Wakala Agreement Definition

Fundamental to all Islamic finance is the prohibition on raising interest, also known as riba. This rule, which is absolute, comes from the Qur`an, the holy book of Islam. However, there is no clear or agreed definition of Riba. This lack of clarity is exacerbated by the fact that there is not a single religious authority that could make a final decision. In other words, there is room for interpretation. Wakala is an agency contract in which the account holder (client) instructs an Islamic financial institution (agent) to carry out investment activities, claiming that Wakala “enables a much more efficient recycling of short-term liquidity in the Islamic banking system.” Islamic banks and financial institutions offer wakala contracts in many different forms, including letter of credit, Islamic money certificate, Islamic bonds, term deposits, and Islamic insurance. When a muwakkil invests money with wakil under a wakala, this money is usually mixed with the wakil`s own pool. In the event that the Wakil becomes insolvent, the money from the muwakkil is mixed with the other money from the Wakil and can be processed by the liquidator in a UAE law that regulates insolvency as part of the Wakil liquidation assets. The structure of a typical Wakala agreement is presented below: It should be noted that a number of Wakala agreements contain provisions aimed at guaranteeing the Muwakkil a certain profit or a minimum return on the nominal amount. It can be argued that a wakala with such provisions violates the principles of Islamic Sharia, as it is a basic principle of Islamic investment that the amounts invested and the returns on these investments cannot be guaranteed by wakil. Wakala is inherently an agency contract and not a traditional deposit account agreement that guarantees a fixed return. It is therefore recommended to include measures such as assurances and guarantees in the Wakalas to support capacity and compliance with Islamic Sharia and to explicitly provide that neither wakil nor muwakkil can break their declared contractual obligations due to non-compliance with Sharia or ultra vires.

There are several types of wakalas used in Islamic finance, the most common of which is “wakalat istithmar”, which means a service agency for fund management. In return for the implementation of investment services, Islamic financial institutions receive a ahead-agreed agency fee (which may be relatively nominal) for making investments under the Wakala Agreement on the basis of participation in the profit and loss of the investment. * Agent Order – The customer`s order of an agent is an offer and acceptance. The role of the agent must be clearly defined in the Wakala and can be specific (for example. B the agent must sell a given asset at a specified price or according to the specific instructions of the contracting authority) or general (e.g. .B. a contracting authority may appoint an agent to purchase certain types of goods when requested). . . .

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