Weekly word: wakala

December 7, 2011

Wakala is often defined as Islam’s version of power-of-attorney.

Brill said wakāla (or also wikāla), or “mandate, authorisation, is a contract (‘akd) by one contracting party, the muwakkil, commissions the other, the mandatory (wakīl) to perform some service for him.”*

In the context of sharia finance, one Muslim source elaborates:

Wakalah is a contract whereby somebody (principal) hires someone else to act on his behalf i.e. as his agent for a specific task. The agent is entitled to receive a predetermined fee irrespective of whether he is able to accomplish the assigned task to the satisfaction of the principal or not as long as he acts in a trustworthy manner. He would be liable to penalties only if it can be proved that he violated the terms of the trust or acted dishonestly.

In the case of a financial wakalah contract, clients give funds to the bank/company that serves as their investment manager. The bank/company charges a predetermined fee for its managerial services. Entire profit or loss is passed back to the fund providers after deducting such a fee.

This contract is used by some Islamic banks to manage funds on an off-balance sheet basis. The contract is more widely used by Islamic mutual funds and finance companies.

Wakala is used as the default model for takaful where a wakala fee is paid to the takaful administrator to oversee investments and payment of claims.  Wakala has been increasingly used as a structure of sukuk.

Unsurprisingly, “ethical” Islamic finance hits unsuspecting Muslim investors hard:  wakala fees are often very high and are not reduced even if the wakīl performs poorly.  Profits go back into the sharia finance industry, which keeps radical Islamist clerics on payrolls, to serve their ultimate purpose of destroying the Western financial system and secular rule of law.

* Brill, E.J., Encyclopedia of Islam, New Edition (Leiden:  E.J. Brill, 1996).

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