An Islamic bank has been using an Istisnah and parallel Istisnah structure to finance the construction of residential as well as commercial buildings

Fatawa Question

An Islamic bank has been using an Istisnah and parallel Istisnah structure to finance the construction of residential as well as commercial buildings ; The structure operates as follows : The Islamic bank enters into an Istisnah agreement with the customer whereby the bank agrees to deliver a building with certain specifications to the customer and the customer agrees to pay the price as per payment plan attached with the Istisnah agreement ; on the other hand the Islamic bank enters into a parallel Istisnah agreement with the contractor, whereby the contractor agrees to deliver building with the same specifications and the bank agrees to pay to the contractor upon completion of certain construction milestones ; to select a suitable contractor, the Islamic bank, or alternatively the customer, arranges for a floating of tender whereby a number of contractors submit their bid and whoever offers the best price for the same specifications is selected to enter into the parallel Istisnah with the bank. In this particular case, after the bid was finalized, it was noticed in the constitution document that the winning contractor was 50 % owned by the customer itself. Shariah guidance is required as to whether it is permissible to proceed with the transaction, given that the contractor company is a partnership between the customer and a third party.

Fatwa

Click hereto view more

Publisher

Islamic Finance News

Publication Date

2014-11-26

Country of Publication

Malaysia

Main Subjects

Economics & Business Administration
Islamic Studies

Data Type

Fatawa

Language

English

Record ID

BIM-783166

• APA
• MLA
• AMA