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An evaluation of the suitability of the Istisna contract to financing small enterprises - Essay Example

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An evaluation of the suitability of the Istisna contract to financing small enterprises

These banks offer services based on religious teachings and laws. The banks continue to provide innovative financial products aimed at filling the existing gaps in the financial industry. These banks have used a philanthropic approach, adopted from Islamic teaching, to offer high quality services to customers. One of these approaches has been the Istisna contract. Based on the Sunnah of the prophet Muhammad (PBUH) this contract has transformed the banking industry immensely (Mahlknecht, 2009). The use of this contract may be enormously beneficial to people seeking comprehensive funding for small businesses.
The contract and its use by Islamic banks
The Istisna contract falls under the category of manufacturing contracts. It was created by the Islamic Financial Institution in line with the Istisna believes. The contract is strongly related to the shariah. In Arabic, the word Istisna means making a request to someone to build, construct or manufacture something for another. This contract is based on the principle meaning of the word. The contract, therefore, involves agreements for sale and purchase between two individuals. The items under discussion in the contract agreements of Istisna are non-existent. This can be termed as the greatest difference between the Istisna and other financial contracts within the industry (Warde, 2000). This has led to the identification of the Istisna as a exceptional sale agreement. Within the scope of the Istisna contract, the agreement is normally based on trust between the parties. The asset in the agreement normally has to be constructed or manufactured in a later date. The parties normally agree on the date in which the finished product should be delivered. The process of creating an Istisna contract needs to be handled with considerable care. The Shariah law dictates that a commodity intended for sale must in the hands on the seller when the sale is being made (Mahlknecht, 2009). The seller must also posses the ownership of the product intended for sale. A product to be sold must also have been gained through acceptable means by the Islamic law. The Istisna contract, however, seems to offer a slightly different ideology. In the Istisna contract, the products being sold are normally, not in their final form. The core aspect of the contract becomes the religious values attached to the agreement. All elements of the contract are based upon trust and belief in the ability of the manufacturing party to deliver items. The quality and quantity of the product is expected to meet the agreed upon standards. In the contract, the parties agree on the specifications of the goods to be manufactured as well as the date of completion of the manufacturing process. The cost price of the items can also be another element agreed upon by the contracting parties. All these elements are done through agreements made by the contracting parties. Within the scope of the Istisna contract, the Islamic financial institutions are requested by customers to manufacture a product. The product is manufactured by the financial institution on behalf of the customer. Upon completion of the construction, the product is then delivered to the customer for payment. Trust becomes essential as the customer may not be able to cater for the payment of the products delivered. An important note to make here is that the contract terms cannot be changed once they have been agreed upon. This becomes essential in ensuring that each party delivers its part of the bargain. Failure by either party, though, immediately makes the contract obsolete. The ...Show more

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The 21st century continues to see new inventions in many sectors of the economy. The modes of operations continue to diversify as years progress. The development of Islamic banking has immensely transformed the banking sector. …
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An evaluation of the suitability of the Istisna contract to financing small enterprises essay example
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