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PPP Introduction and Overview - Appendix B - Sharia Finance

1b2. Traditional Istina'a

A traditional istina’a (‘istina’a’) is an agreement between two parties (the Islamic funder and the construction contractor) whereby the Construction contractor agrees at the outset to construct/manufacture a clearly described/specified PPP project asset for the Islamic funder. The price for carrying out the construction/manufacture will be determined at the time of entering into the agreement, as will the date of delivery of the asset to the funder. Payment of the price may be made as a lump sum on delivery or, as is more common, in instalments linked to the achievement of milestones throughout the construction/manufacturing period. Title to the PPP project asset will pass to the Islamic funder on delivery.

The arrangement requires the Islamic funder to enter into a direct contractual relationship with the construction contractor. This means that the Islamic funder is assuming performance risk — a risk that it will not have much appetite to absorb. Consequently, the use of istina’a for PPP projects has generally stopped and has been replaced by the procurement istina’a.

 

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