This article is the latest in a series of articles focused on basic Islamic finance concepts and structures. This article will focus on Wakala transactions.
What is Wakala?
Wakala is a contract under which an investor (known as the muwakkil) appoints a manager to act as agent or to manage an investment on its behalf (known as wakeel).
The wakeel is entitled to a pre-agreed fee, which may be a fixed fee or calculated by reference to the net asset value of an investment. The muwakkil receives the profits from the business enterprise, less any fees that are used to pay the wakeel.
How is it structured?
Wakala is similar to an agency contract in general English contract law. The muwakkil appoints the wakeel to act as its agent or manager in respect of an investment(s). The terms of that appointment are set out in a contract between the parties. In return, the wakeel will be paid a fee for their services, which can be calculated as a simple fixed fee or by reference to the value of the investments being managed. It is important to establish legal capacity and be aware of general agency law provisions. Any profits and losses are to be borne by the muwakkil.
When is Wakala most often used?
Wakala is popular with certain investors in two scenarios: (i) where a general agency function is permitted; and (ii) where a specific agency function is required. In the former, general powers are given to the wakeel pursuant to which the wakeel acts on behalf of the muwakkil to perform a wide range of activities. In the latter, specific powers are given to the wakeel pursuant to which the wakeel is only authorised to perform a limited range of activities. This might be, for example, in connection with acquiring or managing real estate assets, but it can also be used in the context of bank deposit investment transactions, takaful products and sukuk transactions.
It goes without saying that any structure would require careful consideration to tax implications, which would need to be carefully examined on a jurisdiction-by-jurisdiction and case-by-case basis.
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