SS 46 · Services

SS 46: Al-Wakalah Bi Al-Istithmar (Investment Agency)

What this standard is about

Wakalah bi al-istithmar means "agency for investment." You (the principal) give money to an agent (the wakeel) and authorize him to invest it according to agreed terms. The agent earns a fee for his work. Profits belong to you; losses are yours too — the agent is a trustee, not a partner.

This standard — issued in May 2011 — sets the full rules: how the agency is formed, what the fee may look like, what the agent may and may not do, when he becomes liable, and what happens when the agency ends. It also covers agencies between Islamic and conventional banks.

Why it exists

Investment agency is one of the most-used structures in Islamic banking — for investment accounts, interbank placements, and sukuk. Without clear rules, agents could overstep their mandate, guarantee returns they cannot guarantee, or leave clients' money in limbo when the agency ends.

The key rules, simply put

The agency fee must be clearly specified — a fixed amount or a ratio — and agreed by both sides. The fee stays the same whether the investment does well or badly.
A performance incentive may be added, but if the agency ends early, the incentive can be reduced proportionally when both sides agree.
The agent must follow the agreed mandate. If he breaches its conditions, he becomes liable for the resulting loss.
The agent is a trustee: he is not liable for market losses. He also may not guarantee the capital or the profit. That ban comes from SS 56, the standard on the liability of investment managers.
If the agency is unrestricted, the agent may place the funds in a mudarabah portfolio — but he still earns only his agency fee, not a mudarabah profit share.
If the agency term expires while some receivables are still uncollected, the agent must still collect them. He earns no extra fee for this unless agreed, and he may not reuse the money for himself.
Islamic institutions may appoint conventional banks as investment agents (and accept agency funds from them), provided the contracts are Shariah-compliant and properly supervised.

An everyday example

A customer gives $100,000 to an Islamic bank under a one-year investment agency with a 1% annual fee. The bank invests it in halal ventures. The investments earn $8,000. The customer keeps the $8,000 and pays the bank its $1,000 fee. If the investments had lost $5,000 through no fault of the bank, the customer — not the bank — would bear the loss.

Words to know

Wakalah — agency: appointing someone to act on your behalf.
Wakeel — the agent.
Mudarabah — a partnership where one side provides money and the other provides work; profits are shared.
Tawarruq — buying a commodity on credit and selling it for cash to raise funds.
Halal — permissible under Islamic rules.

Source

AAOIFI Shariah Standard No. 46 — full text in the 2015 Shariah Standards book — https://aaoifi.com/download/24233/