Dec 1, 2022

Exchange Order Securities

Raising Finance via Manufacture Order (Istisnah) Bonds

An istisnah bond is a security which is issued on the basis of a manufacture order. Istisnah bonds are designed, aiming to create a new instrument concerning financing projects and provide contractors and employers with their financial needs. Manufacture order contract is a contract by virtue of which a contract party undertakes manufacture and delivery of a specified asset at the specified date in future in return for a specified amount. The object of istisnah contract is often unavailable upon its conclusion, but the manufacturer or contractor will make and deliver it in future. Additionally, such contract stipulates that procurement of raw materials and tools required for the work will be borne by the manufacturer.


1)     Manufacture order bonds profit installments may be paid on periodic basis from the beginning of issuance, or after a grace period, or in other forms. Installment periods and payment procedure allow for flexibility.

2)     Principal liability is reimbursed lump sum or converted into another kind of bond (lease or murabahah) at the end of manufacture period.

3)     Such bonds may be transacted at securities exchanges or OCTs, because such bonds indicate a person’s joint ownership in a basic asset.

4)     Generally classified, manufacture order bonds are in the class of profit instruments with defined return, like lease/hire bonds.

5)     The aim of designing such bonds at the Securities and Exchange Org. is to provide the conditions required for financing contractual activities.

Types of Manufacture Order Bonds

Government, Municipality, governmental companies and private sector may act through Istisnah in order to finance civil and development plans.  Such an act may be implemented via direct method or indirect method.

1)     Direct Istisnah: In this method, the economic entities seeking construction or development of a certain project and are in need of financial resources, order construction of such project the relevant contractor (constructor) according to istisnah (conveyance) contract, and in return, they undertake to make payment of the price and fee of the project to its constructor according to the defined schedule (e.g., for five to ten years). In this method the ordering party embarks on offering istisnah securities pro rata the progress of project instead of payment of cash fund at specified maturities. The contractor (constructor), i.e., recipient of istisnah securities may either wait until due maturity to receive the nominal value of the instruments from the ordering party or otherwise, he may sell (discount) such instruments at secondary market (Securities exchange or OTC).

2)     Indirect Istisnah: Sometimes contractors may wish to receive the price of project pro rata the progress of project and settle the accounts upon devilry of the project. In fact, they are not interested in time transactions (exceeding the duration of project construction) and entering financial markets. In such cases, ministries and organizations may act through banks; that is, a ministry may have a bank construct a certain project according to an istisnah contract. The bank undertakes to deliver the project according to a defined schedule (e.g., for a period of ten years) in return for a specified amount. Then, the bank defines the project in form of smaller projects and enters into istisnah contracts with several contractors. The bank can also sell them at secondary market in case of needing liquidity, and in cases there is liquidity surplus, it may buy them from people, and even it may wait to receive their nominal value from the government upon their maturity.