UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for December 8, 2010

Wakalah in Islamic Finance


Bank as Agent

“Wakalah means agency, or the delegating of a duty to another party for specific purposes and under specific conditions. Under this concept, the bank acts as your agent in completing a particular financial transaction. As your agent, the Bank will be paid a certain amount of fee for the services it provides.”

Bank/Company as Agent

‘Wakalah is a contract whereby somebody (principal) hires someone else to act on his behalf i.e. as his agent for a specific task. The agent is entitled to receive a predetermined fee irrespective of whether he is able to accomplish the assigned task to the satisfaction of the principal or not as long as he acts in a trustworthy manner. He would be liable to penalties only if it can be proved that he violated the terms of the trust or acted dishonestly.

In the case of a financial wakalah contract, clients give funds to the bank/company that serves as their investment manager. The bank/company charges a predetermined fee for its managerial services. The entire profit or loss is passed back to the fund providers after deducting such a fee.

This contract is used by some Islamic banks to manage funds on an off-balance sheet basis. The contract is more widely used by Islamic mutual funds and finance companies.’

Detailed Explanation of Wakalah

‘Literally, Wakalah means protection or remedying on behalf of others. Legally, Wakalah refers to a contract where a person authorizes another to do a certain well-defined legal action on his behalf. It is a contract of agency, which means doing any work or providing any service on behalf of any other. An agent is someone who establishes contractual and commercial relations between a principal and a third party, usually against a fixed fee. An action performed by an agent on behalf of the principal will be deemed as action by the principal. Agency is necessitated by the fact that an agent has to perform certain tasks, which the principal has neither the time, knowledge nor the expertise to perform himself. The need for agency arises where a person has no ability or expertise to perform a certain action due, for example, to distance or size. The main features of agency are service, representation, and the authority to act for the principal. An agent may obtain a certain wage for services rendered within the incentive structure of the principal.

The contract of Wakalah is about the provision of service. Some of these services include sale and purchase, letting and hiring, borrowing and lending, assignment of debt, guarantee, pledge, gifts, bailment, taking and making payments, litigation and relinquishment, admission and acknowledgment of rights. Islamic banks use the concept of Wakalah in various Islamic products such as Musharakah, Mudarabah, Murabaha, Salam, Istisna´a and Ijarah. It is also used in payment and collection of trade bills, fund management and securitization. Banks normally charge fee for agency services rendered by them on behalf of their clients. An agency contract could be specific or general; it could be both commutative and non-commutative; the nature of activity to be undertaken should be clearly defined to avoid any disputes. For example, if Wakalah is for the sale or purchase of specific goods, the kind, quality and other necessary attributes of the commodity should be clearly mentioned.

The principal should have the power and competence to deal and own the property. For example, an insane or a minor cannot appoint agents to act on their behalf. However, it is not necessary for the person appointing an agent to have attained a minimum age. Also, a principal may appoint an agent to conduct any business transaction activity that the person would be able to undertake. However, Agency is not permissible in activities prohibited in the Sharia’h or acts of dishonesty such as theft and usurpation of property or conducting Riba-based business. It is also prohibited to appoint an agent for acts such as prayer, fasting, giving evidence, or for taking an oath. The agent must act in accordance with the instructions of the principal and exercise due care and skill. If he is appointed to sell goods on behalf of the principal, he cannot purchase these goods as a buyer. Similarly, if the principal restricts the agent to certain limits, the agent is bound to observe them.

An agent appointed to engage in buying and selling activities or to pay and receive a debt is considered to be a custodian of the principal’s property and in the fiduciary position of a trustee. And in the absence of any instructions to the contrary, an agent appointed to sell goods can sell them for cash or on credit; the agent can take a pledge of a security for payment in the case of goods sold on credit. Besides, an agent is not allowed to appoint another agent unless he himself is not capable to do it; in that case, he may appoint another agent with the consent of the principal. He must also avoid any conflict of interest such as selling goods to the principal without disclosing that such goods are owned by the agent.

In the case of Wakalah of sales, the principal appoints an agent to sell a certain property for him; the agent is responsible for making payment and receiving goods on behalf of the principal. He has the authority for claiming the price, exercising the right of option of voiding a sale on account of defective goods or inspection and returning goods as well as similar rights and liabilities associated with sale transactions.

Finally, Wakalah is a non-binding contract; the principal or the agent may withdraw at any time by mutual agreement, unilateral termination, discharging the obligation, destruction of the subject- matter and the death or loss of legal capacity of the contracting parties. If the agent concludes a contract that contravenes the terms and conditions of the agency, the contract is not binding on the principal and its validity depends on his approval. In case where an agent concludes a contract that apparently contravenes the conditions, but the contract is beneficial to the principal, it is binding on him.’



Wakalah Deposit (Product)

“Wakalah Deposit is a deposit product, which the profit is derived from a specific investment. This deposit product is based on the Sharia’h principle of Wakalah, whereby, it refers to a contract between two (2) parties, i.e. the owner of the capital (Muwakil) and the Bank (Wakil). The investor, who is the owner of the capital, places a specified sum of money with the Bank, which acts as the Wakil in investing the funds in specific investment activities of the Bank with the objective of making profits.”

Wakalah in Investment (Product)

‘Either a surplus or a deficit bank may initiate this transaction.  For example, a surplus bank, which is seeking to have a return of investment of ‘x%’, may approach a deficit bank for a short period of investment.  The surplus bank (the principal) will appoint and authorize the deficit bank (the agent) to invest the monies of the surplus bank provided the investment return shall not be less than “x%.” The deficit bank will not accept this offer if it thinks it cannot generate that rate of return or it may accept the offer but will not be investing in any investment portfolio if the expected return is expected to be less than ‘x%’.  However, if the realized profit is more than “x%”, the principal will normally waive this amount to the agent as a fee or an incentive fee.’  (Amanie)


Example Corporate Wakalah Agreement by Association of Islamic Banking Institutions Malaysia

Example of Interbank Wakalah Placement Agreement by Association of Islamic Banking Institutions Malaysia



More Links to Information about WAKALAH



Sources of Data:

Materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance