82 AN INTRODUCTION TO ISLAMIC FINANCE
Recently, Muslim jurists have also provided another contract, ijarah
wa “qtina” or “hire - purchase agreement,” which is similar to the conven-
tional lease - purchase agreements. In addition to the regular ijarah contract,
this includes a promise by the lessor/owner to sell the leased asset to the
lessee at the end of the original lease agreement. The price for the residual
value of the asset is predetermined. The second contract thus gives the les-
see the option to purchase the asset at the conclusion of the ijarah contract
or simply return it.
The ijarah contract has great potential for developing advanced fi nan-
cial instruments to meet the demands of investors and entrepreneurs. One
of the main attributes of leasing practiced today is that the rental fl ows
can be either a fi xed amount or a fl oating amount, which makes it suitable
for the different needs of investors. Leasing constitutes a large portion
of the portfolios of Islamic banks. However, this share could be higher.
One of the reasons why Islamic banks do not increase their lease portfo-
lio is that by becoming the lessor/owner of the asset, they take on addi-
tional responsibilities for administering the lease, which is not their main
business.
An ijarah - based model to provide mortgages for housing is already
operating in North America. In addition, the ijarah contract has been used
in the successful launch of Islamic bonds (sukuk), which are discussed fur-
ther in Chapter 8.
Istisna’ (partnership in manufacturing) The istisna’ contract is suitable for
facilitating the manufacture or construction of an asset at the request of
the buyer. Once the manufacturer undertakes to manufacture the asset or
property for the buyer, the transaction of istisna’ comes into existence. Both
parties (namely, the buyer and the manufacturer) agree on the specifi cations
and price of the asset to be manufactured. At the time of delivery, if the asset
does not conform to the specifi cations, the party placing the order has the
right to retract the contract.
One of the important features of istisna’ is the fl exibility it allows as to
the mode and timing of payment. It is not necessary that the price be paid
in advance nor that it be paid at the time of the delivery. The parties can
agree on a payment schedule convenient to both and the payment can also
be made in installments.
As with the bay’ al - salam, the istisna’ contract is one in which an asset
is bought or sold before it comes into existence. However, it differs from the
bay’ al - salam in that (i) it requires the underlying asset to be manufactured
or constructed; (ii) there is no requirement to pay the full price at the time
of the contract; (iii) it can be cancelled before the manufacturer undertakes
manufacturing; and (iv) it provides fl exibility in the time of delivery.
Like ijarah, istisna’ also has great potential for application in the area of
project fi nance in different sectors and industries. Istisna’ have been applied
successfully in aircraft manufacturing, locomotive and ship - building indus-
tries, and the manufacturing of heavy - duty machinery. The istisna’ contract