From today, I am starting to write on the last investment contract ie Wakalah Bil Istithmar or investment agency agreement in this educative Back to Basics series started by IFN in October 2017.
This stage has arrived after I have systematically explained to readers all aspects and possible nuances of the four sale contracts which are Murabahah, Istisnah, Salam and Ijarah (Ijarah being the sale of usufruct), and two out of three investment contracts viz. Mudarabah and Musharakah.
Before explaining the investment agency agreement, let me first tell you as to how Shariah principles treat the agency or Wakalah, as it is commonly known in the Islamic finance industry.
The act of granting the agency by one person to another is for the purpose of facilitating the completion of a certain task (or a series of them) for and on behalf of the grantor of agency. In other words, the act of appointing someone as an agent to perform a task is akin to entrusting one’s own ability to accomplish the task itself.
So, why does one appoint an agent when he or she can do the chore himself or herself? Well, in daily life, there can be junctures where it may be difficult, if not impossible, to carry out certain work by a person. I can give many examples.
In the simplest form, how about a landlady with young children to take care of, and hence finds it hard to go around collecting the rent? She can appoint her husband as an agent to do so on her behalf.
Similar to the other Shariah contracts I have explained in this space, there are certain parameters or elements for making the working of an agency compliant to Islamic principles, some of which are essential and the other optional. Mind you, these parameters are in place for over 14 centuries and have remained unchanged.
First and foremost, in them is the presence of a minimum of two parties to constitute an agency. This is common to all the other Shariah finance contracts I have discussed so far. As if by default, it brings to the fore the next element which is the perfect capacity of both parties forming the agency.
As also explained earlier, by perfect capacity I mean of the legal age to be considered an adult, and holding a sound mind. As such, minors are automatically disqualified from entering into an agency agreement with minors as well as adults. Nevertheless, guardians of minors are eligible to appoint agent(s) for and on behalf of minors to take care of their estate. The one appointing an agent is called the principal or Muwakkil in Arabic, and the appointee is the agent or Wakil.
The offer and acceptance part is the next. Unlike the sale contracts, here the offer is traditionally made by the principal who is truly in need to appoint the agent. The offer can be made verbally by the principal or written. If written, which is preferred in Shariah to avoid conflict, the modern means of communication such as email or SMS/WhatsApp can also be adopted, provided the law of the land accepts them as lawful evidence.
When we discuss the investment agency phenomenon several articles down the line, it will become clear to you that even an agent can make an offer to the principal. But for now, let me build the blocks for the ease of understanding.
Then comes the subject matter of the agency agreement, or what is the core objective of the agency? It is not possible that the objective of an agency is something which falls outside the premise of Shariah. This is in the context of Islamic finance otherwise the parties can enter into an agency agreement for any purpose including a Shariah repugnant one.
An example of the non-permissible agency could be the collection of interest by the agent on the loans granted by the principal or appointing the agent to sell non-compliant products such as wine (or any intoxicating substance), pork or tobacco or products based on them.
When a principal appoints an agent, it is as if it is hiring an employee. Therefore, Shariah prefers that the agent to be paid a fee (as salary) to perform the entrusted task. However, it does not mean that the agency is void if no fee is paid.
There are options to choose from in that if the agent is paid a fee, the agency shall be irrevocable ie it cannot be abandoned by the agent in the middle of the transaction and that he or she shall be responsible to perform the task to the full extent, having received the fee in lieu thereof. However, if the agency agreement does not provide for a fee payment to the agent, this is a voluntary agency which is revocable at any time by the agent, irrespective of the stage being critical when he or she left the task half done.
I would like to hear from you which types of agency would you like to enter into if you are a principal?
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: We have just started the Wakalah discussion so be ready to bear with me for another 18 or so articles.