The issue of principal-agent in sale-based transactions from the Shariah perspective

Abstract EN

Proper operational execution of underlying Shariah principles applied in Islamic banking products is essential to ensure their validity and compliance with the Shariah.

However, more often than not, the customers of Islamic banks expect more simplified processes when it comes to execution of a contract.

Among the solutions introduced by Islamic banks is the adoption of wakalah (agency) in the execution of the contract whereby the bank, as the seller in a sale-based transaction, concurrently acts as the buyer on behalf of the customers.

This exercise may lead to criticism as the bank assumes two roles at the same time—that of principal (muwakkil) as well as agent (wakil) on behalf of the customers.

This brief paper aims at discussing the potential Shariah issue which may arise from such a practice—particularly, the issue of conflict of interest when the bank acts both as principal and agent to the transaction.

The paper begins by first examining the concept and requirements of the wakalah contract; thereafter it delineates the jurists’ opinions on the principal-agent acting as both principal and agent to a transaction; and it finally provides an analysis of the issue in the context of the contemporary Islamic banking practice.

In particular, the paper is of the view that in Islamic banking practice the issues of conflict of interest, moral hazard or potential manipulation of the price, whereby the Islamic bank can favour itself, are eliminated by the strict supervision and regulation set by the authorities that require, among others, independent Shariah control such as Shariah audit.

The measures adopted by Islamic banks in eliminating the issue of jahalah (unknown element) in the contract execution also provide sufficient ground for rendering this practice permissible in Islamic banking transactions.