Wakala Deposit

Wakala is an agency contract, where the account holder (principal) appoints an Islamic finance institution (agent) to carry out investment activities claims that wakala “allows a much more efficient recycling of short-term liquidity in the Islamic banking system”. Islamic banks and financial institutions offer wakala contracts in many different forms, including letter of credit, Islamic monetary certificate, Islamic bonds, term deposit, and Islamic insurance.  

The Application of Wakala in Banks

In wakala contracts, the actual profit is distributed according to the profit ratio agreed upfront. Bank (Wakil) is able to specify expected return from customers’ deposit by investing into selected instrument for an agreed wakil fee. The Wakil will then make the investment to generate a return, which is carried out for and on behalf of the customers (Muwakkil). The Muwakkil specifies the returns expected from the investment, and Wakil is required to source an investment to achieve the expected returns, after deducting the wakil fees. Any profits exceeding the agreed returns will be retained by the Wakil as additional incentive. Like any other investment, in case of default, the Muwakkil shall bear all risks and losses except those risks and losses resulting from the Wakil’s misconduct or negligence. The structure of Wakala deposit is shown in figure below

Wakala Deposit Structure:

Source: Maryam Sofia Mohd Suhaimi

Shariah Issues on Wakala Deposit Structure

The mechanism, basically has fulfilled all the conditions agreed by the scholars and has ensured just and Shari`ah compliant transactions. However, there are some issues that need to be highlighted in this contract. The wakala contract has been criticised for conflict of interest and it may cause accusation (tuhmah) against an agent. The issue exists where the agents act against the interests of their principals. This problem is commonly referred to as an agency problem, which occurs when the objectives of the owner do not coincide with the objectives of their agents.

Furthermore, no physical commodity is required under wakala contract. This raises the question of whether wakala is an efficient governance structure in terms of risk and control.  

Source: Service Based Contract Used in Islamic Finance: A Comparison of Hawalah, Wakala, and Kafalah, Maryam Sofia Mohd Suhaimi