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Wakala Deposit

The document discusses the application of wakala contracts in Islamic banks. Under a wakala contract, an Islamic bank acts as an agent (wakil) on behalf of depositors (muwakkil). The bank invests the deposits to generate returns according to a pre-agreed profit ratio, deducting an agreed wakil fee. Any profits exceeding the expected returns are retained by the bank. Depositors bear all investment risks and losses except those from bank misconduct or negligence. However, wakala contracts are criticized for potential conflict of interest between banks and depositors and lack of physical assets, raising governance questions around risk and control.

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437 views1 page

Wakala Deposit

The document discusses the application of wakala contracts in Islamic banks. Under a wakala contract, an Islamic bank acts as an agent (wakil) on behalf of depositors (muwakkil). The bank invests the deposits to generate returns according to a pre-agreed profit ratio, deducting an agreed wakil fee. Any profits exceeding the expected returns are retained by the bank. Depositors bear all investment risks and losses except those from bank misconduct or negligence. However, wakala contracts are criticized for potential conflict of interest between banks and depositors and lack of physical assets, raising governance questions around risk and control.

Uploaded by

Solomon Tekalign
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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

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