In the last article, I took you through my impressive journey of witnessing in my early days in Islamic banking how justice was provided by the bank’s Shariah board to a customer who had no clue about his rights in an investment Wakalah agreement.
The sympathetic treatment meted out to the customer on the basis of his innocence in not being able to produce the projected profitability owing to the occurrence of an unforeseen situation sets Islamic finance apart from the conventional banking system where the rigidity is embedded into the core.
I can say it because I have experienced it first hand while serving in the conventional banking environment for a couple of decades before switching sides to Islamic banking. In fact, as elucidated in an earlier article, I had been part of the system where no one was interested to learn the genuine difficulties a borrower may be facing in not being able to repay the loan with interest on time. If ever a consideration was accorded, it was at harsh terms such as a higher interest rate or demanding collateral or canceling the credit lines, etc.
The best part of the story was that the poultry importer actually more than compensated the Islamic bank by making it the preferred bank and made much higher volumes of imports in the coming years than was ever expected. Not only that, the customer spread the word around on how surprised he was at such big-heartedness which is not aligned with banking practices — but then he was dealing with an Islamic bank.
As per a careful estimate, during the next three years the Islamic bank had earned double the amount of the profit cheque it had given back to the customer at the Shariah board’s instruction. Certainly, the customer was moved at the humanity with which he was dealt with in the difficult circumstances and undertook to pay back to the Islamic bank with loyalty, which is a highly sought-after commodity in the banking world.
Now, the question I put to readers was why did the Shariah board not have any reservations about the Islamic bank accepting the AED10 million (US$2.72 million) cheque? The response is simple and straightforward. This is because the Shariah board determined that since the customer still made a profit, albeit a fraction of the projected one, this was enough to prove that the Islamic bank’s originally invested Wakalah capital remained intact, and hence the customer is liable to return it to the bank.
Moving on, now that lots of conventional banks are heavily participating in Islamic consortium arrangements, is it in order from a Shariah perspective to appoint one of them as the agent in an investment Wakalah transaction? Based on AAOIFI guidelines and as per my own practical experience, there is no issue if a conventional bank is appointed as the agent or representative of the consortium member banks, provided that the agency agreement is drawn while respecting Shariah principles.
However, I need to clarify that such permissibility is restricted to the conventional bank acting as an agent for other banks (and itself) in funding the client through the investment Wakalah agreement whereby the client is the investment Wakeel and the consortium is Muwakeel. In other words, the conventional bank shall merely act as the appointed representative for the consortium while signing the investment Wakalah agreement with the client (as the Wakeel) in the capacity of the Muwakeel.
It is not permissible for the conventional bank to become the investment Wakeel and receive the funds from the consortium for its own purpose. Nevertheless, there could be an exception if the conventional bank is operating an Islamic window duly supervised by the formally constituted Shariah board. Also, it will be required that the consortium funds shall only be utilized for the activities of the Islamic window and must not be mixed with the conventionally secured liquidity and such policing is evidenced through the Shariah audit reports.
Can an Islamic consortium accept a conventional bank as one of its members for collective investment through the investment Wakalah arrangement with a bona fide Wakeel? Yes, that is possible because once the conventional bank’s funding is received, it will be invested in terms of the investment Wakalah agreement in a fully Shariah compliant manner. The periodic return received by the conventional bank from such funding shall be construed to be the Wakalah profit and not interest. It is another thing if the treasury of the conventional bank still treats it as interest. And if it does so, would it not be a kind of misrepresentation? I leave it to your better judgment, dear readers.
With this, I come to an end of my explanation on Wakalah (agency) and investment Wakalah. See you next week with a new subject.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at [email protected]
Next week: New topic on Islamic finance.