Wakalah
Wakalah is an agency contract in which one party, the principal, appoints another, the agent or wakil, to act on its behalf — buying, selling, investing or managing — usually for a fee.
Also called: wakala · agency contract · wakalah bil istithmar · investment agency
The agent acts for the principal's account: gains and losses belong to the principal, and the agent is liable only for negligence, misconduct or breach of the mandate. The agent's reward is a fee, which may be fixed or a percentage of assets managed, and can include an incentive above an expected return.
Wakalah is everywhere in Islamic finance. It is how a bank buys a commodity on a customer's behalf in tawarruq, how many takaful operators are paid, how investment accounts and interbank placements are structured as wakalah bil istithmar, and how many sukuk are issued, with the obligor managing a pool of assets as agent for the certificate holders.
In practice
An agent cannot guarantee the principal's capital or a fixed return. An "expected profit rate" in an investment wakalah is a target, not a promise, even where the agent keeps any excess as an incentive.
Example
A company places US$1 million with an Islamic bank under an investment wakalah with an expected return of 4 per cent and a fixed fee of 0.5 per cent. The investments return 5 per cent; the company receives 4 per cent and, as agreed, the bank keeps the extra 1 per cent as an incentive on top of its fee.
Commonly confused with
| Term | How it differs |
|---|---|
| Mudarabah | A mudarib earns a share of profit and nothing if there is none. A wakil earns a fee whether or not the investment makes money. |
See also
- MudarabahMudarabah is an investment partnership in which one party provides the capital and the other provides the management. Profit is shared at an agreed ratio; financial loss falls on the capital provider unless the manager was negligent or in breach.
- TakafulTakaful is a cooperative risk-sharing arrangement in which participants contribute to a common fund that pays claims among them, run by an operator under a Sharia-compliant contract rather than sold as conventional insurance.
- UjrahUjrah is a fee or wage paid for a genuine service or for the use of an asset. In Islamic finance it is legitimate compensation — but only where a real service exists and the fee is not, in substance, a charge for credit.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.