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Due to the variety of wakalah agreements – Shariah-compliant agency contracts where one party has the authority to act or represent another – these contracts can be broadly applicable to any number of business and finance activities so long as they meet certain criteria and follow the principles of Shariah. This versatility has allowed them to be used by Islamic banks and financial institutions for a variety of purposes.
Read more about: Basic Guide of Wakalah Contracts
One of the most common ways banks have utilized wakalah agreements is in the managing of investments and deposits on behalf of depositors and clients – one of the core business functions of a bank.
In this case, the bank will act as an agent for the client under a wakalah bel istithmar (investment wakalah), who authorizes the bank to invest in Shariah-compliant means. Either a fee is agreed or the bank can be paid on commission, and the funds are then invested.
Notable examples include a variety of different asset management and wealth management services offered by Islamic banks, including Islamic investment and savings accounts and wealth management accounts that invest in Shariah-compliant products.
Read more about: Types of Wakalah Agreements
Wakalah accounts are a common feature in Islamic and other banks as a Shariah-compliant alternative to regular deposit accounts. Banks will sometimes use wakalah when structuring deposit accounts and services.
In it, customers will authorize the bank under a wakalah agreement to use their deposits in a Shariah-compliant manner, with the bank setting an indicative profit rate and profit split agreement on the returns.
Wakalahs and agents can be used to facilitate the dispensing of financing to the end customer, sometimes in conjunction with other Islamic financing contracts. Usually, the agent acts as the third party that is hired by the bank, to make appraisals, purchases and then selling-off commodities and goods to help finance the customer’s purchases of said commodities and goods.
As we noted in a previous entry, sometimes banks will hire third party agents when dispensing with Murabaha and tawaruq financing. In a Murabaha, the bank purchases the asset through a broker (under a wakalah agreement) and then sells it to the borrower at a mark-up or cost-plus profit. In a Tawaruq transaction,
the bank purchases an asset, then sells or leases it at a markup to the borrower, who will then sell off the asset, through the bank’s agent, and receive the liquidity.
There are many instances where a bank uses wakalah to facilitate real estate transactions. A bank can be hired as a wakil (agent) to purchase and sell property on behalf of a client. And, as noted above, the bank can act as an agent to invest some of the client’s assets in real estate.
The bank can also provide financing for the purchase of real estate through Murabaha contracts. It can also be used to manage the properties in question, including for such services like maintenance and collecting rent.
As crucial middlemen in global trade financing, banks can use wakalah agreements to facilitate international transactions by issuing letters of credit. The importer would hire the bank through a wakalah agreement to issue a letter of credit to the exporter, guaranteeing payment for the goods sold under specific conditions.
In a complicated transaction, such as the issuance of Islamic bonds (sukuk), there are many layers involved that require the services of a bank, which it can deploy through the use of wakalah agreements. Sukuk and other bond issuances would needs banks to act as advisers,
who can then underwrite the issuance, issue the bonds, provide the credit rating and then market and sell the bonds.
On the flipside, the bank can act as the financial manager of the investors in a bond issuance, by investing their funds in Shariah-compliant portfolios and projects.
In a takaful (Islamic insurance), wakalah agreements are used to manage the contributions (premiums) paid by policyholders. In such cases, the takaful will act as an agent to the policyholders, managing the takaful’s pool of funds on their behalf in Shariah-compliant assets.
The takaful operators will also manage the disbursement of payments to the policyholders who deserve it.
Read more about: Conventional Insurance Vs Islamic Insurance (Takaful)
One key aspect of banking that seldomly comes to the forefront is interbank services and interbank lending – which see banks invest, borrow and lend between each other.
Wakalahs are often used between Islamic banks to facilitate these services. A bank with excess surplus liquidity can hire another bank as a wakil to invest these funds in short-term, Shariah-compliant assets. The proceeds along with the principal is returned to the client bank, minus the management fees.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
