After having laid the ground for the distribution of profit and bearing of loss situations, I have made you all ready to learn from a live example of fairness to a client I witnessed during my early days in Islamic banking. I must admit that I was bewildered to the extent that I considered it madness on the part of the Islamic bank’s management to extend such utmost comfort to the customer, which of course afterwards I regretted.
The bank had invested AED10 million (US$2.72 million) in a commingled Wakalah transaction with a leading Halal poultry importer from the Far East based on its satisfactory long track record of distributing frozen Halal chickens all over the UAE through its own network of refrigerated vehicles. The client was dealing with an Islamic bank for the first time.
The year-on-year mid-double-digit profit earned by the client was comforting for the Islamic bank to part with its capital upon the client submitting the three-year audited financials and the Wakalah investment plan for the bank’s funding. Based on the plan, the bank expected a handsome return even after incentivizing the Wakeel through an attractive share in the profit as the performance bonus.
The investment Wakalah agreement was for one year and upon its completion, the client was required to return the Wakalah capital (to the extent remaining intact) and the bank’s share of profit — net of the Wakeel’s incentive — supported by the audited accounts for the Wakalah transaction.
Upon the completion of the Wakalah period, the Islamic bank received two cheques, the first one for AED10 million being redemption of the original Wakalah capital, and the other representing the amount of profit which was projected by the client in the Wakalah investment plan expected to be earned by the bank. The cheques were accompanied by the audited accounts for the Wakalah transaction.
Upon examining the accounts, it was discovered by the Islamic bank’s officials that the income earned by the Wakalah transaction was meager whereas the profit cheque was of a substantial amount, matching with the profit amount projected by the client in the Wakalah investment plan.
When the matter was discussed with the client, it was revealed that two months after receiving the funds from the Islamic bank, the client’s main supply source was completely disrupted owing to the bird flu outbreak in the Far East whereby UAE authorities put a ban on the import of frozen or canned poultry and related products from there.
This unforeseen situation pushed the client to look for alternate supply sources which it found in Latin America, mainly Brazil. Nevertheless, since the client had never before dealt with the suppliers, they demanded advance payment. Added to that was rising global poultry prices due to a supply crunch. Both these factors squeezed the client’s profitability heavily since it had to buy the Halal poultry at an exorbitant cost and meet with its commitment of sale in the UAE at the pre-agreed prices for the year in terms of the supply agreements signed by the client in the UAE.
The story was submitted to the Islamic bank’s Shariah board for guidance along with copies of the two cheques, audited accounts and the investment Wakalah agreement which included the investment plan. The relevant bank officials sought the Shariah board’s approval to accept both cheques despite there was a disparity in the payment of profit by the client and the actual income appearing in the audited Wakalah accounts.
As I was watching from the sidelines how the drama was unfurling, the pronouncement from the Shariah board was a real shock to me, having recently made the jump from the thick of the conventional banking customs.
The Shariah board instructed the bank to accept the cheque for AED10 million being the Wakalah capital but return the big profit cheque to the client and seek from it the cheque for a much lesser amount based on the actual profit reflected in the audited Wakalah accounts. The bank officials had no choice but to comply with the scholars’ Fatwa.
Like me, the client was also speechless as we both belonged to conventional banking industry practices where the genuine circumstances have no role to play when it comes to servicing the loan by paying the interest, even through your nose.
Now, for the learning curve for me then, and for you today. Why did the Shariah board ask the bank to exchange the fat profit cheque with peanuts? Well, as explained to the client in my presence by the executive director of corporate banking who dealt with the Shariah board scholars, the reason why the Shariah board did not allow the bank to retain the profit amount was that it was not the actual profit earned by the Wakalah transaction.
If the bank accepts the profit cheque on the basis of the investment plan submitted by the client despite the client having failed to achieve the projected result due to circumstances beyond its control, this will be tantamount to claiming interest on funds released to the client, which is impermissible in Islamic banking.
Furthermore, the client had no idea at the time of signing the investment Wakalah agreement and receiving AED10 million that there would be a bird flu pandemic waiting to erupt soon. In other words, the client cannot be blamed for the considerable reduction in the actual profit earned by the Wakalah transaction and in turn by the bank.
When asked as to why it sent the cheque for representing the projected return for the bank despite the fact that it did not realize the anticipated profit, the client replied that based on its experience with conventional banks, it believed the Islamic bank too will not show empathy and will not accept any reason to receive lower return no matter how genuinely difficult the circumstances may have been for the client. Your guess is correct that the client then became the champion of the Islamic banking model.
Lastly, can anyone tell me why the Shariah board did not have any reservations about the Islamic bank accepting the AED10 million cheque?
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: Discussion on the subject of commingled Wakalah investment to continue.