What is the difference between Istisna and Salam?

The following are the main differences between Istisna' and Salam:

1. In case of Istisna, the subject on which transaction of Istisna' transaction is based is always a thing which needs manufacturing/assembling/processing etc., whereas in case of Salam, the subject matter can be a thing that does not necessarily need manufacturing etc.

What is the difference between Istisna and Ijarah?

According to Istisna, the manufacturer either uses his own material or he arranges for the material himself whereas under Ijara the material is provided by the customer and the producer uses only his labour and skill meaning that his services will be hired for  a specified fee paid to him. Further, under Istisna the purchaser has the right to reject the goods after inspection if these are not according to the specifications agreed at the time of contract whereas under Ijara this right of examination does not exist.

What is Istisna?

It is a particular kind of a Bai (sale) where the sale of the goods is transacted before the goods comes into existence. The legality of Istisna is accepted by the Shariah scholars because it does not contain any prohibition, As far as the financing mode, it has been legalized on the basis of the principles of Istihsan (public interest). Istisna is an contract culminating in a sale at an agreed price whereby the purchaser places an order to manufacture,build, assemble or construct (or cause so to do) anything to be delivered at a future date.

Requirements for Bai Salam

The Salam transaction is subject to the strict conditions as follows:

1. It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of affecting the sale. In the absence of full payment, it will be the same as to sale of a debt against a debt, which is expressly prohibited by the Holy Prophet (PBUH). Furthermore the basic basis for allowing Salam is to facilitate the "instant need" of the seller. If it is not paid in full, the basic purpose will not be achieved.

2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified e.g. precious/valuable stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible.

What is Bai Salam?

Salam means a contract or agreement in which advance payment is made for goods/commodities to be delivered at a future date. The seller undertakes to deliver some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of agreement. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. Bai Salam covers approximately everything which is capable of being definitely described as to quantity, quality and workmanship. For Islamic banks, this product is ideal for agriculture financing, however, this can also be used to finance the working capital needs of the customers or Agriculturist. 

What is Ijarah-Wal-Iqtina?

It is permitted in Shariah that the lessor signs a separate promise, (but not an agreement or contract) to gift the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent. There can also be a unilateral (one sided) promise by the lessee to purchase the asset at the end of the Ijarah period. Alternatively, there may be an undertaking by the bank to sell the asset to the lessee at the end of the Ijarah period. On the other hand, Ijarah agreement should not be dependent either on the promise by the lessee (to purchase) or the undertaking by the bank (to sell). This arrangement is called 'Ijarah wa iqtina and it has been allowed by a vast majority of contemporary scholars and is widely used by the Islamic banks. However, the validity of this arrangement is subject to two basic conditions:

Interest rates are subject to unknown variations/ups downs and linking the amount of rent with interest rate will create uncertainty (Gharar) impermissible in Shariah. How would the Ijarah contract remain valid under this scenario?

It is one of the basic requirements of Shariah that the parties to the contract/agreemnet must exactly know its considerations. Under Ijarah agreement, amount of rent is one of the prime considerations of the agreement. So far as the parties are agreed with mutual consent upon a well-defined benchmark which would serve as a criterion for determining the rent, and whatever amount is determined, based on such benchmark, will be acceptable to both parties, therefore, there should not be any dispute. However, in order to save the parties from unforeseen losses due to the either way movement in the interest rate, the scholars have advised that there should be a floor and cap for the amount of rentals stipulated in the contract in case variable benchmarks is taken to determine the rental amount.

The rental amount under Ijarah transaction is normally linked to interest based benchmark like KIBOR or LIBOR. Is not it an interest based financing?

The difference between an interest based financing and a real/valid lease does not lie in the amount to be paid to the lessor. The basic difference is that in the case of lslamic Ijarah, the ownership and title in the asset/property rest with the lessor who assumes the full risk of the corpus of the leased asset. If the asset is destroyed during the lease period, the lessor will suffer the loss. Similarly, if the leased asset looses its usufruct without any misuse or negligence on the part of the lessee, the lessor cannot claim the rent, while in the case of an interest-based financing, the financier is entitled to receive interest, even if the debtor did not at all benefit from the money borrowed. So far as this basic difference is maintained, (i.e. the lessor assumes the risk of the leased asset) the transaction cannot be categorized as an interest-bearing transaction, even though the amount of rent claimed from the lessee may be equal to the rate of interest. Therefore, the use of the rate of interest merely as a benchmark does not render the Ijara contract invalid as an interest-based transaction. It is, however, advisable at all times to avoid using interest even as a benchmark so that an Islamic transaction is totally distinguished from an un-Islamic one, having no resemblance of interest whatsoever. 

What is the difference between Islamic Mortgage financing and conventional mortgage financing ?

There are many key differences between conventional mortgage finance and Islamic mortgage finance. Under conventional mortgage, in order to purchase a property the customer borrows money and repays it with an additional amount over a period of time. The additional amount is the amount of interest which is against the Shariah rulings of Islam. Under Islamic mortgage finance facility, Islamic bank shares with the customer in purchasing his desired property. Accordingly, the customer and the bank become the joint owners of the property in proportion to their share in purchasing the property.

What are the salient features of Ijarah transaction?

Answer: The customer approaches the bank and expresses his desire for a particular asset/property. The bank acquires that asset as per undertaking of the customer to acquire the said asset on Ijarah basis. The bank leases (transfers the use of the asset) it to the customer for an agreed period of time and against an agreed amount of rentals. An Ijarah agreement, signed between the bank and the customer, stipulates all the relevant conditions with regard to the transaction. According to this agreement the bank is Lessor and the customer is Lessee. During the Ijarah period, the corpus of the leased property remains in the ownership of the bank and only its usufruct is transferred to the lessee. The following main points are considered in the Ijarah transaction: 

1. As the corpus of the leased asset remains in the ownership of the Islamic bank, all the liabilities emerging from the ownership shall be borne by the bank. It is necessary for a valid lease that the leased asset is fully identified by the parties.