INTRODUCTION

The emergence of Islamic banking represents one of the important characteristics of Islamic resurgence in our time. Many Islamic commercial contracts such as Mudarabah, Musharakah, and Murabahah have been revived. Istisnd' in its own right can play an important and, in many ways, a leading role in the Islamic banking system, especially when the major parts of goods in a commercial transaction are manufactured goods and notably due to the flexible legal nature of Istisnd' and its secure aspecit of investment.

Despite the scattered discussion about this contract in the classical juristic works, especially the Hanafi jurists and the single detailed legal study of Kasib al-Badran in the 1970s, followed in 1991 by the work of al-Tadamun Bank, the topic did not receive much attention until recently. However, al-Badran's study is somewhat impractical as it has endorsed some rules which are unacceptable nowadays although it still has the merit of being the first detailed study on Istisna'. Meanwhile, al-Tadamun Bank's study is good on some legal aspects even if it did not touch certain other issues, yet it is shallow on the practical and economic aspects of Istisna'.

The first academic discussion of a modern type about the legal aspect of Istisna' and its possible application in Islamic banking was in the seventh session of the Islamic Fiqh Academy,¹ where different papers were presented and an important resolution was adopted. This was followed by another similar discussion held in Qatar in conjunction with ths twenty-second meeting of directors of investment in Islamic banks.

But despite these welcome scholarly efforts, the topic is still in need of a detailed study, which will relate the theoretical aspects with the practical position, and lay down the legal basis for some of the new elements introduced in this contract due to modern practice. Among the issues that call for further investigation must be mentioned the clause about liquidated damage, the arbitration clause, the possibility of rebate for any customer who reimburses in time or before the due date, or the problem of security and risk management in this contract.

Thus, since there is no specific Qur'anic Ayah or Hadith which establishes clearly the legality of this contract, a brief study of the doctrine of freedom of contract in Islamic law is necessary, because the specific evidence advanced by the jurists is somewhat less than convincing. This article also addresses the legality of a contract in which the subject-matter is non-existent and its relation to Istisna. As well as this I will discuss the distinctive features of Istisna' and its independence from other contracts to avoid some of the confusing remarks advanced by some scholars in this area.

Furthermore, since Istisna is a special kind of contract we need to look into its relation with options (khiyarat); especially rhe option of defect (khiyar al-'ayb) and the violation of the desired description (Khiyar al-wasf). Closely related to the study of options is stipulation by the seller (Islamic bank) to preclude his liability for any defect in the commodity and its special consequences regarding the contract of Istisna'. The binding effect of tils contract and its crucial effect in the stability of transactions nowadays will be elaborated upon especially since the majority of the classical jurists consider it as not binding. This opinion naturally makes this contract of no use in our time.

The clause of liquidated damages and penalties in the contract of Istisna deserves careful attention due to its practical consequences on the one hand, and its modern academic discussion as a principle in Islamic commercial law on the other. This is balanced by the effect of change of circumstances and its legal consequences in the contract of Istisna'. On the other hand, as in any transaction, the possibility of dispute in the application of Istisna' is inevitable. Therefore, the methods of dispute settlement need to be tackled. Arbitration as a way of dispute settlement deserves special attention since Islamic banks include in their contract an arbitration clause.

Moreover, we will examine the role of Istisna' in economic development where Istisna' can play an important role by developing the manufacturing sector, financing economic activities, stabilising; the price of manufactured goods, promoting the industrial and technological advancement and contributing to the involvement of many streams of society in economic activities. Furthermore, we will look into areas of application where Istisna' is applicable to the various industries as long as it can be monitored by measurement and specification and can be manufactured or constructed at any stage of the process of its application. In addition, we will explore the different modes of its application, either Istisnff sale or parallel Istisna' and the legal status of the parties in the contract. Finally, the criteria of project evaluation in Istisna will be elaborated upon covering the legal or Shari' criterion, the commercial viability of the project, the financial situation of the application or his management record and the strategy of security and risk management and insurance.

CONCEPT AND DEFINITION

According to most authoritative Arabic dictionaries, the word Istisna' is derived from the word Sana'a which literally means "making,² manufacturing, or constructing something".³ Although the dictionary meaning of the word is to make a thing, its juridical meaning is disputed among the jurists. Some jurists define it by giving examples; others tackle it through its essence and attributes. For instance, it is defined as "when one orders a craftsman to prepare a piece of furniture for a determined price, to be delivered later, or one may engage a cobbler to make a pair of shoes for a fixed price".⁴ It is also defined as "a contract with a manufacturer to make something".⁵ However, al-Zarqa defined it as a contract of selling a manufacturable thing with an undertaking by the seller to present it manufactured from his own material, with specified descriptions and at a determined price.⁶

ISTISNA' AND ITS RELATIONSHIP WITH OTHER CONTRACTS

It is necessary to study the distinctive features of Istisna' and its independence to avoid some of the confusing expressions reported by some scholars in this area. First, the Malikis, Shafi'is and Hanbalis consider Istisna' as a variation of Salam, then they subsume it under the definition of Salam. On the other hand, some of the Hanafi scholars considered Istisna' as a pure Ijarah. Others considered it as Ijarah at the beginning and a sale at the end of the contract.⁷

First of all, despite the fact that Istisna' and Salam have some points of similarity, such as the non-existence of the subject-matter or the future delivery, there are some points of differences as:

(1) The subject-matter in Istisna' is always something that needs manufacturing while Salam is possible in anything whose descriptive conditions can be fulfilled;

(2) It is necessary in a Salam contract that the price is paid in advance while in Itisna' it can be prompt, deferred or paid in instalments;⁸

(3) The classical jurists have also maintained that Salam is binding while Itisna' is not. However, this is not the modern approach;

(4) The classical jurists have also pointed out that the time of delivery is an essential part in the contract of Salam while it is not necessary in Itisna'.⁹ However, modern jurists reject this point of difference, as we shall see later.

Concerning the relation between Itisna' and Ijarah it should be noted that the manufacturer in Itisna' undertakes to make the required goods with his own material. However, if the customer provides the material, and the manufacturer is required to use his labour and skill only, then, the transaction is not Itisna' but becomes Ijarah instead.

Regarding the point of similarity between Itisna' and fu'alah is that in both contracts the work or the labour is a condition, but they differ in the fact that Itisna' is only possible in manufactured goods while fu'alah applies to everything. Furthermore, the labour can be well determined in Itisna' but this might not be the case in fu'alah. In addition, they differ in their subject-matter which in the contract of Itisna' is the labour and the material, but it is only the labour in Fu'alah.¹⁰

With reference to the relation between Itisna' and Murabahah it should be noted that Murabahah is basically the sale of goods at a price covering the purchase price plus a margin of profit agreed upon by both parties concerned¹¹ while Itisna' is a contract where the deal can be referred to something not in existence at the time of concluding the contract. However, Itisna' has some more advantageous characteristics as a method of investment by directly financing the manufacturing of commodities, paying salaries to workers and bearing the administrative costs. In Murabahah, the role of the bank is restricted just to the act of selling. Moreover, in Murabahah, the transaction would not be considered as legal unless the Islamic bank owns the commodity first before transferring it to the buyer. During this period of ownership of the commodity by the Islamic bank, there is a possibility of risk of damage or loss while in Itisna' the commodity will be transferred only after its completion.

Finally, the difference between sale and istisna' is more obvious since in absolute sale there is no labour while in Itisna' it represents the cornerstone of the contract. Thus, it appears clear that the contract of Itisna' is not Salam, or fu'alah, Ijarah, or an ordinary contract of sale. It is an independent kind of contract with is own conditions. Moreover, it combines the distinctive traits of some of these contracts, such as:

(1) The distinctive traits of Salam as to its permissibility even though the subject-matter of the contract is not in existence at the time of the contract;

(2) In addition, the distinctive trait of the ordinary sale whereby the price can be paid by instalments or deferred and it is not necessarily to be advanced as in Salam.

THE LEGAL BASIS OF ISTISNA'

Before proceeding with the specific evidences advanced by the classical jurists for the legality of this contract, it is necessary to discuss briefly the theory of freedom of contract in Islamic law and the contract based upon a non-existent object due to their crucial importance in the legality of Istisna'.

Freedom of contract in Islamic law

The relevance of this theory with Istisna' lies in the fact that first of all there is no explicit text from the Qur'an and Sunnah to establish the legality of this contract and the main basis for its legality as advanced by the classical jurist is Istihsan which is based upon need and necessity. It seems that the argument of necessity or need is less convincing since it implies that the possibility of admitting new contracts is the exception and not the norm in Islamic law. However, by elaborating the principle of freedom of contract, we will be able to demonstrate that the possibility of adding a new contract is normal and not exceptional. As a result, the contract of Istisna' will be based upon the wide principle of freedom of contract and not the result of necessity.

In addition, the modern application of the contract of Istisna' witnessed a fundamental shift from the concept of Istisna' as it was dealt with in the classical legal discourse concerning such subjects as the contract is binding from the very beginning, recourse to the doctrine of unforeseen circumstances, or recourse to arbitration before a judicial court, and especially the introduction of punitive and liquidated damage clauses which lead some modern writers to contend that such a clause vill drive the contract of Istisna' beyond the limits of what is allowed by the classical jurists.¹² However, these changes and other changes in the contract of Istisna' could safely be accommodated under the broad principle of freedom of contract.

Muslim scholars have advanced divergent opinions with regard to the freedom of the contracting parties to conclude the contract they think fit or to stipulate the conditions that they desire. This diversity of opinions can be summarised into two categories: some hold that all contracts and the conditions attached to them are considered to be prohibited except those permitted by the Shari'ah. The Zahiri Sichool championed this opinion. Likewise, rules formulated by Hanafiyyah, Shafi'iyyah, and Malikiyyah are based on a similar opinion. However, jurists other than the Zahiri are relatively more liberal since they accept Qiyas and Maslahah (Public Interest).

The opponents of freedom of contract cited a Hadith, where the Prophet is reported to have said: "Whatever condition there be which is not in the Book of God is void even if it were a hundred conditions. The judgment of God is truer and His conditions are more binding. Patronage belongs only to the emancipator".¹³ Similarly, it is reported that the Messenger of God said: "if anyone does a deed that we have not commanded, then it will be repudiated".¹⁴ Hence, they concluded that all contracts and conditions are prima facie invalid unless their making has been permitted by a rule of law.¹⁵

On the other hand, the advocates of freedom of contract in Islamic law held that the non-restriction of nominated contracts represents the general rule, while any restriction is considered to be exceptional. They based their argument on the Qur'anic verses: "Oh you who believe fulfil all obligations" (Al-Ma'idah 5:1). This stand is supported by the verse: "He hath explained unto you that which is forbidden unto you except under compulsion or necessity" (al-An'am 6:119), which means that, in the natural state of things, there is a presumption of legality. All acts and dispositions (including the making of contracts and conditions) are valid (mubah) unless they have been expressly prohibited.¹⁶ Besides, they cited the saying of the prophet: "Every stipulation is lawful among the Muslims, except one, which declares forbidden what is allowed or allows what is forbidden".¹⁷

It seems that it is right and logical to follow the second school. This is, first of all, due to the strength of the evidence and arguments advanced, and on the other hand, every age or country has contracts and transactions to which it is accustomed, and it will amount to imposing hardship on people to require a legal text from the Qur'an and Sunnah which authorises every contract or condition. Thus, contracts and conditions that have expanded nowadays to an extent unknown to early fuqaha' would be paralysed and people would be faced with serious difficulties, whereas Allah (s.w.t.) has said: "Allah desires for you ease, He does not desire for you difficulty" (al-Baqarah 2:185). Therefore, it could be submitted that the contract of Istisna' is legally based upon the theory of freedom of contract and it is only under this theory that the drastic shift in the modern concept of Istisna' from its concept in the classical literature could be justified.

Sale of a non-existent object and its relationship to Istisna'

The importance of studying the existence of the subject-matter of a contract during the conclusion of Istisna' lies, first of all, in the fact that the contract of Istisna' is basically a future trading contract where the subject-matter is non-existent at the time of the contract. Secondly, due to the interpretations of the Hadith: "Do not sell what is not with you",¹⁸ three schools of law did not recognise the contract of Istisna' as an independent contract and subsumed it under Salam. Moreover, some scholars went further and mentioned explicitly the illegality of the contract of Istisna.'¹⁹  Besides, the Hanafis considered Istisna' as an independent contract, however, they maintain that it is legal on the basis of Istihsan and not under Qiyas or the general principles of contract, because it is a sale of what one does not have.²⁰ However, this opinion as we shall see is rejected by modern scholar due to their endorsement of the broader interpretation of Ibn Taymiyah and Ibn al-Qayyim. On the other hand, the Hanafis consider Istisna' as not binding and their main argument is that it is a sale of what has not been seen.²¹ For these reasons and other matters, it seems necessary to elaborate briefly on the different interpretations of this Hadith and its effect on the contract of Istisna'. There are different interpretations of the Hadith in question:

(1) "Do not sell what is not with you" means not to sell what one does not own (la tabi'ma laisa 'indaka) at the time of sale;²²

(2) Some other jurists and Hadith scholars hold that this Hadith applies only to the sale of a specified object (Al-'ayn) and not to fungible goods as those can be substituted or replaced with ease;

(3) A third position is that a sale of "what is not with you" means the sale of what is not present and what the seller cannot deliver. This is the view of Ibn Taymiyah;²³

(4) Finally, some contemporary legal writers have taken into consideration the changes of market in the present circumstances compared to the time of the Prophet.²⁴ Therefore, the possibility of gharar or dispute is not present here.

The specific legal basis of Istisna'

Muslim jurists have tried to establish the legality of this contract from different legal sources: the Qur'an, the Sunnah, Ijma', Qiyas, Istihsan, and Maslahah. However, Istihsan seems to represent the first legal basis for this contract especially in the literature of the classical schools of law. Al-Kasani in this regard said:

Concerning the legality of Istisna', in principle it would not be allowed on the basis of Qiyas because it is a sale of what we do not have nor on the basis of Salam and the Prophet had prohibited the sale of what we do not have ... and it is allowed based on Istihsan because people are unanimous about its need. They have used it through the ages and the Prophet has said "My community shall never agree on an error"²⁵ and "What is good for Muslims is good in the sight of Allah".²⁶

It is also claimed that this contract is based on Ijma'.²⁷ The claim of Ijma' by the Hanafis is widespread among the major Hanafi works, such as al-Mabsut and al-Badai'.

Regarding the basis of Istisna' under public interest (Maslahah), which refers to unrestricted public interest in the sense of not having been regulated by the lawgiver and no textual authority can be found on its validity or vice versa,²⁸ al-Ashgar said: "The use of this contract, for example: in building construction, shoes, furniture and other items without objections from the scholars is a demonstration of the general need. Therefore, it should be legal on the basis of public interest".²⁹

On the other hand, Siddiq al-Darir maintains that Istisna' is based on Qiyas and not against it as it is claimed by the Hanafis. He argues that although the subject-matter in this contract does not exist, its availability is certain, and there is no risk (gharar) especially in the opinion that Istisna' is a binding contract. Then it is a legal contract, and any contract free from excessive risk (gharar} is a contract in accordance with Qiyas.³⁰

Besides, according to al-Ashgar the legality of this contract can be demonstrated by the Qur'anic guidance in the story of Zulqarnain where some people requested him to build a barrier between them and the Gog and Magog people (Surat al-Kahf 18:94). Commenting on this verse, Ibn Abbas said "kharajan" means big reward. According to al-Ashgar, this verse represents a guidance in the Qur'an for the legality of the contract of Istisna'.³¹

But it seems that this agreement may have been concluded as a leasing contract or any other type of contract or even a pure charity. Therefore, the claim of considering it as evidence for the legality of Istisna' is hard to accept. On the other hand, this contract is also contended to be based on a Hadith that the Prophet had ordered the manufacture of a ring³² and a pulpit³³ for himself. However nothing prove that the ring or the pulpit are made under Istisna'.

The binding effect of Istisna'

The classical Hanafi jurists generally divide the binding effect of this contract into three stages. At the first stage where the work of manufacturing has not yet started, the Hanafi jurists are unanimous that the contract is not binding (lazim) upon either of the parties and the manufacturer may refrain from making the commodity and both contracting parties have the right of revocation.³⁴ At the second stage, the manufacturer may finish making the needed goods, but the client has not seen the manufactured object yet. The manufacturer still has the right even to sell the commodity to a third party. The third stage is when the required goods have been manufactured and presented to the purchaser. Here, again the Hanafi jurists have different opinions whether the purchaser has a right to reject the commodity or not.³⁵

However, it is reported that Abu Yusuf is of the opinion that Istisna is binding from the first stage whereby no one has the right to revoke the contract, because otherwise the manufacturer will be harmed and it is possible that he will not find anyone who will buy the goods from him in time or he may not get a similar price as agreed upon with the first purchaser.³⁶

Moreover, Article 392 of the Majella endorses this opinion and considers the contract of Istisna' as binding from the beginning. In addition, if we refer to the opinion of the contemporary Muslim jurists we realise that they follow the Majella provisicn.³⁷ Furthermore, the practice in the Islamic banks is also based on this opinion. Thus, al-Tadamun Bank opted for this opinion by providing that: "This is the opinion which can go along with the circumstances and conditions of the modern time especially with the booming industries".³⁸

The option of defect and the option of desired description in Istisna'

The two major types of options related to the contract of Istisna' are the option of defect and the violation of the desired description because a commodity manufactured under Istisna' may turn out to be defective.

These two kinds of options have great similarities and have the same legal bases.³⁹ The option of defect is the right of the buyer to cancel the contract or to confirm it if he discovers a defect in the object, which diminishes its value.⁴⁰ The option of the violation of the desired description is the right to rescind the contract due to the absence or violation of the desired description stipulated by the contracting parties in the subject-matter of the contract.⁴¹

These options are based on some Hadiths, such as: "Do not tie up the udder of female camels and sheep; if one among you buys them with its udder tied up he has two options after milking it, whether to retain it or to return it with a measure of dates".⁴² "It is not lawful for a Muslim to sell anything to his brother and there is a defect which he does not show him (inform him about it)".⁴³ "Who cheats us is not from us".⁴⁴

Conditions for valid exercise of the option of defect

(1) The defect should exist before the conclusion of the contract;

(2) The defect must still be in existence when the buyer takes possession of the object;

(3) The buyer must be unaware of the defect at the time of the contract and of taking the object into his
possession;

(4) The contract must not have been subject to an agreement excluding guarantee;

(5)  It must be general, in the sense that such goods are generally free from such defect;

(6) The defect must still be in existence: when the buyer wants to annul the contract;

(7) The defect must not be so minor that it can be easily removed;

(8) The seller did not stipulate that he is not liable for any defect.⁴⁵ However, this last condition will be discussed separately later due to its special effect in the contract of Istisna'.

The buyer who discovers a defect in the commodity in accordance with the conditions stated above is guaranteed the right by law:

(1) Either to annul or to confirm the contract with the whole stipulated price as far as the Hanafis and Shafis are concerned. As for the Malikis this right is given only if the defect is major;

(2) To annul the contract or to confirm it with a commensurate damage to the defect according to the Hanbalis. The Malikis view is the same if the defect is minor.

Concerning the violation of the desired description the general rule is that as with all the previous conditions, the buyer has an option whether to return the goods or to take them at the full price without any compensation for the violation of the desired description.⁴⁶ The confinement into these two alternatives is due to the fact that what is violated is only a description and the description is not valuable and has no special part or role in the price.

Istisna' and stipulation by the seller to preclude liability from defects in the commodity

Generally the Hanafi jurists give the seller the right to distance himself from any liability for any defect in the commodity as far as the clause or condition is the result of mutual consent between the contracting parties. Meanwhile, the majority of other Muslim scholars held that, the seller is still responsible for any defect in the commodity despite his stipulation to waive himself from any responsibility. Moreover, this waiver could be accepted only if the defect is invisible because any waiver of responsibility from any defect will protect fraud, dishonesty and corruption. These arguments are taken into consideration when the seller is acting in good faith. However, if he is acting in bad faith or misrepresentation, the Muslim jurists are unanimous that the clause is void, and the seller is responsible for any defect.⁴⁷ Nevertheless, what concerns us here is the legality of such a clause in the contract of Istisna'. The classical jurists have not discussed the matter. But al-Zarqa opines that among the points of difference between the ordinary sale and Istisna' which must be adopted is that, any clause to waive the responsibility of the seller from any defect in the commodity must be regarded as absolutely void regardles. of the difference about its legality among the classical scholars in the ordinary sale. The logic of this opinion is clear where nowadays Istisna' is concluded with large industries with sophisticated articles involving high technology where any defect will lead to a huge financial loss.⁴⁸

From the above, it is clear that the Islamic banks should bear responsibility for any defective products that they have undertaken to manufacture. And they have to sue their parallel contractors for damages instead and the Islamic banks should not see this approach as an obstacle, but rather as one of the factors that distinguishes between Ribawi' investment and Islamic investment.

Different conditions for the legality of Istisna'

These conditions are divided into general conditions and specific conditions. As a contract, Istisna' must fulfil the requirement of a valid contract i.e., the capacity of the contracting parties, offer and acceptance, and the subject-matter should be a valuable thing. In addition to these general conditions, there are some specific conditions for the contract of Istisna' itself.⁴⁹

(1) The object must be precisely determined both in its essence and qualily.⁵⁰ If the commodity is of the modern sophisticated electronic kind, sue a as a radio, television, etc., it can be determined by the design of a renowned expert engineer or by a very well known sample;⁵¹

(2) The early Hanafi jurists are of the opinion that it is not permissible to practise Istisna' in what is not familiar among people under this contract, such as the manufacture of cloth.⁵² However, the example of cloth is very familiar nowadays and the types of manufacture differ from age to age and for this reason the Majella cited new permissible things such as a ship.⁵³ According to al-Qaradaghi, it is possible to add to this all industrialised things irrespective of whether they are from the heavy, medium and primary industry as well as special items such as satellites. Al-Zarqa went further by opining that as industrialisation booms in the world today, manufacture is becoming common in almost everything. Then, there is no need for this particular condition;⁵⁴

(3) It is a condition that the time of delivery is specified, whether it is short or long, so as to avoid ignorance, which might lead to conflict between the two parties.⁵⁵ This is to avoid dispute between the parties;⁵⁶

(4)  The materials should be supplied by the maker: if they are supplied by the buyer the contract is Ijarah and not Istisna';⁵⁷

(5) The place of delivery should be specified if the commodity needs loading or transportation expenses.⁵⁸

It is worth mentioning that it is not a condition in a Istisna' contract to advance the payment, though it is permissible to do so, or to defer it, or make the payment in instalments. Also, it is not a condition that the seller should himself make the commodity. He can fulfil his obligation by bringing a commodity with an exact prescribed description although manufactured by a third person. Finally, it is not a condition that the seller be an expert in manufacturing.⁵⁹

The contract of Istisna' and the clause of liquidated damages and penalties

Al-Majma' al-Fiqhi al-Islami in its Resolution No. 66/3/7, 1992 concerning the contract of Istisna' includes a clause about liquidated damages and penalties.⁶⁰ By liquidated damages and penalties is mean a prior agreement between the parties to a contract about what sum shall be payable in the event of one party failing to complete or delaying his contractual obligation.

The basic source of legality of this concept lies in what is reported by al-Bukhari, narrated by Ibn Sirin that:

... a man said to a hirer of animals, prepare your travelling animals and if I do not go with you on such and such day, I shall pay you a hundred dirhams, but he did not go on that day. Shuraih said: "If anyone imposes a condition on himself of his own free will without being under duress he has to abide by it". Also it is narrated by Ayyub from Ibn Sirin that "A man sold food, and the buyer told the seller that if he did not come to him on Wednesday, then his deal would be cancelled, and he did not turn up on that day". Shuraih said to the buyer "You have broken your promise" and gave the verdict against him.⁶¹

Also we have the Hadith of the Prophet (pbuh) "Muslims are bound by their stipulations".⁶² It is clear that the clause of liquidated damages is in the interest of the contract and it is a catalyst and an inducement for its fulfilment. Despite these evidence from the Sunnah, the topic did not receive ample attention from the classical jurists, but during the latter part of the Ottoman Empire, as pointed out by al-Zarqa, the topic has been revived.⁶³

One of the recent extensive and detailed studies on the legality of the liquidated damages and punitive clause is the study of Hay'at Kibar al-'Ulama' in Saudi Arabia which analysed it through the general theory of contract and conditions. The council concluded unanimously that the punitive condition on a contract is a legal condition and must be taken into consideration unless there is an excuse for the non-fulfilment of ths obligation. However, it should not be used as a means of financial threat, which in consequence will become incompatible with Shari'ah principles.⁶⁴

However, the implementation of this principle may vary according to custom, size and kind of transaction and the Islamic bank involved. Thus, in al-Rajihi Banking and Investment for instance, if the Islamic bank fails to deliver the manufactured goods in time and without any reason, it will be liable for damages amounting to ten per cent of the total cost of the contract for every year. However, if the delay is caused by the sub-contractor, he will be liable for damages amounting to 15,000 Riyal for each day but the total amount of damages should not exceed 10,000,000 Riyal. On the other hand, if the delay is from the custcmer who fails to prepare his side of the project, he will be liable for damages of one per cent for every week but the total amount of such damages should not exceed five per cent of the total cost of the contract.⁶⁵ However, the clause of liquidated damages is somewhat restricted by the effect of change of circumstances.

The effect of change of circumstances in the contract of Istisna'

In most legal systems, change in circumstances generates legal consequences that are, in turn, governed by a number of defined legal principles and rules. The doctrine of change in circumstances means: "Occurrences which radically disturb the equilibrium of a contractual obligation, making the performance excessively onerous for one of the contracting parties".⁶⁶

It is possible to find authority for this doctrine in the following Qur'anic verses: "God commands justice and fair dealing (al-Nahl 16:90), "O ye who believe! Eat not up your property among yourselves in vanities" (al-Nissa' 4:29). It is possible also to prove the authority of this doctrine by the following legal maxims: "No harm may either be inflicted or reciprocated". "Necessity is judged according to its merits" (Majalla Art. 22); "Harm must be eliminated to an end" (Majalla Art. 20).

The relevance of this doctrine in the contract of Istisna' is like the case in any other obligation; the performance of the obligation of the parties to a valid contract can be frustrated by events beyond their control. These events make the performance of the contract either impossible or fundamentally different from that which was initially contemplated by the parties. Sometimes the impact of such events is so considerable that the performance of the contract is completely frustrated and the parties are therefore discharged from their obligations. However, it may be that the contract only needs readjustment to enable reasonable performance of the parties' obligation. The readjustment may be contractual, if the parties agree, or judicial, if the parties disagree.

However, there is no agreed minimum level above which the buyer may be entitled to a reduction in the price. However, the Malikis maintain that the concept of al-fai'ha will be applied only when at least one-third or more of the drop was affected. This would validate the buyer's claim for a reduction in price.67 However, it seems that largely custom and changes of time and place influence this question. It is worth mentioning that al-Majma' al-Fiqhi al-Islami has a very important resolution. It decided that in deferred contractual obligations (such as the contracts of import and construction) if the situation has changed drastically and the fulfilment of the contractual obligations becomes very hard for one party as a result of price fluctuation for instance and not as a result of negligence or shortcoming from the affected party, the court can intervene, if it has been notified, to balance the rights and obligations, by dividing the loss between the parties.

It is also possible to cancel the contract regarding the non-fulfilled part of the contract if it seems to the court to be the favourable solution with just and reasonable indemnities for the affected, party. The court should rely on the opinion of reliable and trusted experts in its assessment. The court could also defer the fulfilment of the obligations if it becomes obvious that the unforeseen event will end soon and the second party will not be harmed by this deferment.68

However, for the application of this doctrine several conditions must be fulfilled. Thus, the event should be exceptional, unforeseeable, of a general character, and must occur during the time of performance of the contractual obligation excessively onerous for the contracting party invoking the doctrine of change of circumstances. There should also be a direct causative link between the exceptional, unforeseeable, and general event and the onerous nature of the performance.69

But if the above-mentioned requirements have been shown to exist, the court has the power of intervention to adjust the onerous obligation. Before intervening in this way, the court may ask the contracting parties to re-negotiate the contract among them. Failing any agreement between the parties, the court's intervention will usually be affected either by reducing the aggrieved party's onerous obligation or by increasing the counter obligation.70

Arbitration and the contract of Istisna'

The study of arbitration in the contract of Istisna' is a new approach. It is the direct result of the modern application of this contract in Islamic banks where an arbitration clause is always included in the contract. In addition, commercial disputes do not fit into any particular mould, and, in international or domestic contracts the parties often prefer to have disputes between them settled by arbitration. Therefore, the availability of an effective, independent and impartial mechanism for the settlement of investment disputes is considered to be one of the crucial factors which must be borne in mind in the assessment of the investment climate.

Regarding the binding effect of Istisna' and the legality of an arbitration clause some writers claim that an agreement to arbitrate can only strictly be made after the dispute arises. An arbitration clause in the Western form would ccnstitute gharar because the nature or occurrence of a future dispute is uncertain.71 The Shari'ah determines that, in the interests of fair and ethical dealing, elements of uncertainty or risk (gharar) are to be avoided. What is non-existent necessarily involves a strong element of gharar.12 On the other hand, apart from the Maliki School, the general view is that such agreements are not binding. Each one of the parties can revoke the agreement up until the time the award is made in the absence of prior authorisation of a judge. This view is expressed in Article 1847 of the Majella.

However, these arguments are unacceptable. It seems that any arbitration clause should be considered as an ordinary contractual commitment, which is valid and binding on the parties by virtue of the general theory of contracts already discussed. Furthermore, the Maliki jurists have stated clearly that an arbitration agreement is irrevocable.73

Furthermore, all the different opinions advanced by the scholars are Ijtihadi opinions, based on what they believe will secure the interest of the parties. Therefore, there is no harm in adopting the Maliki's opinion based on Maslahah. Moreover, it is well proven by the international practice nowadays that the interest of the parties would not be secured unless we acknowledge the binding character of arbitration clauses.

The scope of arbitration has given rise to a lot of discussion among Muslim jurists.74 However, there is one area where there is general agreement that it falls within the scope of arbitration, namely the area of commercial transaction. Therefore, arbitration clauses in the contract of Istisna' are without any doubt within the scope of arbitration. It is stated in the Majella, Art. 1941: "It is permissible to appoint an arbitrator in actions for property, dependent on the rights of people".

Generally, an arbitrator must possess the quality of a judge (Qadi).75 However, these qualifications are more theoretical than practical since even the existing judges did not fulfil these requirements. Thus, we find Article (4) of the Saudi Arbitration Code stipulating that an arbitrator must be of experience, good conduct and behaviour and full legal capacity, and the implementation rule in its sub-section (3) provides that an arbitrator may be chosen from among professionals (such as lawyers and accountants) and may be a government official, provided approval of his department is obtained. As a rule, if a dispute is to be heard by more than one arbitrator, the umpire must be knowledgeable in the relevant principles of the Islamic Shari'ah commercial codes, customs and traditions prevailing.

In practice, business persons tend to choose arbitrators who possess practical experience and knowledge in business matters rather than those who are knowledgeable in legal issues.76

Thus, the use of arbitration by the Islamic bank is legally based on strong fundamentals in regard to its legality, binding effect (luzum) and award.

THE TERMINATION OF THE CONTRACT OF ISTISNA'

As one of the nominated contracts in Islamic law, Istisna' is terminated by the normal ways of termination of contracts, namely, when the manufacturer makes the commodity and presents it to the buyer and receives payment.

On the other hand, classical jurists are of the opinion that the contract of Istisna' can be terminated by the death of one of the contracting parties.77 Thus, due to the similarity between Ijarah and Istisna' it is argued that the contract of Istisna' should be terminated by the death of one of the contracting parties as in the case of Ijarah.18 However, this form of extinguishing the contract of Istisna' is contested by some modern scholars and restricted by others.

Due to the extensive application of the contract of Istisna' nowadays, the manufacturer is not a single person. It is rather a large corporation. Therefore, it is not imaginable that the contract will be ended by the death of one or two persons. Thus, we must differentiate between a contract of Istisna' between individuals and one which involves corporations and industries.79 However, this opinion is less convincing and the best solution is to refute the Hanafis arguments. This will be expounded as follows:

(1) The Hanafis claimed that Ijarah is terminated by the death of any one of the contracting parties and the contract of Istisna' likewise will be governed by the similarity between the two types of contracts. However, there is no similarity according to the majority, namely, the Malikis,80 the .Shafis81 and the Hambalis;82

(2) Nowadays the industrial corporations, and in our study the Islamic banks, have a juristic personality which will continue as long as the corporation is in existence and it will not be affected by the death of its members;

(3) The analogy of the Hanafis is a discrepant analogy because the subject-matter in Ijarah is the labour alone, while in Istisna' it is the labour and the material;

(4) We are not at all in need of Qiyas since the contract of Istisna' is a contract in its own right and should not be subjected to another contract.83

The role of Istisna' in economic development

As a mode of investment, Istisna' can play an important role in economic development. It encourages the demand for manufacturing goods; financing economic activities, contributing to the stabilisation of prices of manufactured goods, promoting industrial and technological advancement and making use of the available possibilities of the economy.

The manufacturing sector represents the backbone of modern economies. Istisna' can play a role in strengthening this sector by increasing the demand for manufactured goods. It is not a condition in Istisna' that the price should be paid in advance. Thus different bargains can be concluded and the price will be paid in the future or in instalments. Moreover, there is no doubt that the increase of the demand has a great economic effect by expanding economic activities, opening new areas of competitiveness, creating new jobs and enlarging the market.

Furthermore, if the buyer possesses the money during the conclusion of the contract and pays in advance, the manufacturer will benefit from this payment to finance the process of production or other investment projects. Moreover, it will finance the expenses of manufacturing and stabilise the process of production.

Furthermore, the contract between the buyer and the seller before the production of the commodity will be based on sound calculations. The buyer would be aware that what he pays is commensurate to the right price. The manufacturer on his side wants the market to continue its progress in a stable manner to guarantee a regular demand for his merchandise. Thus, the agreed price will be based on solid estimates, which will contribute to the prevalence of a market price, which reflects the realities of supply and demand.

In addition, based on the production and trade of manufactured goods, and in particular the need to take the utmost care in the selection of the manufacturer, Istisna' increases competition and specialisation in the manufacturing field which will, in turn, boost technological advancement in this area, a factor which is not available in other modes of investment. Finally, a seller in an Istisnd' transaction need not supply the necessary services for the manufacturing of the goods by himself. This makes it possible for financial institutions, like Islamic banks, to be the seller in Istisna' contracts. Therefore, it is inevitable for a financial institution that assumes the role of a seller in Istisna' transactions to relate the Istisna' contract to a third party that will be able tc provide the necessary services for manufacturing the goods. Furthermore, it is necessary sometimes to have a consultant or supervisor to monitor the effective progress of the production. Thus, Istisna' allows the involvement of many parties in the production which will contribute to the reduction of unemployment.84

Areas of application of Istisna'

Istisnd' is applicable to the various industries as long as they can be monitored by measurement and specifications and which could be manufactured or constructed at any stage of the process of production. Thus, it can be used in the food processing, drying, or canning industries or beverage manufacturing. The Istisna' contract is applicable also in high technology Industrie  such as aircraft industries, locomotives, ships, cars, electronics and machines produced in big factories and workshops.85

It can also be used to finance intangible assets, such as electricity and gas. In addition, Istisna' could be used as an international mode of investment (especially among Muslims countries) in pre-shipment financing of the acquisition of capital goods in projects for which no other suitable mode of financing is available.

The Islamic development bank, for instance, has so far used instalment sale and leasing mostly for financing finished goods. Working capital needed for the production of such goods falls outside the ambit of the Islamic Development Bank financing. With the introduction of Istisna' as a mode of financing, it lias now become possible for the Islamic Development Bank to finance working capital needed for the production of capital goods.86 But the most common area of financing through the contract of Istisna' up to now is in house building finance. Perhaps this is due to the infancy of the manufacturing sector in most Muslim countries or due to the general policy in Islamic banking where the goal of Islamic financial institutions in an Islamic state should take into consideration the goal of achieving the basic needs of the society, of which housing is one of paramount importance.

In the Gulf states, for instance, where the establishment of Islamic banks, synchronised with the galloping building expansion and increasing revenues of these countries as a result of the 1970s oil boom, a considerable part of investment has gone into the housing sector".87 The construction industry was the field where Istiina' has played a prominent role and where the investment of a single Islamic bank reached billions. Thus, Istisna' has contributed in solving one of the crucial contemporary problems.88

On the other hand, the Islamic Development Bank has been generally financing economic infrastructure through loans. This is because financing of infrastructure has been the exclusive zone of the public sector. However, in recent years, the financing of economic infrastructure projects has witnessed a shift from the public to the private sector. It has, for several reasons, been realised that some infrastructure projects may be more efficiently financed and managed by the private sector. The projects that have featured prominently in this shift are those that have regular and reliable cash flows, such as telecommunicatio is, power generation, transmission and distribution, toll roads, airports, seaports, pipelines and water supply and sanitation. Given that the development of infrastructure is a prerequisite of general economic development, the Islamic banks should not be less keen in their support of these projects because they have shiftec from the public to the private sector. On the other hand, it will not be feasible for the Islamic banks to extend financing to private sector projects through interest free loans. Istisna' will give the Islamic bank a mode of financing infrastructure projects that cannot easily lend themselves to financing by way of instalment sale or leasing.89

Modes of application of Istisna'

The Islamic bank can use Istisna' as a buyer by contracting with industrial and manufacturing institutions, or with any artisan to manufacture or construct for it some commodities with specific description. Then, it can sell them after receipt, for cash, installed or deferred payment through Murabahah or bay' bi al-Thaman al-'ajil. Thus, the Islamic bank will be involved in direct investment. But this method is related to some extent to the position of the Islamic bank where in practice some Islamic banks are not allowed to be involved directly in commerce.90

It is also permissible for the bank to enter an Istisna' contract in the capacity of seller to those who demand the purchase of a particular commodity. Then, it will draw a parallel Istisna' contract in the capacity of a buyer with another party to make or manufacture the commodity agreed upon in the first contract. This method is more suitable to the practice of Islamic banks nowadays but in Malaysia in particular, despite the very wide definition given to "Islamic banking business" in the Islamic Banking Act, which can accommodate easily the concept of Istisna.' It is appreciated that Parliament intentionally gave Islamic banking business a general and, therefore, a very wide definition so as to give as much flexibility and scope as possible to Islamic banks to enable them to grow, expand their operations, and to evolve into viable competitors to conventional institutions.91 Bank Islam Malaysia unfortunately has not been involved up to now in this important mode of investment as it should be.

The first Istisna' can be immediate or deferred and the payment in the second Istisna' can be cash or deferred as well. The parallel Istisna' is the most applicable form of Istisna'. Accordingly, the deal may involve three parties: firstly, the customer (the buyer); secondly, the Islamic bank (the seller); and finally, the original manufacturer. Sometimes, especially in building construction, it may involve four parties; the customer; the Islamic bank (contractor); the subcontractor; and a consultant or an expert to supervise the execution of the construction contract.

It is worth noting that the contract between the Islamic bank and the customer and the contract between the Islamic bank and the manufacturer or sub-contractor should be separate and independent from each other. Moreover, the Islamic bank should not wait for the coming together of two parties agreeing on the manufacture or construction of something, and proposing that the bank finances the project only because such a deal can no longer be an Istisna' but rather a loan with interest (qard bi al fai'dah). This is because in such a deal the Islamic bank is just lending money to the seller for a determined profit.

It is necessary for the Islamic bank to set up its special unit on matters related to Istisna' having its own special relation with the manufacturers and constructors with whom it can bargain and contract on its own responsibility, sharing with them the risk, benefit, and bearing the liability of any defect in the manufactured or constructed commodity. Only in this way, it is possible to make the difference between a usurious (Ribawi) and interest-free investment. Furthermore, Islamic banks have their own objectives, which differ from the conventional bank; an alteration therefore, in the structure of the bank is necessary to fulfil this objective in a Shari' manner.

On the other hand, a correct implementation of Istisna' can avoid the problems and criticisms that are encountered in Murdbahah in its application. Thus, ir Murabahah the agreement between the Islamic bank and the customer must be ar ordinary promise according to the majority of Muslim scholars, and the customer would not be liable for any misfortune which may face the specified commodity. Moreover, the customer has a full option to accept the requested item or to reject it even without reason. It is obvious that under such circumstances the use of Murabahah by the Islamic banks will be very limited due to the different risks mentioned above. To avoid these problems, some scholars have adopted the view that the promise between the customer and the Islamic bank should be considered as binding which would mean that the customer will be under an obligation to accept the commodity. But the legal bases of this opinion is controversial and for these reasons even the proponents of this idea, such as al-Qaradawi, are discouraging the Islamic banks from an excessive use of Murabahah.92

The second criticism advanced against Murabahah is that it involves a sale prior to taking possession while it is a requirement of a valid sale in Islamic law that the purchaser may not sell the goods purchased until they are in his possessio. In support of this ruling, jurists have referred to the authority of some ahadith. Although some scholars have tried to restrict this principle, it is far from being a point of consensus of the majority and it is difficult in such conditions to gain the confidence of the customers. In addition, the role of the Islamic bank is almost negative in Murabahah as practised nowadays just limited to the act of delivering the various cheques and signing the documents.

On the other hand, the good performance of Istisna' could be proven by ihe following figures. Thus, in Dubai Islamic Bank, for instance, and in the field of real estate activity in particular, Istisna' jumped from zero in 1990 to 49 per cen! in 1994 compared to Murabahah which declined from 100 per cent to 51 per cent in the same period.93 In addition, according to Ibrahim al-Ghafaly, the Deputy General Manager of al-Rajihi Banking and Investment, Istisna' represents a vehicle which allows flexible payment options and now constitutes 27 per cent of Al-Rajihi's portfolio. This constitutes such a major shift from Murabahah that it is likely to be mirrored throughout the Islamic-financing sector.94

Project evaluation in Istisna' investment

There are some mechanisms and criteria governing the evaluation of projects in Istisna' investment. These will be looked at below.

The legal (Shari') criterion

The Shari' criterion in Istisna' investment is similar to other investment activities in Islamic banks governed by the principle of halal and haram. Therefore, the subject-matter of Istisna', for instance, must not be prohibited items such as the manufacture of alcohol or its derivatives or the canning of pig meat or the construction of gambling clubs, etc. Furthermore, the primary consideration for the acceptability of a project is the non-existence of any element of interest or Riba. It is obvious that the Shari' criterion will not be the subject of compromise or concession as it constitutes the basis of acceptance of all other criteria concerning Istisna'. 

Commercial viability of the project

The second condition is that the project should be commercially viable, generating enough cashflow to cover direct costs, and overhead expenses, and earn a reasonable return for the investor. On the other hand, the project should contribute to other socio-economic goals, such as the creation of jobs, growth of the economy, and foreign exchange. Therefore, the Islamic bank will critically review the feasibility of the project and judge the soundness of the venture from the commercial standpoint.95 Islamic financial institutions therefore always ask for audited financial statements for the latest three years in operation. These figures give the bank an opportunity to analyse the financial trends and reasonably judge their causes.96

Customer performance and management

The process of evaluation of the customer includes detailed information about his reputation, his financial situation, and his management capabilities. Thus, if the applicant is suffering from certain financial strains resulting from poor performance of his other business, there is a possibility that it might also affect the performance of the new proposal as well. That is why the Islamic banks should ask for audited financial statements and business projections. In addition, the general economic situation is analysed, especially the economic sectors to which the project under study belongs because it may have a negative impact on the project.97

Furthermore, the Islamic bank may be interested to know whether the entity the customer represents is a proprietorship, partnership or a limited liability company to ascertain the legal set up. The Islamic bank may need to know the place and the year 01 registration, number of years in operation and the line of the cust Diner's business. It is possible also to ask about the company's market, its size, and its share in the market and the strategy to increase this share. Finally, the customer may be asked to identify the names, addresses, and contact persons of banks he deals with.98

The role of consultant or supervisor in the contract of Istisna' and its legal status

Generally, as the customer is not an expert in construction or manufacturing and he likes to receive a specified commodity according to his specifications, he may need an expert or consultant to advise him to this effect. On the other hand, the Islamic bank on its side, wants to be sure that every part that it has financed is performed according to the specifications desired by the customer. Moreover, the Islamic bank will release no progress payment unless the beneficiary certifies that the work for which payment is claimed is executed in conformity with the contract. For these reasons a consultant or supervisor is needed in Istisna'. However, some practical issues have been raised about the status of the consultant, especially his appointment and payment. In principle, he should be appointed and paid by the customer (buyer), since he is acting on his behalf and any approval by the consultant of any executed part of the contract is considered as an acceptance by the buyer.

At the beginning of the implementation of the contract of Istisna' in Islamic banking, the appointment and payment of the consultant was the respons ibility of the customer. Nevertheless, it was realised later that there is sometimes a lack of co-operation between the consultant and the Islamic bank and the consultant sometimes acts in a biased manner against the sub-contractor and the Islamic bank. To solve this problem, the practice in some Islamic banks has beer adjusted so that the beneficiary (the buyer), in consultation with the Islamic bank, appoints the consultant to supervise the execution of the work by the manufacturer/contractor.99 However, it should be noted that the Islamic bank should appoint its own consultant besides the customer's supervisor, and any dispute which may arise would be solved through the ordinary way of dispute settlement. This is legally preferable rather than applying Istisna' through illegal practices.

Istisna' and the possibility of rebate

Once again, this new subject in the study of Istisna' is the direct result of the modern application of this contract. If the beneficiary (buyer) pays the instalment of the price of the goods falling due in a particular year, on or before their due dates, the beneficiary (buyer) shall be entitled to a rebate. In the practice of the Islamic Development Bank, for instance, this rebate may amount to 15 per cent of the rate of return of the Islamic Development Bank's investment in respect of those instalments for that year.100

However, there is a difference of opinion among Muslim jurists concerning an agreement between the debtor and the creditor as to if the debtor pays on time or before the due time, whether the creditor should rebate part of the debt. The legality of such a dealing is disputed. Some scholars maintain that it is an illegal transaction, arguing that such a dealing is similar to what all scholars agreed about its prohibition, namely to ask the debtor to add more money in exchange for a relaxation in the time of payment. Thus, in both cases there is an exchange of time with money. In contrast, some other jurists held that there is no problem in such a deal. They assert that it is reported from the Prophet that he said to the Jews, after the decision of their evacuation from Madinah and their claim of debt toward some people, pay less for early settlement (dau' wa ta'ajjalu).101

The reason behind the jurists' disagreement is the interpretation of this Hadith and the previous analogy drawn by some others. However, it is suggested that:

(1) The Islamic bank may give rebate of a special amount of money to a customer who pays on time or before the due time without a pre-determined agreement;

(2) It is possible that the Islamic bank will make it a general policy pertaining that all cases of payment prior to the due date without an antecedent agreement are subject to rebate;

(3) In some cases it may be necessary for the Islamic bank to secure its interest to make such a rebate for some of its customers who will not pay unless they get such a reduction.102 It should be noted that the Islamic Fiqh Academy in its resolution regarding bay' al-taqsit maintained that a rebate after an early payment by a customer is legal if it is not the result of a prior agreement and there is no intermediary or middle person between the two parties. In cases where bankruptcy, delay of payment, or death, debtor and the debt is prompt, then, it could be rebated with mutual consent.103

Furthermore, if we consider this transaction in a wider perspective, it is obvious that it is in favour of the weaker party. It is totally the opposite of cases of Riba, which will make the rich richer and the weak weaker. Having said this, it is better to leave the matter to the Islamic bank assessment, on case-by-case basis, and not to make it general policy. Otherwise, some opportunists may abuse it and this may lead to instability in the market.

Security and risk management in the contract of Istisna'

Istisna' involves the manufacturing of goods or the construction of buildings or other assets (ships, aircraft, etc.). Consequently, all risks associated with manufacturing or construction contracts are present in the contract of Istisna'. The major risks that have to be addressed in an Istisna' transaction, with regard to the relationship with the manufacturer, is the latter's failure to deliver the commodity in time, or his failure to deliver conforming goods. The failure to deliver the goods on time could be due to delay in the execution of the works, accident, or unforeseen events, the occurrence of a calamity (i.e. the goods are destroyed by fire or otherwise lost), or the insolvency of the manufacturer.

I have already discussed how the first two issues can be addressed and the risk can be eliminated under the principle of liquidated damages and the theory of unforeseen events. In this part of the article I shall deal with two remaining issues.

Insolvency of the manufacturer

Though liquidation, chronologically speaking, will be the last misfortune that can befall a company, it is being addressed here as the first risk in the context of Istisna'. This is to remind ourselves of the need to take the utmost care in the s election of the manufacturer and the rigorous examination of its financial standing and technical and administrative capability.104 There are some alternative measures for Islamic banks to protect their investment, such as taking a mortgage, taking a charge over all the assets of the manufacturer, taking a refunding bond guarantee, taking a personal guarantee, taking a bank guarantee from another bank, or taking cheques for the instalment equal in value to the remainder of the sale price after deducting any advance payment, which is paid at the time of signing the contract to purchase.105

Insurance and the contract of Istisna'

It is usual to deal with the risk over the loss of assets or their destruction (totally or partially) during construction or manufacturing by means of insurance. The manufacturer should, therefore, be obliged to take out the appropriate insurance policies and assign the proceeds of these policies to the Islamic bank concerned.

In case of partial loss, the manufacturer may be allowed to use the proceeds of insurance to restore the asset to its condition before the occurrence of loss. If, as a result of events beyond the control of the parties, such as floods, earthquakes, volcanic eruptions, and other natural disasters, or adverse political actions, such as expropriation, change of law, war, etc. the manufacturer is unable to complete the construction or the manufacturing, a reasonable extension of time may be granted.

If, after this extension of time, the manufacturer could not complete the manufacturing of the assets, the contract may be terminated and the buyer can claim a refund of the payments, which he has paid and compensation for any loss caused by such a delay.106

Thus, the contract with the manufacturer shall require him to insure the assets under manufacture and until their delivery for their full replacement value under a contractor's all risk policy.107

CONCLUSION

Our study of the contract of Istisna' shows that it has witnessed a major shift from its concept in the classical analysis as necessary transformations are required to enable this important method of investment to play its role in the modern framework of transactions.

However, in Malaysia in particular, as I have mentioned before, despite the wide definition given to "Islamic banking business" in the Islamic Banking Act (1983) and despite the fact that the area of application of Istisna' is the fastest growing area in the Malaysian economy,108 Bank Islam Malaysia has not yet benefited from this golden opportunity. Other financial institutions are restricted by law to be involved in trade and manufacturing.

From a practical point of view, as discussed earlier, Istisna' has all the potential to be one of the leading modes of investment in Islamic banks. However, despite this attractive picture of Istisna', some practical issues are still problematic. If the Islamic banks do not tackle them in a forthright manner, they may lead to further complications. Thus, the Islamic banks must be held liable for any defect in their product, as I have already discussed while referring to al-Zarqa's opinion. He maintained that any clause by the Islamic banks to exclude their liability from any defect in the manufactured item shall be considered null and void due to the special character of Istisna'.

But Mohamed el-Fatih Hamid is of the view that the problem should be submitted to the Islamic Fiqh Academy, saying that "though the views of a jurist of the stature and scholarship of Professor al-Zarqa command utmost respect, this issue is of great practical importance f 3r financial institutions using Istisna' as an instrument of financing. It, therefore, needs to be submitted to the Islamic Fiqh Academy for a final opinion".109

On the other hand, some Islamic banks, keeping the structural form of banks inherited from the conventional banks, are unable to deal with some of the rules of the Islamic law of transactions. Thus, some Islamic banks authorise the customer to conclude the contract with the sub-contractor on their behalf. Of course, wakala is valid but in such a sensitive area it is better for the Islamic bank to set up a special unit on Istisna' to conclude the contract with the sub-contractor. They ought also to have their own special team of experts to supervise the fulfilment of their obligations.

Finally, despite the successful implementation of Istisnd' by some Islamic banks, it seems that the full potentials of this contract have not been totally used, especially with regard to the possibility of issuing Istisna' certificates to raise funds or to manage liquidity. Yet, this is an issue which needs separate investigation.

* PhD student, Faculty of Laws, International Islamic University.

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NOTES & REFERENCES

1. The session was held in Jeddah, Saudi Arabia, from 7 to 12 Zul-qa 'idah 1412H, March 1991.

2. Ibn Manzur, Muhammad Ibn Mukarram, Lisan al-'Arab, Dar Sadir, Beirut, Lubnan, 1955, Vol. 8, pp. 208-212.

3. Ibn Yacoub al-Fayrozabadi, al-Qamus al-Muhit, Mua'ssasat al-Risalah, Beirut, 1983, p. 54. See also E. W. Lane's, Arabic English Lexicon, Islamic Book Centre, Lahore, Pakistan,  1982, Vol. 4, p. 1733.

4. Al-Kasani, Abu Bakr Ibn Masud, Badai' al-Sana'i Fi Tartib al-Sharai', Dar al-Kutub al-'Ilmiyyah, Cairo, 1948, Vol. 6, p. 2677.

5. 'Al a' al-Din al-Samarkhandi, Tuhfat al-Fuqaha', Mat ba'at Jamiat Dimashq, Damascus, 1983, Vol. 2, p. 538.

6. Al-Zarqa, Mustapha Ahmad. 'Aqd al-istisna' Wa mada Ahammiyyatuhu Fi al-Istitmarat al-Islamiyyah al-Mu'asira (Lecture Series of Renowned Scholars No. 12), Islamic Development Bank, Jeddah, 1995, p. 21.

7. Ibn al-Humam, Muhammad  Ibn' Abd  al-Wahid, Fath  al-Qadir, Maktabat al-Rashidiyyah, Pakistan, 1985, Vol. 2, p.32.

8. Dunya, Shawkhi Ahmad, al-fu'ala wa al-Istisna' Tahlil Fiqhi wa Igtisadi, al-Bank al-Islami Li al-Tanmiyah, Jeddah Saudi Arabia, 1991, p. 30.

9. Ibn 'Abidin, Rad al-Mukhtar' ala Sarh al-Dur al-Mukhtar, al-Maktaba al-Tijariyyah, Makkah al-Mukarramah, 1986, Vol. 5, p. 225.

10. Al-Qaradaghi, " 'Aqd al-Istisna'", Majallat Majma' al-Fiqh al-Isami, No. 7, Vol. 2, 1992, pp. 336-344.

11. Sudin Haron, Islamic Banking Rules and Regulations, Pelanduk Publications, Selangor, Malaysia, 1997, p. 75.

12. Al-Badran, Kasib, 'Aqd al-Istisna' Fi al-Fiqh al-Islami Dirasah Muqaranah, Dar al Da'wah al-Islamiyyah, al-Iskandariyyah, 1980, p. 218.

13. Sahih al-Bukhari with Fath al-Bari (Book of Conditions), al-Matba'ah al-Salafiyyah, Vol. 4, p. 369.

14. Sahih Muslim (Book of Aqdiyah), Kitab al-'Aqdiyah, Hadith No. 1718.

15. Ibn Hazam, al-Muhalla, Dar al-Kutub al-Islamiyyah, Beirut, Lubnan, 1988, Vol. 8, p. 412.

16. Abhath Hai'at Kibar al-'Ulama' Bi al-Mamlakah al-Arabiayyah al-Saudiyyah, Matab'at Ibn Khuzaimah, Riyad, 1991, Vol. 1, pp. 101-130.

17. Sahih Muslim, Kitab al-Shurut, Hadith No. 2876.

18. Abu Dawud, Sunan, Hadith No. 2187.

19. Ibn Muflih, Kitab al-Furu', 'Alam al-Kutub, Beirut, Lubnan, 1984, Vol. 4, p. 24.

20. Al-Kasani, Badai' al-Sanai', Vol. 6, p. 2678.

21. Ibid., p. 2680.

22. Muhammad Ibn Isma'il al-San'ani, Subul al-Salam Sharh Bulugh al-Maram, al-Maktabah al-Tijariyyah, Cairo, Vol. 3, p. 17.

23. Al-Baghawi, Abu Muhammad al-Husayn, Sharh al-Sunnah', al-Maktab al-Islami, Damascus, n.d., Vol. 8, pp. 140-141.

24. For further details, see Kamali, "Islamic Commercial Law, An Analysis of Futures", The American Journal of Islamic Social Sciences, Vol. 13, Summer 1996, No. 2, pp. 205-7.

25. Ibn Majah, Sunan Ibn Majah, Kitab al-Fitan, Hadlth No. 3950.

26. This is not a genuine Hadith. It is just the saying of Ibn Mas'ud, reported by Ahmad, al-Bazzar and al-Tabari, see Ahmad Shakir's comment on Musnad al-Imam Ahmad, Vol. 5, p. 211, Hadith No. 3600.

27. See al-Kifayah, Vol. 3, p. 222.

28. Kamali, Muhammad Hashim, Principles of Islamic Jurisprudence, Pelanduk Publications, Selangor Darul Ehsan, Malaysia, 1995, p. 339.

29. Al-Ashgar, Muhammad Sulayman, Bay' al-Murabahah Kama tujrih al Bunuk al Islamiyyah 'Aqd al Salam Wa 'Aqd al-Istisna' 'wa Imquaniat Istifadat al-Bunuk al Islamiyyah, Dar al-Nafa'is, Amman, 1995, p. 157.

30. See, al-Darir, Siddiq Muhammad al-Amin, al-Gharar wa atharuhufi al'uqud, Majmu'at Dallah al-Barakah, Jeddah, 1991, p. 457.

31. Al-Ashgar, Bay' al Bay' al-Murabahah, p. 157.

32. Malik Ibn Anas, al-Mudawanah al-Kubra, Dar al-Fikr, Beirut, Lubnan, Vol. 2, p. 9; al-Nawawi, Rawdat al-Talibin, Dar al-Kutub al-Ilmiyyah, Beirut, n.d., Vol. 4, p. 7; Ibn Qudamah, al-Mughni, al-Maktabah al-Tijariyyah Makkah al-Mukarramah, 1985, Vol. 4, pp. 310-316.

33. Sahih al-Bukhari, Kitab al-Salat, Hadith No. 965.

34. Al-Kasani, al-Badai' al-Sanadi', Vol. 5, p. 2680.

35. Ibn al-Humam, Fath al-Qadir, Vol. 8, p. 116; Al-Kasani, Badai' al-Sanai', Vol. 6, p. 2680.

36. Al-Muhit al-Burhani (Manuscript in Al-Awqaf Library), Vol. 2, pp. 575-576. As reported by Al-Qaradaghi, 'Aqd al-Istisna', p. 347.

37. See, for instance, Al-Zuhaili, al-Fiqh al-Islami Wa Adillatuh, Dar al-Fikr, Damacus, 1989, Vol. 4, p. 634.

38. Al-Tadamun Bank, 'Aqd al-Istisna', p. 51.

39. Ibn Hazhm, 'Ali Ibn Ahmad, al-Muhallah, Dar al-Fikr, Beirut, n.d., Vol. 9, p. 41; Vol. 8, p. 314.

40. Wafa, Muhammad, Bay' al-Taghrir Wa al-Tadlis Bay' al-Ma' yub fi al-Fiqh al-Islami wa al-Qanun al-Wadi'al-Misri, Dar al-Tiba 'ah al-Muhammadiyyah, Cairo, 1987, p. 15.

41. 'Abd al-Satar Abu Ghudbah, alkhiyar Wa Athruhu Fi al- 'Uqud, p. 419.

42. Sahih al-Bukhari, Kitab al-Byu, Hadith No. 1340  Sahih Muslim, Kitab al-Iman, Hadith No. 164.

43. Ibn Majah, Sunan Ibn Majah, Kitab al-Byu', Hadith No. 2789.

44. Sahih Muslim, Kitab al-Byu', Hadith No. 2987.

45. Al-Zuhaili, al-Fiqh al-Islami Wa Adillatuh, Vol. 4, p. 559; and Wafa, Mohammad, Bay' al-Taghrir, pp. 104-109; Baillee, Mohammadian Law of Sale, pp. 126-127.

46. Ibn al-Humam, Fath al-Qadir, Vol. 5, p. 136.

47. See Wazarat al-Awqaf al-Kuwaitiyyah, al-Mausua' al-Fiqhiyyah, Vol. 20, p. 98.

48. Al-Zarqa, 'Aqd al-Istisna', pp. 37-49.

49. Al-Badran Kasib, 'Aqd al-Istisna', p. 147.

50. Al-Kasani, al-Badai', Vol. 6, p. 2677.

51. Bank al-Tadamun, 'Aqd al-Istisna', pp. 37-38.

52. Hashiyat Ibn 'Abidin, Vol. 5, p. 223; and Ibn al-Humam, Fath al-Qadir, Vol. 5, p. 355.

53. Majella, p. 388.

54. Al-Ashgar, Bay' al-Murabahah, p. 160.

55. Koja Ezzedine, Instrument of Islamic Investment, p. 54.

56. Al-Qaradaghi, 'Aqd al-Istisna', pp. 354-356.

57. Koja, Ezzedine, Instrument of Islamic Investment, p. 53.

58. Ibid., p. 54.

59. Al-Qaradaghi, 'Aqd al-Istisna', pp. 347-548.

60. Al-Ashgar, Bay' al Murabahah, p. 183.

61. Al-Bukhari, Sahib al-Bukhari with Fath al-Bari (Book of Conditions) (Shurut), Vol. 5, p. 354.

62. See Sunan al-Tirmidhi with Shark Tuhfat al-Ahwazi, Kitab al-Ahkam, Vol. 4, p. 584; Sunan Abi Dawud with 'Awn al-M'abut, Vol. 9, p. 516.

63. Al-Zarqa, al-Madkhal al-Fiqhi al-'Am, Vol. 3, p. 386.

64. Abhath Hay'at Kibar al-'Ulama', Vol. 1, pp. 101-264.

65. 'Abd al-Bari Muhammad, 'Ali Mish 'al, "al-Dawabit al-Shari'yyah li-'Aqd al-Istisna' bi Sharikat al-Rajihi al-Masrifiyyah", al-Iqtisad al-Islami, No. 195, Year 17, June 1997, p. 140.

66. Adnan Amkhan, "The Effect of Change of Circumstances in Arab Contract Law" [1994] ALQ 258.

67. See, e.g. al-Dirdir, al-Sharh al-Saghir, 1974, Vol. 4, pp. 241-247.

68. See Qararat Majlis al-Majma' al-Fiqhi al-Islami li-Rabitat al-'Alam al-Islami, January 1985, pp. 99-104.

69. Adnan Amkhan, "The Effect of Change of Circumstances in Arab Contract Law" [1994] ALQ 258 at 263-268.

70. Ibid., 269.

71. See Saleh, Commercial Arbitration, pp. 49-50.

72. See Rayner, The Theory of Contract in Islamic Law, p. 366.

73. For more details see al-Baji, al-Muntaqa, Vol. 5, p. 227; Ibn Farhun, Tabsirat al-Hukkam, Vol. 1, p. 55.

74. See al-Dawri, 'Aqd al-Tahkim Fi al Fiqh al-Islami Wa al Qanun al-Wadi', Matba't al-Khulud, Baghdad, 1985, pp. 243-280.

75. Articles 1792, 1793, 1794, the Majella,  translated by C.R. Tyser, Law Publishing Company, Lahore.

76. Yahya al-Samaan, "The Settlement of Foreign Investment" [1994] ALQ 227-228.

77. Al-Kasani, al-Badai', Vol. 6, p. 2672.

78. Ibn al-Humam, Fath al-Qadir, Vol. 5, p. 354.

79. Bank al-Tadamun, 'Aqd al-Istisna', pp. 60-61.

80. Ibn Juzai, al-Qawanin al-Fiqhiyyah, p. 291.

81. Al-Nawawi, Rawdat al-Talibin, Vol. 5, p. 245.

82. Ibn Qudamah, al-Mughni, pp. 467-468.

83. Al-Qaradaghi, 'Aqd al-Istisna', pp. 361 and 388.

84. Fayad 'Abd al-Mun'im, Bay' al-Istisna' wa tatbiqdtuhu al-Masrifiyyah al-Mu'asirah (unpublished paper), presented in the 22nd Meeting of Director of Investment in Islamic Banks, Qatar, 15-17 March, under the auspices of the Islamic Development Bank.

85. Islamic Development Bank, "Operational Guidelines on Istisna'" (unpublished material), pp. 3-4.

86. Ibid., p. 4.

87. Ahmed 'Ali Abdallah, "Forms of Investment in Real Estate in Islamic Perspectives", Islamic Banking Modes for House Building Finance (Seminar proceeding Series No. 28), Islamic Development Bank Publication, Jeddah, 1995, p. 43.

88. See Muhammad 'Abd al-Hakim Zi'ar, "al-Ijtihad al-Jama'i fi Majal al-Iqtisad al-Islami al-Istisna'", al-Iqtisad al-Islami, Markaz al-Tadrib wa al-Tatwir bi Bank Dubai al-Islami, Mo. 194, Year 17, April-May 1997.

89. See Mohammed El-Fatih Hamid, "Istisna' - Classical Concept in a Modern Framework", New Horizon Islamic Banking and Insurance, published by the Institute of Islamic Banking and Insurance, London, February 1997, No. 60, p. 4.

90. Fayyad 'Abd al-Mun'im, Bay' al-Istisna' wa Tatbiqatuhu al-Masrifiyyah al-Mu'asirah (unpublished paper presented in the 22nd Meeting of Directors of Investment of Islamic Banks, Qatar, 15-17 March 1997, p. 13.

91. Mohd Illias,  "Islamic/Interest-Free Banking in Malaysia: Some Legal Considerations", The Malayan Law Journal [1995] 3.

92. Ahmad 'Ali Abd Allah, al-Murabahah Usuluha wa Ahkamuha wa Tatbiqatuha fi al-Masarif al-Islamiyyah, al-Dar al-Sudaniyyah li al-Kutub, al-Khartum, 1987, p. 187.

93. See Richard Thomas, "Is the Murabahah an overused and abused facility?" "A future of Islamic finance", 'Accessing Islamic finance - Market and Investment Opportunities", collection of papers delivered at the Islamic Bank Conference, 17-18 October 1995, London.

94. The American Journal of Islamic Finance, 1997, Greenwich Hills Drive, USA, Spring 1997, Vol. VII, No. 1, p. 4.

95. 'Abd Allah Sheikh Muhammad, "The Islamic Way of Finance and Investment", The Muslims World League Journal, March 1992, Vol. 19, No. 9, p. 47.

96. Suleiman A. Dualeh, "How to Apply for Islamic Financing", The Muslim World League Journal, January 1992, Vol. 19, No. 7, p. 34.

97. Jamal Ahmad al-Asmar, "al-Istisna' baina al-Nazariyah wa al-tatbiq", p. 18; 'Abd Allah Sheikh Muhammad, "The Islamic Way of Investment", p. 48.

98. Suleiman, A. Dualeh, "How to Apply for Islamic Financing", p. 34.

99. Jamal Ahmad al-Asmar and Khalid Mohammad al-Salamuni, al-Istisna' baina al-Nazariyah wa al-tatbiq (unpublished paper presented in the 22nd Meeting of Directors of Investment in Islamic Banks, Qatar, 15-17 March 1997, under the auspices of the Islamic Development Bank, p. 26.

100. Islamic Development Bank, "Operational Guidelines on Istisna', p. 5.

101. Ibn Rushd, Bidayat al-Mujtahid wa Nihayat al-Muqtasid, Matb'at al-Baby al-Halaby, Cairo, Egypt, Vol. 2, pp. 143-144.

102. Al-Masrif al-Islami al-Dawli li-al-Istithmar wa al-Tanmiyah Markaz al-Iqtisad al-Islami Idarat al-Buhuth, Dalil al-Fatwa al-Shari'yyah fi al-a'amal al-Masrifiyyah ahammu ma Sadra min Fatwa al-Riba wa al-Fawa'id, Cairo, 1987, pp. 131-134,

103. See Majma' al-Fiqh al-Islami, Majallat Majma' al-Fiqh al-Islami, No. 7, Vol. 2, 1992, pp. 217-218

104. Mohamed el-Fatih Hamid, "Istisna' - Classical Concept in a Modern Framework", New Horizon Islamic Banking and Insurance, published by the Institute of Islamic Banking and Insurance, London No. 6, 1997, p. 6.

105. Jeremy Martin, "Security in Islamic Bank", New Horizon, London, No. 48, February 1996, p. 5.

106. Mohammed el-Fatih Hamid, "Istisna' Classical Concept", p. 7.

107. Islamic Development Bank, "Operational Guidelines", p. 8.

108. Before the recent economic turmoil the manufacturing and construction sectors are expected to provide a strong base for growth for the Malaysian economy. The manufacturing sector is expected to grow at between 11-13 per cent during the period 1996-1998, while growth in the construction sector will be at 8-9 per cent on average during the same period (see Malaysian Economy Outlook, Vol. 9, No. 2, December 1996, Malaysian Institute of Economic Research).

109. New Horizon, Islamic Banking and Insurance, London, February 1997, No.60, p.7.