I am resuming after a lull of a couple of weeks. I concluded article 136 on the point of how would the principal determine the agent’s breach in an unrestricted agency given that the scope of such agency is wide-ranging. I will discuss it in today’s article.
The historic era’s Islamic scholars from the four established schools of the Sunni clique (Hanafi, Shafi’i, Maliki and Hanbali — named after the four great scholars) and their students have discussed in detail all possible scenarios of an agent’s default in the unrestricted agency situation. The contemporary scholars have very well molded such treasured guidance into present-day circumstances. I will attempt to explain it in the following paragraphs.
As explained in the preceding article, granting an unrestricted agency is a high-risk proposition and thus should be applied in special cases where there is no other viable option available and the principal reposes a high-level of trust in the agent.
In the modern-day financial environment, it is not easy to find an agent of that caliber and hence great work has been done by the scholars and practitioners from the Islamic finance industry to ring-fence the unrestricted agency transactions to considerably reduce, if not eliminate, the risk of ‘by-design’ default by the agent.
You may have frequently heard the following phrase in the judicial corridors: “Innocent unless proved guilty.” How would you like it if I spin the phrase on its head as “guilty unless proved innocent”? This is exactly what is applied in the unrestricted agency transactions currently undertaken by Islamic banks and financial institutions.
The Wakalah contract bears a provision that based on its expertise, the unrestricted agent shall submit a business plan envisaging the expected profit by deploying the Wakalah capital and, accordingly, the payment of the profit and redemption of the capital upon maturity to the principal.
Should the agent fail to achieve the projected profitability threshold or redeem the capital in full, it will be responsible for the shortfall unless it can prove beyond doubt that the non-performance was not attributed to its negligence. Hence, the onus to prove the innocence lies with the agent who will bear the loss upon failure to bring forth its virtue.
The critics of Islamic finance say that such a provision is akin to a conventional loan agreement since the agent will have to pay the principal in all circumstances but that is not true. Shariah principles fully support the agent if its non-delivery is directly correlated to any extraordinary market situation, such as the global financial crisis of the last decade or the current COVID-19 pandemic.
The criticism is thus unfounded since the agent shall stand absolved in the Shariah court owing to having been constrained by the exceptional circumstances which it could not have envisioned while preparing the business plan. I have many times personally experienced the Shariah board stance going against its own financial institution and in favor of the client whenever the ‘beyond the control’ phenomenon was found in a default situation, be it non-payment in a Murabahah, Ijarah, Mudarabah or Wakalah transaction.
Once, a non-Muslim home finance customer who immensely benefited from such a fair Shariah approach could not hide his affection for Islamic banking and posted on social media “I wish they all could be Islamic”, borrowing the line from an old UK airline advert.
So, how does an agent prove its innocence to the principal in negative circumstances? This requires a threadbare discussion on clear Shariah guidelines which act as the barometer for honesty or otherwise.
Starting with the purchase transactions, the agent will need to prove through the audit that it always bought the goods either at a price lower or at par with the market price. If the agent carried out some of the purchases on behalf of the principal at a price higher than the market price, it may be acceptable occasionally but not repeatedly.
However, if it is found to be an established pattern to purchase above the market price and that too from a single source, the agent’s mala fide is apparent here. Generally, such a practice is adopted by the agent to benefit a relative or a close connection as well as with an intention to share the booty.
The approach here should be to ascertain the aggregate amount paid by the unrestricted agent over and above the market price during the course of the Wakalah period since it caused a drain on the principal, and the amount should be recovered from the agent.
I will come back next week insha Allah to discuss the other aspects of a breach by an unrestricted agent.
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 Wakalah shall continue.