Istisna Explained and uses – Islamic Finance concepts series
Introduction Istisna’ is a sale transaction where an item is transacted before it comes into existence. It is an order to a manufacturer/contractor to manufacture/construct a specific item or asset for the purchaser (borrower). The manufacturer/contractor uses his own material to manufacture the required goods. In Istisna’, price must be fixed with the consent of all parties . The parties being the person for whom the object is being manufactured or constructed, the contractor or manufacturer and the provider of finance. Example Development Finance A building is to be constructed, parties will be the developer who would specify what is to be done and will buy the finished development from the finance provider. The finance provider who will be the funder in advance to the contractor to whom the initial sale by the contractor will be. This development will be sold by the Financial institution with a profit mark up to the developer in advance on completion of the project development. The developer will exit by either paying the Financial institution or switching to a long-term finance deal like Ijara (leasing) or Diminishing Musharaka (partnership) or Murabaha (cost plus profit finance) with deffered payments. Example Bridge Finance A property buyer buys a building at auction, which say requires hard or soft refurbishment or has planning permission to build extention. The property purchaser will contact a bridge finance provider and contractor or renovator to do the changes, funded by the Financial institution and on completion of the works, sold to the property purchaser at a profit mark-up to the funds provided. The Exit strategy being to switch to long-term finance from the bridge Finance provider or another financial institution or if they have the funds complete the payment. Caveats If you do not keep up to your agreed payments to your finance provider your security is at risk. If your home is the security for your borrowing, it may be reposted. Due to the current economic climate finance providers are asking for higher returns hence cost of borrowing is generally higher than in the recent past. Furthermore, lending and affordability criteria are being tighten plus more checks and scrutiny of borrowers than before, leading to increasing timelines for completion of deals.
Islamic Finance series – Mudharaba
What is Mudharaba? A partnership of those people who have funds and those who have skills like scientific, managerial, technical or professional skills. Principles are similar manner to hedge funds managers and investors. Mudarabah financing is a kind of partnership where one partner contributes money (i.e. the financier) to another (entrepreneur, who contributes his expertise, skill, knowledge, labour, idea), for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ul-Maal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio. Modern day uses Investment and savings accounts in Islamic Sharia Compliant banks are structured based on Mudharaba principles. The bank management provides management skills and the depositors the funds. Islamic Sharia Compliant Venture capital funds can be structured based on Mudharaba principles. In this case the Venture capital fund is the provider of capital and the Venture promoter’s are the providers of Skills. In property development 🙌 finance the Islamic Bridge Finance or development finance provider, provides the capital and the property developer or investor the skills to manage the property development or investment. Contact Everest Financial Services for Islamic Sharia Compliant Bridge Finance and property development and investment solutions.