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KembaraXtra–Islamic Finance–Islamic Capital Market – Wakalah (Agency)
• Wakalah is a Shari’ah-compliant agency contract established between a principal and an agent.
• Under a Wakalah contract, the principal authorises the agent to act on their behalf in carrying out specific tasks or services.
• The agent performs the assigned duties in exchange for a payment or fee known as Ujrah.
• Wakalah is commonly used to facilitate financial and commercial transactions without transferring ownership or risk to the agent.
• In trade finance, an importer applying for a letter of credit under Wakalah authorises the bank to act on their behalf.
• The bank, acting as an agent, issues the letter of credit to the exporter’s bank on behalf of the importer.
• The issuing bank performs administrative and transactional services related to the letter of credit.
• For providing these services, the bank charges a Wakalah fee (Ujrah) to the importer.
• The bank does not bear commercial risk in the transaction unless negligence or misconduct occurs.
• Wakalah contracts are service-based and do not involve profit-and-loss sharing.
• Wakalah is governed by specific Shari’ah principles.
• The contract must clearly establish an agency relationship between the principal and the agent.
• Wakalah facilitates transactions by allowing the principal to delegate authority.
• The agent is entitled only to the agreed fee (Ujrah) and not to business profits.
Examples of Wakalah
• Letter of Credit (Trade Finance): An importer appoints an Islamic bank as an agent under Wakalah to issue a letter of credit to the exporter’s bank in exchange for a fee.
• Investment Wakalah: An investor appoints an Islamic bank as an agent to invest funds in Shari’ah-compliant assets for a fixed agency fee.
• Takaful Operations: A Takaful operator acts as an agent under Wakalah to manage participants’ funds and earns a Wakalah fee for providing administrative and management services.
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