Facilities Granted Through Muzara’ah and Istisna’

Facilities Granted Through Muzara’ah and Istisna’

The term Muzara’ah is derived from cultivation and refers to the joint farming activity carried out by two or more parties.

Pursuant to Article 518 of the Civil Code, under a Muzara’ah contract, one party grants land to another party for a specified period so that the latter cultivates it and the resulting crop is shared between them. Based on this definition, the essential elements of Muzara’ah are as follows:

• Land.
• Labor.
• Produce.
• Duration.

The party that provides the land is referred to as the Muzari’ or owner, while the party that undertakes the cultivation is known as the Zari’ or operator. The legal basis for banks granting Muzara’ah facilities is found in Article 17 of the Law on Usury-Free Banking Operations and its related executive regulations. Under Article 17, banks are authorized to place agricultural lands or orchards that are under their ownership or lawful possession into Muzara’ah or Musaqat arrangements.

Banks may, for the purpose of increasing agricultural productivity and output, act as the landowner and transfer cultivated lands that they own or are legally entitled to possess and exploit to farmers under a Muzara’ah contract. In addition to land, banks may also provide other necessary inputs such as water, seeds, fertilizers, pesticides, production tools, and transportation equipment, as stipulated in the contract.

Banks are required, before entering into the contract, to make the necessary assessments to ensure that the operator will properly carry out the Muzara’ah and that the crop will be obtained.

Jurisprudential and Legal Foundations of Muzara’ah and Istisna’ Contracts

Characteristics of Muzara’ah

Muzara’ah is a binding contract and is therefore enforceable upon both parties. It does not become void by unilateral termination. It should be noted that the Muzara’ah contract does not terminate upon the death of one or both parties, unless personal performance by the operator has been expressly stipulated or the landowner’s right to the benefits of the land has been limited to his lifetime.

If the Muzara’ah contract becomes void for any reason, the entire crop shall belong to the owner of the seeds, and the other party, whether the owner of the land, water, or labor, shall be entitled to receive fair compensation in proportion to what he has contributed.

Duration of Muzara’ah

Muzara’ah is regarded as a short-term financing method in the agricultural sector, as its maximum duration is one year. An exception applies where the agricultural cycle of the crop subject to the contract exceeds one year, in which case the duration of the Muzara’ah shall correspond to one full cultivation cycle to allow for harvesting. Under the Law on Usury Free Banking Operations and the executive regulations governing Muzara’ah, banks may only act as the landowner and assign agricultural lands that they own or lawfully possess to Muzara’ah arrangements.

They may also, pursuant to the contract, provide necessary inputs, including water, seeds, pesticides, fertilizers, transportation means, and production tools. In this regard, banks are not permitted to acquire agricultural lands through purchase, settlement, lease, or similar means, except with the approval of the Money and Credit Council.

Istisna’ Facilities (Manufacturing Order)

Istisna’, in its literal sense, means an order to manufacture. In contractual terms, it is an agreement between two parties, whether natural or legal persons, for the production of a specific good or the execution of a project with defined specifications at a future date. Under this contract, the manufacturer or contractor undertakes to produce the ordered item and deliver it to the purchaser in accordance with an agreed timetable, in exchange for payment at agreed intervals. Such payment may be made partly in cash and partly in installments, either in proportion to the physical progress of the work or independently thereof.

The parties to an Istisna’ contract must possess the general legal capacity required for contracts, including legal maturity, sound mind, and free will. They must enter into the contract by mutual consent, expressed through offer and acceptance. At the time of concluding the contract, the subject matter does not yet exist, as the purpose of the contract is the production or creation of the item. An Istisna’ contract may be concluded for goods that are to be manufactured. Still, it does not apply to natural products such as fruits, vegetables, and legumes, even if their packaging or processing is structured under an Istisna’ contract. The characteristics of the goods or the project specifications must be clearly defined so that no ambiguity or uncertainty remains. The contract price must be specified and determined, although it is not required that the entire amount be paid at execution. By agreement, part of the price may be paid as an advance before the commencement of work, with the remainder paid in stages in accordance with a defined schedule. The procurement of raw materials and equipment necessary for manufacturing the goods in accordance with the agreed specifications is the manufacturer’s responsibility, and the purchaser has no obligation in this regard. Where the delivered goods or project conform to the contractual specifications, the purchaser is obliged to accept them and to fulfill the corresponding contractual obligations.

Frequently Asked Questions on Muzara’ah and Istisna’ Facilities