We are discussing the ingredients of the investment agency agreement and today I will explain the determination of the Wakalah profit and its treatment.
As already covered earlier, the profit emanating in terms of an investment agency agreement solely belongs to the Muwakeel (principal) and the Wakeel (agent) does not have the right to claim a share of it.
Nevertheless, Shariah principles allow the Muwakeel to include the Wakeel in sharing the Wakalah profit in the shape of a pre-agreed voluntary incentive based on a threshold, and not as the right of the Wakeel.
What happens here is that the Muwakeel reviews the investment plan submitted by the Wakeel and, if found appetizing, approves it by entering into the investment agency agreement. The investment plan becomes part and parcel of the agreement and all its terms and conditions come alive upon the Muwakeel releasing the Wakalah capital to the Wakeel.
If the arrangement encompasses an incentive provision, the Wakeel shall be authorized to deduct such amount before passing on the Wakalah profit to the Muwakeel. If the agreement is ongoing, the Wakalah profit for a relevant period is determined on a constructive liquidation basis.
This type of liquidation is where the size of the Wakalah capital is assessed and if it is found to be exceeding the originally invested capital, the excess is considered profit for that period pursuant to deducting the direct running expenses of the Wakalah entity. The profit is then shared between the two parties.
There could be various ways to assess the value of the Wakalah capital upon completion of the relevant investment period depending on the nature of the Wakalah assets. In the case of trading inventory, the extent to which the sale price is higher than the Wakalah capital shall be the gauge. Similarly, if the Wakalah capital has been invested in real estate, the rate of rental return may be a basis, and so on.
If the Wakalah term is one-off, the constructive liquidation shall not work here and it will require the actual disposal of the Wakalah assets in order to compare the sale proceed with the original Wakalah capital. Any surplus shall be construed as profit in which the Wakeel shall also enjoy a certain share in addition to the Wakalah fee.
This is all fine and straightforward if the Wakalah capital was invested by the Wakeel independently. How about a situation which is fairly common in Islamic banking where the Islamic bank, being the Muwakeel, permits the Wakeel — which is the bank’s client — to invest the Wakalah capital in its own business?
This is permitted by Shariah scholars provided that the client does not deal in Haram goods or services, and that its financials live up to the AAOIFI Shariah screening parameters for being the eligible investment target. Such a situation is called commingling of the Wakalah capital with the Wakeel’s business.
The determination of the Wakalah profit in a commingling environment is two-tiered — first, to ascertain the overall profit for the entire commingled capital, and then to deal with the portion of the profit attributable to Wakalah.
Upon coming to know of the profit which belongs to Wakalah, it becomes possible to determine the incentive amount pertaining to the Wakeel and the rest of the profit is then paid to the Muwakeel for that specific period. The Wakalah capital continues to remain invested in the Wakeel’s business. Here, the Wakeel enjoys earning the profit twice, first in the capacity as the owner of the business and then through the Wakalah incentive.
At the outset of this series, I had provided the Shariah definition of profit which is simply: ‘what exceeds the capital is profit’. This conveys that in order to arrive at the Wakalah profit, it is vital to first ensure by all means that the originally invested capital has remained intact.
Keeping the aforementioned in mind, what shall be the Shariah position if the Wakeel declares a loss situation in a commingled Wakalah environment? Come back next week to find out.
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: Commencement of discussion on the subject of commingled Wakalah investment.