I left you with a question last week which was: in which areas is the unrestricted agency currently applied by Islamic banks?
The brief answer to that question for the time being, until we broach the subject exhaustively later on, is when the Islamic bank enters into a Musharakah agreement with the customer and provides capital to grow the customer’s business and reap the benefits mutually.
Since the Islamic bank’s personnel may not have the essential skill to run the day-to-day operation of the Musharakah entity with the customer, it appoints the customer as an unrestricted agent for and on its behalf. However, such an appointment cannot be embedded into the text of the Musharakah agreement since it shall violate the Shariah principle of not combining the two contracts into one (here, the Musharakah agreement and the agency agreement).
For that purpose, the Islamic bank shall enter into a separate agency agreement with the customer which is widely known in the industry as the ‘management agreement’, granting the customer a certain mandate within which to operate as an agent of the Islamic bank.
As the customer shall need to make the day-to-day decisions in the routine running of the business, the agency cannot be restricted and by default shall have to be on an unrestricted basis. I shall discuss the finer points of how such an agency works in the Islamic investment contracts in due course.
I also briefly highlighted in the last part of article 130 the rights of the agent. These rights are effective irrespective of whether the agency is restricted or unrestricted.
There could be situations where the principal wishes to wriggle out of the agency arrangement, such as the availability of the principal to perform the assigned tasks itself — which was not possible in the past prompting the need for an agent to perform them. If the principal wants to terminate the agency agreement for such a valid reason, it shall be required to remunerate the agent for the agreed amount of fee, commensurate with the agent’s completed performance up until the termination date.
Nevertheless, if the agent has not provided any cause for concern to the principal and yet the principal urges to terminate the agency agreement with any unreasonable pretext, such that it shall hire a cheaper agent to perform the same job, the principal shall be required to fully compensate the agent as per the agreed fee, even if the agent has not yet completed the full assignment or fulfilled the period for which it was appointed.
As also explained by me earlier, the agent’s fee shall be payable by the principal irrespective of the financial state of the subject matter of the agency agreement. To understand it better, if the agent has been responsible to collect the rent from the principal’s properties and the rental income has sharply fallen due to a glut in the real estate market or economic recession due to COVID-19, the agent shall be eligible to be paid by the principal the full agency fee.
In other words, the principal shall not be able to reduce the agency fee in proportion to the decline in the rental income. Nonetheless, the fee can be adjusted provided the principal has obtained the agent’s consent and an addendum to the agency agreement has been signed by both parties.
It is to be noted that the said compensation shall apply provided the agency agreement is irrevocable where the fee payment clause has been added to it. But if there is no mention of the agency fee and the agent has agreed to perform the assigned job on a pro-bono basis, the principal shall not be required to eke out anything while terminating the agency agreement prematurely with or without any justified reason.
What are the acceptable modes of ascertaining the agency fee and the terms of its payment? Well, the most simplistic approach is to set a fixed known amount as the agency fee with clearly defined milestones for its payment, such as upfront, in arrears or in installments.
Another approach could be a known percentage based on the financial output achieved by the subject matter of the agency agreement. An example of such an agency fee could be the 5% of the gross income realized by the agent from renting the construction machinery owned by the principal. Here, the agent’s fee shall fluctuate in monetary terms since the rental proceeds cannot remain the same from period to period.
A generous principal can use the Shariah compliant tools to motivate its agent for the enhanced performance level desired by the principal. A case in point could be the manager of a mutual fund who acts as the investors’ agent with the agreed fee, topped up with the performance bonus if he is able to breach an agreed income threshold. Hence, the agent can be incentivized in a manner which does not raise the eyebrows of the Shariah scholars.
For this article, I do not have any questions to throw at you. So, relax and enjoy the week.
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 fascinating subject of Wakalah shall continue.