Wakala Agreement

Often, a group of investors aggregates its capital into a special purpose vehicle (SPV) managed by a trustee who enters into the agency contract (wakala) with the designated agent. In addition, no physical property is required under the Wakala contract. This raises the question of whether wakala is an effective governance structure in terms of risk and control. Many wakalas provide that the applicable laws of the treaty are laws of the United Arab Emirates, as long as these laws do not conflict with the provisions of Islamic Sharia. We emphasize that in the event of a dispute, this can lead to confusion if an act has been deemed illegal or incapable under the laws of the United Arab Emirates, but a Sharia council declares it valid and legal or vice versa. Evidence from Sharia scholars should help the court determine whether an agreement was compliant, but ultimately, the courts will decide the case. The fact that UAE laws and Islamic Sharia principles regulate a Wakala agreement will be problematic. The dynamics between law and doctrine are complex, but it is clear that the applicable laws are fixed, while fatwas declared by Sharia scholars are issued in relation to a particular agreement and can vary from one Sharia council to another and from one agreement to another. The issue of ensuring a minimum rate of return on muwakkil`s investment raises further questions regarding Wakil`s ability to provide such guarantees and whether or not Wakil can waive its obligations under the Wakala Agreement due to a lack of capacity. This point was highlighted in the recent case of The Investment Dar (TID) and blom Development Bank SAL of Lebanon (Blom Bank), based in Kuwait. Blom Bank sued TID in the High Court of Justice in London last year to recover $10.7 million it had invested with TID in 2007, as well as a promised return of 5% on Wakala terms. TID refused to pay, arguing that the deal was not sharia compliant because the 5% yield could be considered a prohibited “interest” in Islam, and tid`s charter prohibits non-Islamic transactions.

TID argued that it was acting ultra vires. The case, which was never brought to justice and was not subsequently prosecuted, raised the issue of capacity risk in Islamic transactions. In Islamic finance, the term Wakala describes an agency or delegated authority where a muwakkil (principal) appoints the wakil (agent) to perform a specific task on behalf of the muwakkil. Under a wakala agreement, Muwakkil and Wakil share the profit and risk of loss. The expected benefits indicated in a Wakala agreement are given for information purposes only and do not constitute a guarantee of return. If wakil makes a profit on the maturity date, the profits will be shared with Muwakkil in pre-agreed shares. Conversely, if a loss is made, this loss will be borne by muwakkil if there is no gross negligence, fraud or intentional delay on the part of wakil. 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 exchange for the provision of investment services, Islamic financial institutions receive pre-arranged agency fees (which can be relatively minimal) for making investments under the Wakala Agreement on the basis of participation in the profit and loss of the investment. It should be noted that a number of Wakala agreements contain provisions to guarantee the Muwakkil a certain profit or a minimum return on the principal 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. The mechanism essentially fulfilled all the conditions agreed upon by scholars and ensured fair and Shariah-compliant transactions. .

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