Wakalah means; to look after, to delegate, to authorize, doing a task on behalf of another party. it is a contract of agency where a person (the principal – Muwakkil) appoints another person (the agent – Wakil) to do a certain well-defined tasks on behalf of him or her for a specified time for an agreed upon fee or commission.
Basis of Wakalah
It reads in Quran chapter 18 verse 19; “…So send one of you with this silver coin of yours to the town, and let him find out which is the good lawful food, and bring some of that to you”.
In Abu-Dawud, Book 24, Hadith 3625, it is narrated by Jabir Ibn Abdullah who said: ‘I intended to go (on expedition) to Khaybar. So I came to the Prophet ﷺ, greeted him and said: I intend to go to Khaybar. He ﷺ said: When you come to my agent, you should take from him fifteen Wasqs (of dates). If he asks you for a sign, then place your hand on his collar-bone’.
Wakalah Product as a Deposit taking Instrument in Islamic financial Institutions
Wakalah is a term in Islamic finance that denotes an agency contract, where one party appoints another to conduct a defined legal action on his behalf, for a specified time, specified fee or commission.
Wakalah can be used in transferring money from one person to another through the bank. The Muwakkil appoints the bank as Wakil which will debit a certain amount of money to muwakkils account. The Wakil will transfer the money to the selected customer as prescribed.
In case of Letter of Credit (LC) commitment, the bank acts as a Wakil on behalf of a client to pay the corresponding financial institution.
The Muwakil can transfer his money through a Cash Deposit Machine, in this case, the Cash Deposit Machine will act as Wakil on behalf of the Bank (Muwakkil) In cases of postal money orders, where the bank (Wakil) receives the money directly from the customer (Muwakkil) and send to the intended customer (recipient).
Wakalah is also used in various services such as sale and purchase, letting and hiring, financing and investments, assignment of debt, guarantee, pledge, gifts, bailment, taking and making payments, litigation and relinquishment, admission and acknowledgment of rights.
Banks normally charge fee for agency services rendered by them on behalf of their clients e.g. on Letter of Credit basis.
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.
Modern Operationalization of Wakalah in the Islamic Banking Sector
Wakalah is one of the contracts used by banks in the deposit taking. In this arrangement, the Islamic bank is appointed by customer as agent (Wakil) to invest the customers’ money in various proﬁtable and Shari’ah-compliant ventures.
In investment aspects where the customer expects a return in the venture as prescribed in the agreement, the profits as well as losses solely belong to the customer.
However in cases where the agreement states of profit sharing between the Islamic banks (Agent) and the customer (principal), then the same will be done as per the agreement, on an arrangement known as (Wakalah-tul-istithmar) – Investment Wakalah.
Islamic Banks also use the concept of Wakalah in executing various Islamic products such as Musharaka, Mudaraba, Murabaha, Salam, Istisna´a and Ijarah. It is also used in payment and collection of trade bills, fund management and securitization.
Dissolution of a Wakalah Agreement
Wakalah is a non-binding contract; the (customer) principal or the (Islamic Bank) 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.