Wakal ah | 1

Table of Contents
1.0 DEFINITION........................................................................................................... 2
1.1

Evidences....................................................................................................... 2

1.2

Pillars of wakalah........................................................................................... 4

1.3

Types of Al-Wakalah....................................................................................... 4

1.4

Terms and conditions of Wakalah Contract....................................................4

1.5

Flows of wakalah.......................................................................................... 5

2.0 PRODUCT OF WAKALAH........................................................................................ 6

2.1 Wakalah bil istithmar........................................................................................ 6
2.2

Wakalah in Takaful Model............................................................................. 11

3.0 ISSUES AND RECOMMENDATIONS......................................................................14

4.0 CONCLUSION...................................................................................................... 19
5.0 REFERENCES...................................................................................................... 20

Wakal ah | 2

1.0 DEFINITION
Literally Wakalah

means protection or remedying on behalf of others. Legally

Wakalah refers to a contract where a person authorizes another to do a certain

well-defined legal action on his behalf. It is a contract of agency which means doing
any work or providing any service on behalf of any other. An agent is someone who
establishes contractual and commercial relations between a principal and a third
party, usually against a fixed fee. An action performed by an agent on behalf of the
principal will be deemed as action by the principal. Agency is necessitated by the
fact that an agent has to perform certain tasks which the principal has neither the
time, knowledge nor the expertise to perform himself. The need for agency arises
where a person has no ability or expertise to perform a certain action due, for
example, to distance or size. The main features of agency are service,
representation and the authority to act for the principal. An agent may obtain a
certain wage for services rendered within the incentive structure of the principal.

1.1 Evidences
Wakalah is authorized by law. This is stated by the Al Quran, Al Sunnah and
supported by the scholars.
1. Al Quran

And if you fear dissension between the two, send an arbitrator from his people and
an arbitrator from her people.

Wakal ah | 3
Surah An Nisaa 35

2. Hadith
Reported by Urwah R.A that the prophet S.A.W gave himone gold Dinar to buy
with it (be an agent for the ProphetS.A.W) a sheep but instead he managed to
buy two sheep. He then sold one of it for one gold Dinar and then presented the
prophet with both the sheep and one gold Dinar that heacquired. The prophet
S.A.W prayed for him to be given blessings (barakah) in all his trade and
transactions and mentioned that even if he sells solid soil, he will definitely gain
profit in it.
3. Ijma
The ummah had come to a consensus on the legitimacy of Wakalah contract
since there is a great need for it, and individuals are also not capable of catering
and handling all his/her needs, matters and daily affairs on their own without
having to resort for the help of other people. Hence, it is permitted because it is
one of the types of cooperation on good deeds and fear of God ( TaawunAlal
Birri Wa Taqwa ) encouraged in Islam.

Wakal ah | 4

1.2

Pillars of wakalah

Wakil - The authorized agent, representative, proxy, trustee

Muwakkil Authorizer, mandatory, client, principle
Muwakkil bih things or subject matter that is being entrusted for or business
deals involved.
Sighah ijab (offer ) qabul (acceptence)

1.3

Types of Al-Wakalah

There are two types of Al-Wakalah:

1. Al-Wakalah Mutlaqah (Absolute Al-Wakalah)
General agency contract that allow the agent to act on behalf of the
principals on any

matters including all methods of disposing of assets provided

that the interest of the

principal and customary practices is well observed.

2. Al-Wakalah Muqayyadah (Limited Al-Wakalah)

Restricted agency contract whereby an agency contract is restricted and
confined with certain conditions and time constraint and hence the agent has
no right to violate what has been restricted by the principal.

1.4 Terms and conditions of Wakalah Contract

1. Agent
The condition of agent is that he should posses the capacity of execution
that requires sanity and ability of understanding and discrimination in the
agent.
2. Subject-matter
The subject-matter of agency is the act for the performance of which the
agent is appointed. Agency is permissible in each known disposion
recognized by shariah.

Wakal ah | 5
3. Principal
The conditions of the principal are that he should have full authority of
disposing of a matter, which he has entrusted to another person to
perform on his behalf.

1.5 Flows of wakalah

Wakal ah | 6

2.0 PRODUCT OF WAKALAH

Modern Applications of Al-Wakalah

Recently, Wakalah Bil Istithmar has developed as one of the most significant
mechanisms in Islamic financial markets. There is a growing interest for this type of
contract among both the investors (muwakkil) who have capital/liquidity surplus but
lack time or expertise in managing the capital and the agents (wakil) who have time
and expertise in managing the funds.

2.1 WAKALAH BIL ISTITHMAR

An agency contract whereby the agent is appointed to invest the principals capital
for the benefit of the principal is called as investment agency (wakalah bil
istithmar). Wakalah bil istithmar (investment agency) is categorized as wakalah
lazimah (binding agency) between the investors (the principal/ muwakkil) and agent
(wakil) whereby the agent will undertake investment activities on behalf of the
principal for a fee. The underlying Shariah principles of wakalah bil istithmar is
based on the pillars and conditions of the wakalah contract. The structure is
preferred by those who have surplus capital but lacking in investment strategy, time
or other constraints. The investors would hand over their capital to be managed by
the wakil on trust basis. The wakil thereby uses his expertise to select and manage
investments on behalf of the investor to ensure that the portfolio will generate the
expected profit rate agreed by the principal. Nevertheless, the wakil cannot

Wakal ah | 7
guarantee the capital as well as the profit. It is part of the investor (muwakkil) risk
unless it is proven that the agent has misused or breached the contract. The
contract necessitates the presence of a principal (muwakkil), an appointed agent
(wakil), subject-matter of agency (muwakkil bihi) and the wakalah agreement
between the principal and agent (sighah). The relationship between the principal
and the agent must comply with certain basic conditions which are among others;
the principal (muwakkil) in this regard would take the risk of the acquisitions and
investment and is entitled to any profit generated from them. Essentially, the
wakalah agreement must be clear and unambiguous, contain descriptions about the
parties involved in the contract; their rights and responsibilities; the duration of the
wakalah, the type or criteria of assets that the wakil can select, the fees payable to
the wakil for its services and the conditions for termination of the wakalah
agreement.

THE APPLICATION OF WAKALAH BIL ISTITHMAR IN ISLAMIC FINANCE

Wakalah bil istithmar (wakalah investment) is now popular in Islamic financial
transactions and has been applied in various structures of Islamic banking and
Islamic capital market products.

1. Wakalah Bil Istithmar Sukuk

Wakalah bil istithmar sukuk is defined by AAOIFI (2010) as certificates that
represent a project or activities managed on the basis of an investment agency by
appointing an agent to manage the operation on behalf of the certificate holders.
SC of Malaysia in their Sukuk Guidelines (2012) defines wakalah bi al-istithmar
sukuk as certificates of equal value which evidence undivided ownership of the

Wakal ah | 8
certificate holders in the investment assets pursuant to their investment through
the investment agent.

In wakalah bil istithmar sukuk arrangement, the sukukholders are the principal
(muwakkil) who are investing their money. The issuer of the sukuk, i.e. special
purpose vehicle (SPV), acts as the trustee who will hold the underlying assets on
trust for the sukuk holders. The originator/obligor is the party that requires the
money and in many cases, is also the investment agent (wakil) that manages the
underlying assets of sukuk in an investment. The proceeds will be used to acquire or
invest in Shariah compliant assets investments from where periodic income
distribution will be generated and distributed to the principal (sukukholders). Upon
maturity of the sukuk date or upon the occurrence of an event of default, the obligor
will purchase the wakalah assets that were held on trust by the issuer at the agreed
exercise/purchase price pursuant to the obligors undertaking. The purchase will
fund the redemption amount (amount due on dissolution of sukuk).

In the case of default, since wakalah bil istithmar sukuk is an asset backed sukuk,
recourse is limited to the trust assets. Sukukholders shall have no recourse against
any other assets of the Obligor, Issuer SPV or the Trustee or against any director,
shareholder, officer or employee of the Issuer or Trustee. Nevertheless, the
sukukholders will have access to the reserve fund, or to seek to liquidate the
collateral.

Wakal ah | 9

2. Wakalah Liquidity Management

The contract of wakalah has also been used to solve the liquidity problem faced by
Islamic financial institutions. IFIs usually faces the maturity mismatch between the
long term assets as IFIs main investments are in medium to long term
investment/financing and short term liabilities since the main funding are from short
term wholesale deposits. So far, IFIs have mainly relied on Commodity Murabahah
for liquidity management. There are some issues in using tawarruq as an underlying
contract because IFIs is unable to raise liquidity through reverse Murabahah
(tawaruq), due to criticism by some scholars, it also involves some cost of
commodity brokerage beside the amount of commodity to cover transaction
volumes which is open to debate. Wakalah bil istithmar is offered as an alternative
to facilitate deposit placements by corporate clients with IFIs. AIBIM (Association of
Islamic Banking Institutions Malaysia) in 2009 has produced an Inter-bank Wakalah

W a k a l a h | 10
Placement Agreement that arranges and provides mechanism for deposit
placements by corporate clients with IFIs.

IIFM (International Islamic Financial Market) has also recently attempted to address
the issues and diversity in practices of wakalah in liquidity management by
producing an Interbank Unrestricted Wakalah Investment Operational Guidance and
Interbank Unrestricted Master Wakalah Investment Agreement.

The transactions is done by the muwakkil (the deposit placing entity/investor) will
transfer certain funds to the wakil (the deposit recipient/agent for investment) and
appoint the wakil as its investment agent to invest such funds on its behalf in a
manner compliant with the principles of Shariah and in accordance with the terms
of the agreement.

W a k a l a h | 11

2.2

Wakalah in Takaful Model

Under the structure, an agency relationship is agreed between two parties to

conduct a certain business undertaking. Based on this premise, the model
describes an agency agreement between the operators, acting as the agent or
wakil to the participant as the principal to manage the participation of the
latter in a variety of takaful products provided by the operator. In return for
rendering the agency services, the operator is permitted to charge a fee under
the agreement. The fee is payable from the takaful contribution paid by the
participant. In this sense under the above model, management expenditure can
be charged to the takaful fund as upfront charges. By this model, the operator
earns its revenue from the agency fee described in the aforementioned as well

W a k a l a h | 12
as returns on the investment of its shareholders fund. However, there are also
operators practising the above model who charged performance fees on its roles
and services of managing the investment of the takaful fund. In the event of a
cancellation or surrender, the participant will be refunded of the net balance of
his contribution, if any, after deducting all the upfront charges such the wakalah
fees and other management expenses from the takaful fund.

W a k a l a h | 13

Modified Wakalah Model in Family Takaful.

There are basically two forms of Wakalah model, namely pure Wakalah model and
modified Wakalah model. In a pure Wakalah model, Takaful participants contribute
to the Takaful fund on the basis of voluntary charitable contributions (Tabarru) to
cooperate in mitigating (certain) risks suffered by members. The Takaful companies
manage the Tabarru fund, process claims and pay compensation, on the basis of
agency contract by receiving the agent fee (Wakalahbil-ajr). The Takaful operator is
authorized to invest a portion of the Takaful fund and thus is entitled to a fee for
acting as the agent for investment. By virtue of the principle of Wakalah, the Takaful
operator does not bear any liability for losses unless it has been negligent or
misconduct; conversely, it does not participate with the Takaful participants in any
profits.

W a k a l a h | 14

3.0 ISSUES AND RECOMMENDATIONS

A basic Wakala model is the most widely acceptable form for Risk Sharing contracts.
Differences in opinions do still exist relating to charging of expenses (marketing
versus administration) and also the fee structure/basis.
One major issue which is still being deliberated upon relates to the pure Wakala
model (where the operator charges a fee for services) and modified approaches
where within a

Wakala model a percentage share of the underwriting surplus is

paid as a performance incentive for the operator. Sharing in underwriting surplus is

something that does not appear to be in line with the concept of mutual assistance
and hiring of professional expertise of Risk Manager although it may be argued
that it is meant to provide an incentive to the operator to better manage the risk.
One may argue that as a Wakeel and trustee the operator is responsible to ensure
careful and fair management of the takaful fund for the fee that it is receiving.
Moreover,

better

underwriting

results

through

careful

risk

selection

and

management would ensure that higher surpluses arise in the takaful fund for
distribution to participants. Higher surplus distribution in itself is an incentive for the
operator as more clients may get attracted to it due to its better Risk
Management capability.
This would be an indirect benefit of better management and not a direct one which
seems more acceptable given the principles of takaful and also the concerns
relating to the Mudaraba model where underwriting profits are shared. A detailed
note related to this issue has been compiled separately (Annex 1) and the view of

W a k a l a h | 15
prominent Shariah scholars in this regard is that any sharing in surplus by way of an
incentive is not permissible.
Risk Premium (for claims) and Operator Fee
Another concern relates to the Wakala operator fee being charged to the Takaful
fund which understands from some operators is expressed as a fixed percentage of
the total contributions. This is basically as the operator is the Wakeel of the whole
fund on behalf of the participants so his fee is based on and recovered from the
takaful fund.
The typical contract has a Risk Premium to which one may add Expense margins
and profit margins for the operator. Both the expense and profit margin would need
to be competitive based on the volume of premium for a single contract.
Identification of these separately is not required in a conventional insurance
contract as Expense surplus as well as Underwriting Risk surplus both belong to the
Shareholders. However in the takaful system based on Wakala, the underwriting
surplus belongs to the participants and therefore adequate risk premium needs to
be identified separately.
As an example if CLIENT A has say one motor car to be insured and the risk
premium rate is 4% of sum assured. Add to this a 30% of gross premium as margin
for expenses and profits takes the gross rate to 5.71% [4% / (1-.30)]. NOW, take
another corporate CLIENT B who has a fleet of 100 cars to be insured given to its
different employees. The actuarial risk premium rate of 4% under the two contracts
does not change. What changes is the expense and profit margin which should be
much lower in a large contract due to greater competition as well as due to real
reduction in expenses and profit objective. Suppose this was just 15% so the gross

W a k a l a h | 16
rate to be charged would be 4.71% [4% / (1-.15)].IF, an operator fixes the fee as
30% and supposes Client A and B is the total portfolio (101 motor cars) of the
operator.

The total premium (assuming a unit of 1 for sum assured), would be:
CLIENT A: 5.71 x 1 = 5.71
CLIENT B: 4.71 X 100 = 471.00
TOTAL PREMIUM = 476.71
Less OPERATOR FEE 30% = 143.01
RISK PREMIUM FOR CLAIMS = 333.70 (FOR 101 CARS)
RATE % PER CAR ACHIEVED = 3.30%
ACTUARIAL RISK PREM. RATE = 4.0%
WHEREAS, the risk premium rate for undertaking the risk for the takaful fund should
have been 4%. What has happened is that while pricing and attracting clients, we
gave a discount to be competitive but when charging the fee to the Fund, the fixed
percentage fee being removed may imply that the takaful fund may be left with less
to pay claims (3.30%) in relation to the risk being undertaken (4.0%).

W a k a l a h | 17
FURTHER, there are situations where due to the importance of certain clients /
businesses for the company, an operator may give an extra ordinary discount to get
the business in. Here again an overall fee would mean what is left in the takaful pool
for claims would get reduced.
This would mean the equity amongst individuals in the Risk pool may get
disturbed as more risk is passed into the pool by larger clients than the appropriate
risk premium due to the removal of the fixed percentage of contribution as operator
fee. This aspect may be visited by practitioners who may very well have devised
mechanisms to ensure that this may not happen. However, if this is not the case
than there is a concern that depending on the portfolio mixes of the operator, the
underwriting results could fluctuate. In cases where the major portion of the
portfolio is reinsured to a large extent, this risk may get transferred to the
reinsurance pool (assuming at least similar levels of commissions are payable by
the reinsurer as the operator fee) but nevertheless the risk premium issue remains
which would ultimately get reflected in the takaful fund.
If this issue does exist, perhaps a solution may be to define at the stage of pricing
the appropriate Risk premium for the particular risk. For the expense loadings, an
operator may have a percentage fee table based on premium size etc. possibly with
different tables for different lines of business with the flexibility of taking business
decisions to reduce fee levels as suitable to a particular case/client.
Shariah concerns relating to Wakala Model
Although Shariah scholars agree with the conceptual basis related to the basic
Wakalah model they have expressed some concerns and also proposed solutions
which may better address these concerns. The issues have been highlighted here

W a k a l a h | 18
primarily to identify the concerns as per my understanding. I may not have been
able to communicate the concerns of Scholars in the most appropriate manner as it
requires a much greater level of understanding of Shariah concepts. Clarifications if
desired can and should be requested from Shariah scholars as we are in the process
of evolution of this system in the hope that what evolves is better than what exists:
1

Under a typical Wakalah model, the tabarru (donation) remains the property
of the participants unless consumed as he has the right to receive the

surplus back and therefore becomes a conditional gift

Further this gives rise to issues such as Inheritance (not possible to measure
share of surplus in the pool at time of death) and Zakat in the case of death

of the person as the donation is a conditional gift.

The relationship is between the participants and the operator and also
amongst the participants (exchange of gift for a gift). This also creates

doubts about the contract becoming a contract of compensation.

Qard Hasnah is an obligation on Shareholders which would be returned by
future generations which would be different from those which may have
given rise to the deficit as the participants keep changing on a continuous

basis.
Contingency Reserves may not be equitable between generations as the
operator is likely to also hold higher proportionate reserves in the early years
for future contingencies. Since the participants again keep changing on a
continuous basis, it leads to an intergenerational equity issue. In a pure
pooling arrangement, one should be able to call on members to actually
contribute more in case of a deficit on a pro-rata basis. This is not seen as
practical in retail commercial insurance and therefore alternative solution

may be explored.
Wakeel should not be guarantor of the participants whom he represents.

W a k a l a h | 19
These concerns were considered to be less serious and it was proposed to look for
solutions to these issues within the Wakalah model as in principle this model was
seen as well accepted by most scholars from a Shariah perspective.

4.0 CONCLUSION

Al-Wakalah means agency, or the delegating of a duty to another party for specific
purposes and under specific conditions. It is a contract between two parties in which
one party will appoint another party to act on his behalf. The agreement is to
authorize a power to represent him or to exercise the power on his behalf in any
manner that is instructed by him. In a contract of agency the person who authorizes
the power is called the principal and the person who is appointed to exercise the
power is called the agent (al-wakil and the subject matter of which the authority is
given to exercise the power is called the object (al-mawkil bih).
In its operation, however, the power of exercise is not to be vested on the agent in
any of the following circumstances: (i) if the agent takes an oath on behalf of the
principal; (ii) if the agent has been appointed by the principal to perform an illegal
act; (iii) if the agent has been instructed by the principal to divorce the principals
life on his behalf; (iv) if the agent has been appointed by the principal to give the
consent of marriage of the virgin daughter of the principal; (v) if the agent has been
asked by the principal to sell the principals house; and (vi) any other matter which
is not covered by the condition of the agreement.

W a k a l a h | 20
Under this concept, the bank acts as your agent in completing a particular financial
transaction. As your agent, the bank will pay a certain fee for the services it
provides.
All the issues about wakalah there is a good recommendation and solution that we
have discuss above.

W a k a l a h | 21

5.0 REFERENCES
Internet

1.
2.
3.
4.

http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments
http://www.islamicbanker.com/education/takaful-wakalah-model
http://www.scribd.com/doc/97553267/Al-Wakalah
http://www.financialislam.com/wakalah.html