Massive Potentials of Istishna’ Contracts in Islamic Financing

The istishna’ contract is one of the Islamic financing instruments based on a sale and purchase agreement where the product or item being sold does not yet exist at the time of the contract and must be produced according to the buyer’s specifications. This financing solution is particularly useful for sectors such as construction, manufacturing, and projects that require custom-made products. The flexibility offered by istishna’ makes it an attractive option in Islamic banking, particularly in Indonesia, where there is significant potential for further development. This article explores the potential of istishna’ contracts in Islamic finance, its implementation in Islamic banks, and the challenges involved.

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Definition and Characteristics of Istishna’

An istishna’ contract is a sale and purchase agreement in which the product being sold has not yet been produced at the time of the contract. The product will be made according to the agreed-upon specifications between the buyer (mustashni’) and the manufacturer (shani’) (Farid & Khotimah, 2019). This contract differs from salam because in istishna’, payments can be made in stages during the production process, either in advance, at the time of delivery, or after the goods are completed (ICDX, n.d.).

The key characteristic of istishna’ is its flexibility in payment and customization of the product. This flexibility allows Islamic banks to cater to large projects such as infrastructure development or manufacturing of heavy machinery (Blossom Finance, n.d.). The ability to adjust payment schedules and product specifications makes istishna’ a crucial tool for financing large, custom-made goods.

Implementation of Istishna’ in Islamic Banks

Islamic banks in Indonesia, including Bank Syariah Indonesia (BSI), have implemented istishna’ contracts for financing large-scale construction projects, such as building construction, housing, and public infrastructure (Farid & Khotimah, 2019). In practice, Islamic banks act as intermediaries between the customer (mustashni’) and the contractor (shani’). The bank receives the order from the customer for the production of a specific product and then orders the product from the contractor at the agreed price and specifications.

Research indicates that the implementation of istishna’ in BSI Lumajang has adhered to the guidelines set out in PSAK 104 on Istishna Accounting, which regulates the recognition, measurement, presentation, and disclosure of istishna’ transactions (Farid & Khotimah, 2019). However, the adoption rate of this contract is still relatively low compared to other Islamic financing products, such as murabahah. This low usage is partly due to a lack of public understanding of the istishna’ mechanism and minimal promotion by Islamic financial institutions.

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Opportunities for Developing Istishna’ Contracts

The potential for expanding istishna’ contracts in the Islamic finance sector is significant. Several key sectors could benefit from the development of this contract:

1. Construction and Infrastructure: Istishna’ can be applied to large-scale construction projects, such as building infrastructure, roads, and other public works. The flexibility of staggered payments allows for easier financing of large projects with less financial strain on customers and developers (Blossom Finance, n.d.).
2. Manufacturing: The manufacturing sector can also utilize istishna’ for the production of heavy machinery, equipment, or other custom-made products. Examples include the production of ships, airplanes, or vehicles with specific requirements (Iqbal & Mirakhor, 2019).
3. Housing Projects: In the property sector, istishna’ can be used to finance housing development projects. Islamic banks can act as intermediaries between developers and customers, allowing customers to order homes based on their desired specifications (Suaidi & Hakim, 2020).

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Challenges in Implementing Istishna’ Contracts

Despite its potential, istishna’ contracts face several challenges in implementation. One major issue is the lack of innovation in product development, which makes istishna’ less flexible compared to other contracts such as murabahah or mudharabah (Suaidi & Hakim, 2020). Additionally, the high risk associated with the production of goods presents a challenge for Islamic banks. Banks must ensure that manufacturers can meet the agreed-upon specifications and delivery schedules to minimize the risk of delays or product discrepancies (ICDX, n.d.).

Banks also need to closely monitor the production process, which requires additional resources and costs. Another risk is the uncertainty of product delivery, which can disrupt the project timeline and cause financial losses if not properly managed.

Conclusion

Istishna’ contracts offer significant potential in Islamic financing, particularly in sectors that require custom-made goods, such as construction, manufacturing, and property development. The flexibility of payment schedules and product specifications makes istishna’ a relevant solution for financing large and complex projects. However, challenges such as a lack of public understanding, production risks, and the cost of monitoring must be addressed to encourage wider adoption of this contract in the future.

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Daftar Referensi (APA Style)

Blossom Finance. (n.d.). Application of istisna in Islamic financial institutions. Retrieved from https://www.blossomfinance.com/posts/application-of-istisna-in-islamic-financial-institutions

Farid, M., & Khotimah, H. (2019). Analisis implementasi akad istishna’ dalam perbankan syariah pada Bank Syariah Indonesia (BSI) Lumajang. Muhasabatuna: Jurnal Akuntansi dan Keuangan Islam, 1(2), 43-50. Retrieved from http://ejournal.iaisyarifuddin.ac.id/index.php/muhasabatuna

ICDX. (n.d.). Apa itu istishna’ dan contohnya dalam perbankan syariah. Retrieved from https://www.icdx.co.id/news-detail/publication/apa-itu-istishna-dan-contohnya-dalam-perbankan-syariah

Iqbal, Z., & Mirakhor, A. (2019). Introduction to Islamic finance: Theory and practice. In Handbook of Ethics of Islamic Economics and Finance (pp. 405-424). Springer, Cham. https://doi.org/10.1007/978-3-030-17624-2_21

Suaidi, & Hakim, L. (2020). Pembiayaan istishna’ dan implementasinya di perbankan syariah. Al-Huquq: Journal of Indonesian Islamic Economic Law, 2(1), 48-73. https://doi.org/10.19105/al-huquq.v1i2.3555

Islamic Markets. (n.d.). Istisna’. Retrieved from https://islamicmarkets.com/education/istisna