As promised in the last article, I now embark on my discussion on Wakalah Bil Istithmar or the investment agency agreement. Since I have already covered the nitty-gritty on Wakalah or agency agreements in the last 15 articles, I expect readers shall bear that in mind while going through this and future articles on the subject.
In simple terms, if Party A provides capital to Party B, relying on the latter’s expertise in prudently and profitably deploying the former’s funds for an agreed period of time, and to return them on maturity or on demand, they enter into an investment agency arrangement. This is done by the parties by entering into an investment agency agreement. Shariah terms used here are the same, eg the principal is the Muwakeel (at times Mustathmir is also used which means the investor) and the agent is called the Wakeel.
Breaking it down further, Wakalah Bil Istithmar is different from Mudarabah or Musharakah in that the profit generated through the investment is not available for distribution between the parties and belongs 100% to the Muwakeel alone. As explained earlier, the Wakeel acts as an employee of the Muwakeel against a fixed fee (either in the amount or a percentage of the capital) which is tantamount to the Wakeel’s salary. This is analogous to the employees working for a business entity who do not have a right over the profit generated through their efforts.
However, Shariah permits it if the Muwakeel grants a certain share of the profit to the Wakeel on a voluntary basis with the purpose to incentivize the Wakeel for superior performance. The most common example in the contemporary financial landscape is a mutual fund where the fund manager is granted the entitlement by the individual investors to share a certain percentage of the net income as the performance bonus.
An industry colleague who invested in a mutual fund quipped in a lighter note that the fund management company literally snatched the 20% performance bonus by asking him to sign on the dotted lines without which it would not accept his investment. He said that this seemed more like ‘gunpoint’ robbery rather than him voluntarily granting the incentive. Readers, any comment on this market practice?
Before moving on, and to save readers from scanning my previous articles, I will summarize the main aspects of an agency agreement. It is to be noted that the investment agency agreement is not different in nature in that respect.
As you know by now, every Islamic financing and investment contract is not complete without the presence of a minimum of two parties and the offer and acceptance from either of them. Also, by default, the subject matter of the investment agency agreement must be compliant to Shariah principles and, once signed, the agreement terms must not be unilaterally altered.
The agreement may or may not contain the agency fee payable to the Wakeel. In the absence of a fee provision, the investment agency agreement shall be considered revocable by the Wakeel. Hence, it is always recommended for the Muwakeel to enter into a fee-based investment agency agreement. Lastly, the text of the agreement must not bear any provision which collides with the Shariah parameters of a Wakalah agreement.
Other related aspects are that the expenses of any relevant investment made by the Wakeel shall be borne by the Muwakeel either separately or deductible from the provided capital. Nevertheless, if the Wakeel is a service provider entity, it will be responsible to manage its own running expenses and shall only be able to claim the expenses from the Muwakeel which are directly related to the Wakalah investment.
Contrary to Musharakah but similar to Mudarabah, the Wakeel is not liable to bear any loss of investment. Although in Mudarabah, the Mudarib (fund manager) is not entitled to any remuneration in case of a loss, interestingly the Wakeel will still be eligible to get the agreed fee for providing its services even if the Wakalah turns out to be a loss-incurring venture.
At times, it surprises me to realize that the Shariah scheme of things has taken care of all types of investors with a diverse nature. For investors having a high risk appetite, Mudarabah is the most suitable proposition where the Mudarib holds full discretion to manage the capital the way it deems appropriate and the investor does not have the right to intervene in the day-to-day Mudarabah affairs.
For medium-risk takers, it is Musharakah where both parties work together with a hands-on approach, and for low-risk investors we have Wakalah where the counterparty does not have any discretionary powers for managing the capital and must follow the instructions from the Muwakeel. Do you not find it fascinating? I will be glad to have your comments.
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.