We are defining the essential elements of an investment agency agreement. Continuing from the last article, the parties can sign a conditional investment agency agreement which means the agency effect shall come into play only upon the fulfillment of certain pre-specified conditions either by the Muwakeel or Wakeel, or both.
For example, if the Wakeel (agent) is required to pledge a certain asset in favor of the Muwakeel (principal) as surety for its due performance, the investment agency shall come alive only after the completion of the pledge. The condition from the Wakeel could be the delivery of the entire Wakalah capital at once, instead of in piecemeal, or upfront payment of the Wakalah fee. Care must however be taken not to cross the Shariah boundary while introducing any condition in the agreement.
The scope of an investment agency agreement could be devised either in a circumscribed or unrestricted fashion. What it means is that the Muwakeel will call the shots whether it would like the Wakeel to perform in a limited scale local market or to feel free to invest the Wakalah capital the way it deems fit in the other parts of the country where the yield is expected to be greater. You may recall we have also discussed the confines of an unrestricted agent who cannot be granted an absolute carte blanche.
Clearly, the asset class for the Wakeel to invest in would have been predefined based on its expertise. You cannot expect a building material expert to be assigned the task to generate profits from foodstuff trading. This is where the Muwakeel’s due diligence comes to play.
If the Muwakeel’s intention is to reward its Wakeel on the performance in addition to the Wakalah fee, the scale of such recompense should be specified in the investment agency agreement text so as to avoid any future row.
Shariah principles allow the Wakalah capital drawdown to be in a lump sum or in installments at the discretion of the Wakeel who may be waiting for the right market opportunity. Nevertheless, there should be a long stop date beyond which the Muwakeel shall not wait for the deployment of the Wakalah capital by the Wakeel. If the Wakeel has not drawn down the Wakalah capital beyond such a date, this should be tantamount to the termination of the investment agency agreement.
What if the Wakeel has placed an urgent drawdown notice so as to grab an opportune deal but the Muwakeel has sought little time to arrange for the delivery of the amount? Well, if the Wakeel is resourceful, it can use its own funds to conclude the purchase of the relevant commodity and recover the amount on receiving the Wakalah capital from the Muwakeel.
Why would a Wakeel put its own money at risk? The answer is simple — to earn the Wakalah incentive. Nonetheless, the amount so invested by the Wakeel temporarily will be strictly treated as the Qard Hasan or interest-free loan by the Wakeel to the Muwakeel for that short duration.
In your opinion, what may happen if the Muwakeel is unable to deliver the Wakalah capital to the Wakeel out of which the Wakeel could have recovered its Qard Hasan? In that case, the Wakeel will have the right to terminate the investment agency agreement and dispose of the commodity, recover the amount of Qard Hasan and retain the entire profit. This is because pursuant to the termination of the investment agency agreement, the ownership to the commodity is instinctively passed to the erstwhile Wakeel who is also entitled to own the entire profit.
Care must be taken to the effect that the Wakeel does not claim anything from the Muwakeel beyond certain actual compensation if the disposal of the commodity by the Wakeel in a distressed situation entailed a loss whereby the sale price could not cover the original funds used by the Wakeel to complete the purchase in the capacity of the Wakeel, ie prior to termination.
There could also be a situation where the Wakeel did not need to dish out its own funds to complete the commodity purchase but bought them on credit in anticipation of receiving the Wakalah capital soon which never arrived. This is an easier way out for the Wakeel who will sell the goods on cash/ultra-short term credit, collect the proceeds, pay the actual cost of the commodity to the seller and pocket the profit.
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 Bil Istithmar shall continue.