Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 18Wakalah, Hawalah, Ibra, and Rahn

The contracts of wakalah, hawlah, ibra, and rahn play an essential role in Islamic finance as they support core contracts. Wakalah combined with murabahah results in a product called murabahah by purchase orderer. Similarly, rahn allows a creditor to obtain collateral from debtors and therefore plays a critical role in debt financing or debt-based sale contracts.

Wakalah

Wakalah is one of the many supporting contracts that is used in the Islamic finance sphere. It comes from the root word wakkala, which means to perform a task on the behalf of another, that is, the delegation of duties or job to another person/entity. According to AAOIFI, wakalah is “the act of one party delegating the other to act on its behalf in what can be a subject matter of delegation.”¹ It can be comparable to the concept of agency in general, whereby one party (muwakkil) would give authorization to another (wakil) to perform a task as an agent on behalf of the muwakkil in the matters that can be delegated. This is done either voluntarily or for a fee.

The legality of wakalah is derived from the main sources of shariah law. Apart from the Qur'an,² there is also a hadith that mentioned the Prophet ([saw] pbuh) had commended one of his companions when he had instructed his companion to buy a sheep for him, which in turn brought the Prophet (saw) an additional dinar as a profit from his business dealing.³ Wakalah concept is also generally accepted by all classic ...