, the cooperation contracts entered into must be fair and just, ensuring that all parties are treated fairly.

In addition, Istishna adheres to the principle of risk sharing and profit sharing, which has become the core of Islamic finance. In the Istishna contract, the risks and benefits associated with the project or goods produced in collaboration are shared between the producer and the buyer. This principle is in line with the Islamic belief that profits must be obtained through lawful means and that each individual must bear the consequences of the actions they take.

Characteristics of the Istishna Contract Components.

The Istishna contract consists of several main features and components that regulate the terms and conditions of an agreement. These features ensure that the cooperation contract is in line with Islamic sharia principles and encourages transparency and fairness in cooperation.

1. The Istishna Agreement must clearly include a description and details of the goods or projects produced in a collaboration. This includes the design, quality and specifications of the goods or services that will be produced in the collaboration. So collaborating parties need to have a comprehensive understanding of the goods being produced to ensure that both parties are on the same page.

2. The cooperation contract must outline the terms of cooperation and payment schedule. This includes the price of goods or projects produced in the collaboration and the payment period. It is important for both parties involved in the collaboration to agree on a payment structure to avoid misunderstandings or disputes.

3. The Istishna Agreement must overcome the problems of default and violations in a collaboration. Agreements based on these principles should outline the consequences and remedies in the event of non-compliance or failure to fulfill the terms of the contract. This ensures that both parties are aware of the consequences of their actions and encourages them to fulfill their obligations diligently.

To reduce the risks in the istishna contract, there are several steps that can be taken. First, define product specifications clearly and build clear communication between the two parties. That way, you can avoid misunderstandings, disappointments or disputes that might arise if the goods received do not match the specifications ordered. Second, agree on a fair and flexible price and payment method accompanied by penalty, guarantee or insurance clauses in the contract. This can help to reduce the risk of loss caused by delays, defects or damage to the goods ordered. Penalty clauses in contracts can be in the form of fines, discounts, or cancellation of the contract. Meanwhile, collateral in the contract can be in the form of a down payment, collateral, or securities. Insurance in the contract can be in the form of protection against the risk of natural disasters, fire or theft. The final important step is to monitor and evaluate the production process periodically until the goods are delivered. This can help to reduce the risk of delays, errors or fraud which could harm the buyer.

How to determine the price in an istishna contract depends on the type of payment agreed between both parties, starting from cash, installments or due. If payment is made in cash, the price includes production costs with the profit margin desired by the seller. If payment is made in installments, the price may include production costs, profit margins, and financial costs arising from delays or delays in payment. If payments are made on time, then the price includes production costs, profit margins, financial costs and risk costs arising from the possibility of default. Risk costs here can be in the form of loss reserves, insurance, or collection fees set by the seller.


Application of Istishna in Modern Islamic Finance.

The Istishna concept can be widely applied in modern Islamic finance, especially in the construction sector and manufacturing sector. Istishna contracts are usually used to finance large-scale infrastructure projects with large costs, such as the construction of mosques, schools, hospitals and other public facilities. These contracts facilitate the development of critical infrastructure for communities while adhering to ethical standards in Islamic sharia.

Apart from that, we can also use the Istishna contract in the manufacturing industry, which provides a means of financing for the production of goods. Manufacturers of manufactured goods may enter into Istishna contracts to secure funds for the production of certain goods, ensuring a stable supply of goods in the market.

Apart from infrastructure and manufacturing projects, the Istishna contract can also be adapted to various other sectors, such as the agricultural sector, technology sector and renewable energy sector. Istishna do’s flexibility in application allows this collaboration concept to adapt to the needs of the Islamic finance industry which continues to develop, providing flexible and sharia-compliant financing options.

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