Abstract
Istishna contract financing has become an integral part of sharia banking practice, where sharia financial institutions use this contract to finance construction projects, manufacture, or purchase goods with a system that complies with sharia principles. However, like other financing methods, istishna contracts also involve a number of risks that need to be managed carefully by the relevant financial institutions.
This article identifies the key risks associated with istishna contract financing in the context of sharia banking. These risks include contractual risk, project risk, liquidity risk, sharia compliance risk and reputation risk.
Contractual risks arise due to uncertainty related to the conformity of purchased goods with the specifications agreed in the istishna contract, as well as delays in delivery of goods or inability to receive goods by the buyer. Meanwhile, project risk is related to changes in the project environment that can affect the quality or completion time of the funded project.
In addition, liquidity risk is related to the ability of sharia banks to fulfill their financial obligations, while sharia compliance risk is related to non-compliance with sharia principles in the process of implementing istishna contracts. Reputational risks are also a concern, especially if Islamic financial institutions are involved in controversial cases or are inconsistent with ethical and moral values in their business.
This study also explores mitigation strategies that Islamic financial institutions can adopt to manage these risks. This strategy includes implementing strict supervision and control mechanisms, portfolio diversification, careful monitoring of funded projects, and the use of sharia derivative financial instruments to manage risk.
By understanding and managing the risks associated with istishna contract financing, sharia banks can strengthen their resilience and maintain operational sustainability in facing various market challenges, while still complying with sharia principles in every financial transaction.
Keywords: Financing Risk, Istishna' Agreement & Sharia Banking
Discussion
Financing in sharia banking uses various (technical) mechanisms and contracts to ensure compliance with sharia principles. One of the methods used in the financing process is the istishna contract. An istishna contract is a sale and purchase agreement in which the seller agrees to make certain goods according to the specifications agreed with the buyer at a future time at a certain price that has also been agreed upon.
In the istishna contract, the bank acts as a manufacturer of goods and not as a seller. This differentiates it from a sale and purchase agreement (murabahah). The bank makes a profit from the difference between production costs and the sales price previously agreed with the client.
