Sunday, January 02, 2011

BNM Shariah Parameter Reference 5: Istisna'a

I was reviewing the Bank Negara Malaysia Shariah Parameter Reference 5 on Istisna'a and I think the effort is incredibly valuable for the Islamic finance industry by laying out the specifics of each contract. This is something not widely available (although Al Baraka has published some compendium of fatawa on Islamic finance products). The aspect of the BNM SPRs that provides an added benefit to fatawa compendium is that it takes the material and compacts it into a more succinct format than just the underlying fatawa.

There were a few points that I read and didn't know whether they would be accepted outside of Malaysia from a Shari'ah perspective. I don't claim to have the expertise necessary to make any ruling on these points, and I would appreciate reader's perspectives on whether these areas are acceptable outside of Malaysia.

1) "The price of Istisna' assets shall be determined upon the execution of the contract. The agreed price concluded may take into consideration the warranty, after sales services and length of delivery period."

--Is this considered two sales in one; one sale of the istisna' asset and one sale (or lease) of the after sales services for a specified period of time?

2) "The purchaser shall not be entitled to claim from the seller any reduction of Istisna’ sale price due to reduction of construction/manufacturing cost. However, the manufacturer may decide to waive (Ibra’) part of the selling price based on its own discretion."

--Is the concept of Ibra' acceptable outside of Malaysia? When I have read about conflicting views of ibra', it is in the context of the Malaysian market (specifically bai' bithamin ajil)?

3) "In the cases of late delivery of the assets without a valid reason, the manufacturer shall be liable for damages and subject to any penalty specified in the contract."

--In the example, the late payment is specified as a certain percent per year based on the value of the istisna'. Is this acceptable outside of Malaysia or would that be prohibited because the delay is based on a fixed markup on the contract value based on the time elapsed? Would it be acceptable outside of Malaysia if the late payments were donated to charity?

4) "An IFI (purchaser) and the manufacturer (seller) under an Istisna’ agreement may enter into a separate forward lease agreement under which the manufacturer leases the manufactured asset from the IFI with an option or undertaking to purchase provided that the ownership remains with the IFI until the asset is sold."

--An article by Michael McMillen (Islamic Shari'ah-Compliant Project Financing: Collateral Security and Financing Structure Case Studies, pdf) described: "The Lease (Ijara) was executed at the same time as the other financing documents, but cannot become fully effective at such time due to a Shari’ah principle that prohibits the payment of rent for an asset until that asset has sufficient economic value and sufficiency for Shari’ah purposes--i.e., until the asset can be, and is, put to the intended use." This idea would conflict with payments being made through a forward lease. However, the debate on this issue may be a broader debate than just a Malaysia-elsewhere debate. In a paper presented at the Al Baraka 30th Symposium for Islamic Economics in August 2009, Dr. Abdul Sattar Abu Ghuddah presented a paper (pdf) on the uses of forward ijara (al-ijara al-mawsufah fi al-dhimmah), including for real estate financing where the asset is not yet constructed.

Again, I don't have answers for the question I posed and I appreciate any information, insights and comments from readers .

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