Wakala Agreement Definition

In Islamic Finance, the term wakala describes an agency or delegated authority in which a muwakkil (captain) appoints the Wakil (agent) to perform a specific task in the name of the Muwakkil. The structure of a typical Wakala agreement is described below: the term wakala is used in the islamic finance world to enter into a contract with the agency or to describe the delegated authority under which the client (muwakkil) appoints an agent (Wakeel) who performs a specific task on his behalf. The wakala concept is often used for financing transactions, including sale and purchase (where the agent can buy or sell assets on behalf of the client), borrowing and borrowing funds, and allocating debts, guarantees and commitments. In this article, the authors explain the use of Wakala in Islamic finance, summarize the main characteristics of the relationship between agent and client and give a recent example of a Wakala they worked on. After his appointment, the agent assumes certain documented functions in Wakala as an agent on behalf of the principal. It also involves investing money he receives from the client in the company for which the representative has been appointed. The Wakil must carry out its obligations in accordance with the instructions of the Mouwakkil and act in good faith and exercise appropriate diligence and skill in carrying out its duties. If Wakil suffers losses in the performance of its duties, this loss should be borne by the Muwakkil as the principal obligation under the wakala agreement, unless there has been intentional, late or gross negligence on the part of Wakil. The basic principle of these agreements is that the parties can win or lose depending on the value of the investment. Despite the TID statutes and the terms of wakala with Blom Bank, which claim to show that TID is ultra vires because of its obvious conflict with Islamic principles, TID`a Board issued a fatwa saying that Wakala was a valid Islamic treaty. This case highlighted the issue of capacity risk and led Islamic financial institutions to be examined by credit rating agencies, which are now asked to assess the additional risks associated with the valuation of these transactions. Wakala is an agency contract in which the account holder (main owner) appoints an Islamic financial institution (agent) to conduct investment activities that claim that wakala “allows a much more efficient recycling of short-term liquidity in the Islamic banking system”.

Islamic banks and financial institutions offer Wakala contracts in many forms, including letters of credit, Islamic money certificates, Islamic bonds, term deposits and Islamic insurance.