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Monday, July 7, 2014

CHAPTER TWO -AL-WAKALAH -

CHAPTER TWO
2.0  APPLICATION OF AL-WAKALAH
Al-Wakalah is one of the most Islamic product practicing at this moment. Based on this assignment writing, the application discuss on two parts either in banking and institution. For instance, the products provided from banking (followed shariah principles) are :
1.      Transfer of money, such as: postal money order, transfer money via a bank branch, and transfer via ATM.
2.       Import Letter Of Credit Sharia, such as: Wakalah bil Ujrah, Wakalah bil Ujrah and Qardh, Wakalah bil Ujrah and Mudharabah, Wakalah bil Ujrah and Hiwalah.
3.      Export Letter Of Credit Sharia, such as: Wakalah bil Ujrah, Wakalah bil Ujrah and Qardh, Wakalah bil Ujrah and Mudharabah.Islamic.
4.      Mutual Funds Investment.
5.      Financing the Sharia Account.
However in institution, the most popular product is takaful. Takaful is a co-operative system of reimbursement in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a Takaful Operator. It is defined as an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law.[1]

2.1 APPLICATION OF AL-WAKALAH IN BANKING
1.1.1        TRANSFER OF MONEY
The money transfer process is a process that uses the concept of Wakalah contract , where the process begins with the customer demand as Al - Muwakkil against banks as Al - Wakil to do the command / request to the bank to transfer money to the account of another person , then the bank debiting the customer's account ( If the transfer from account to account ) , and lastly is where the bank crediting of funds to the designated account . Here are some examples of this process in the transfer of money :[2]
1.      Money Order. In the process of postal money orders , cash given directly from Al - Muwakkil to Al - Wakil, and Al - Wakil give the money directly to the intended customer.
2.      Transfer money via a bank branch. In this process , Al-Muwakkil gave the money in cash to the bank which is al - Wakil, but the bank does not give directly to customers who are sent . But banks send it to the designated customer accounts.
3.      Transfer via ATM. Then there is also the money transfer process in which the delegation to send money , money not given directly from Al - Muwakkil to the bank as Al - Wakalah . In this model, the Customer (Al – Muwakkil) ask the bank to debit his savings account , and then ask the bank to add in customer accounts designated by the reduction in the own account . Which is very common today is the third process , where customers can make their own transfer via ATM machines .[3]

2.1.2 LETTER OF CREDIT SHARIA
A Letter of Credit (L/C) is a commitment, usually by a bank on behalf of a client, to pay a beneficiary, such as a supplier of goods, a stated amount of money under specified conditions such as on shipment of the specified goods. It is a form of financial guarantee covering the buyer's risk and guaranteeing payment to the seller; the bank will only make payment upon presentation of the shipping and other stipulated documents, which complies with the terms and conditions of the L/C. 
            L/Cs are widely used in financing foreign trade to guarantee payment to a supplier after shipment is effected. They carry a risk for the issuing bank in case the bank makes a payment under the L/C and the client defaults. Therefore, before issuing a L/C, the bank assesses the client’s financial position to determine whether the client’s creditworthiness merits the risk taken by the bank on the client’s ability to pay. The bank may even consider taking a security to minimise any potential loss.[4]
            Through L/C in the context of foreign trade, exporters can obtain a quick, secure and guaranteed payment of goods from a bank. The import client of the bank gives a written undertaking in favour of an exporter or a local supplier guaranteeing payment on sight or payable after a determinable period after shipment for purchase of goods from an exporter.
            When used by Islamic banks for export/import financing, L/Cs are not treated as a as a guarantee but rather as a fee based banking service to facilitate trade. Islamic banks usually issue L/Cs on the basis of Wakalah, Murabaha or Musharakah. All operations must fulfil the requirements of the Shari´ah. The processing of L/Cs usually involve two banks, the L/C opening bank and the correspondent bank to whom the L/C is sent for advising the exporter.
            When using the Wakalah concept, the bank acts as the agent of the importer; he deposits with the bank the full amount of the L/C to cover the import transaction and the bank opens the L/C; after shipment of goods and submission of stipulated documents by the exporter, the bank makes payment using the client’s deposit.  The bank charges a fee/commission (Ujrah) for its services. In the case on LC using Murabaha, the procedures of Murabaha still apply except that payment to the bank is not deferred. In fact, the Islamic bank opens the L/C and, after shipment of goods and submission of stipulated documents, it makes payment to the exporter, using the bank’s own funds; It takes delivery of the goods on arrival and sells the imported goods to the client; the bank recovers its cost and gets a small commission for services rendered as an agent. The client repays the bank on a deferred basis as agreed. In the case of a Letter of Credit with Musharakah, the client deposits with the bank an agreed share of the cost of the imported goods, representing the client’s share in the transaction. After shipment of the goods and submission of the stipulated documents, the bank makes full payment to the exporter, using the client’s deposit and the bank’s own funds for the balance. After the imported goods are sold at the market price, the bank and the client share the profit at a pre-agreed ratio. The client may also purchase the bank’s share of the imported goods at the market price.[5]
            Islamic banks are allowed to charge a handling commission/fee, as a service charge to for processing L/Cs, documentation and payments; the amount various according to the service and to the L/C amount involved. For example, the bank can also charge its client an issuing commission, plus other charges such as postage, an advising fee, or a confirmation fee. These fees are usually not relative to the amount of the L/C and its duration. The bank may also charge an amendment fee in case the exporter requires amendments to the L/C terms. It may also charge a commission for accepting the Bill of Exchange, as it becomes the bank’s obligation to make the payment on the due date.[6]

2.1.3 ISLAMIC MUTUAL FUNDS INVESTMENT
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.  The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds).  When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).
            By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.  But the biggest advantage to mutual funds is diversification. Diversification is the idea of spreading out your money across many different types of investments.  When one investment is down another might be up.  Choosing to diversify your investment holdings reduces your risk tremendously. The most basic level of diversification is to buy multiple stocks rather than just one stock.  Mutual funds are set up to buy many stocks (even hundreds or thousands).  Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on.  It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, low-grade corporate bonds, international small companies).
            The ruling with regards to mutual funds from an Islamic perspective can be determined by understanding the Shariah ruling on shares and bonds. The ruling with regards to investing in shares is that this is permissible (according to the majority of contemporary scholars), provided the following conditions are met :[7]
1.      The main business of the company must be lawful (halal). Therefore, to purchase shares of a company whose main business is unlawful, such as interest bearing banks, insurance companies, companies manufacturing and selling liquor, etc will not be permitted. If the main business of the company is Halal, such as a textile company or a telecommunication company, then it will be permissible to subscribe to its shares.
2.      Many companies, despite their main business being Halal may be involved in interest dealings in one way or another. Due to this, the following is necessary:
a)      One should object to the interest dealings, preferably in the annual AGM. By doing so, the responsibility will be deemed fulfilled.
b)      When the dividend is distributed, the proportion of the companys income which was gained by interest dealings must be given in charity without the intention of receiving reward, as is the case with unlawful money in general. This amount (interest accumulation) may be known by means of the income statement.
3.      The company whose shares one intends to purchase must have some illiquid assets in its possession. It must not all be in liquid form (i.e. cash, cheques, bonds, etc). If all of the companys assets are in liquid form, then the share cannot be sold or purchased except at face value.
            With regards to bonds, the ruling is that, it is not permissible to invest in them. Premium bonds do not represent the ownership of the holder in a company or a financial institution; rather it only signifies giving a loan to the issuers of these bonds. Due to this fact, the excess amount received on these bonds, which is stipulated and sought from the contract, is regarded as usury (riba), and is thus unlawful (haram).
            Now, if investing in a mutual fund is regarded as purchasing the shares of the fund and becoming a share holder, then the ruling is that this is not permissible. The reason being, that one of the conditions for the permissibility of purchasing shares was that the company has some illiquid assets (see condition, 3), and the fund here is a combination of peoples investments.
            If the case is that the fund is merely acting as an intermediary for the investment in shares and bonds, then this would also be impermissible. The reason being, that one is unaware what kind of companies the fund will invest into. Also, the funds normally invest in bonds, which have been declared unlawful.[8]

2.1.4 FINANCING THE SHARIA ACCOUNT
Banks can profit from the buying and selling of approved goods and services. The principal means of Islamic finance are based on trading, and it is essential that risk be involved in any trading activity, so banks and financial institutions will trade in sharia-compliant investments with the money deposited by customers, sharing the risks and the profits between them.
            Islamic banks are structured so that they retain a clearly differentiated status between shareholders' capital and clients' deposits in order to make sure profits are shared correctly. Although they cannot charge interest, the banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.
            There are firm laws governing the types of businesses with which the banks can trade. There should be absolutely no investment in unsuitable businesses, including those involved with armaments, pork, tobacco, drugs, alcohol or pornography.
            Wakala is an agreement that the bank will work as the individual's agent. If a saver enters into this type of agreement, the bank can use their cash to invest in sharia-compliant trading activities to generate a target profit for them.[9]

2.2 APPLICATION OF AL-WAKALAH IN INSTITUTION
The Wakalah concept is practiced by most of the takaful operators in Malaysia and this is a necessary tool to market the takaful products to the society. This task is very much needed by the Takaful operators to accelerate the distribution of products based on Islamic principles.
            Takaful Ikhlas Sdn. Bhd. (IKHLAS) for example, is using a model named Wakalah as the basis of its operating business.[10] Using the Wakalah principles, IKHLAS operates by representing its participants in managing all their established funds with trust, transparency and professionalism. For this purpose, IKHLAS has charged management and performance charges to participants based on the principle of Paid Wakalah (al-Wakalah bi al-ujrah).
            IKHLAS also employs representatives as intermediaries to market the company products with paid wages. Aqad (contract) between the representatives and IKHLAS is based on Aqad Wakalah. This concept is consistent with the principles of Islam as the practice of
Prophet Muhammad PBUH who had sent officers (employees) to collect tithe, and the Prophet gave wages to them (al-Talkhis al-habir, Vol. 1, pg. 176, 251, 271). In the Islamic principles, when a Wakalah contract with wage payment is implemented, then the contract is firm and binding, and this means that all parties are responsible for implementing all the matters agreed in the Aqad.
            Under the Wakalah system, the representative is necessarily associated with four characteristics, Siddiq (Honesty), Amanah (Trust), Tabligh (Preaching) and Fatanah (Wisdom). The four characteristics must be implanted, comprehended and implemented by the representatives in each business representation in order to achieve a valuable life in this world and hereafter.
            A Takaful representative is a DAKWAH who works to develop the products of Islamic Transactions. Takaful is an alternative to the conventional insurance system as concluded by the Task Force on the Establishment of Islamic Insurance Company in Malaysia 1983. A Takaful representative also performs JIHAD against the Jahiliyyah system (conventional insurance). This is because conventional insurance is considered Haram (unlawful) according to the Fatwa issued by the National Fatwa Council in 1972. Besides, a representative of Takaful also IBADAH through his works because it is a manifestation of dedications, faith and devotion to Allah who ordered to act upon the ma’ruf (good deeds) and leave the munkar (evil deeds): Surah Al Baqarah; verse 25.
            A Takaful representative must have the creditable behavior to achieve the mission and vision as the standard bearer of Islam. The concept of representation as practiced by most of Takaful operators creates employment opportunities and one of the sources of income. The representatives also have the opportunity to perform responsibilities as da'ie who encourage people to help each other, do tabarru' and develop Islamic Muamalat system which is a religious responsibility of every Muslim. As a result, in this world it may serve as their source of income and in the Hereafter it may serve as a reward to be presented before Allah.[11]


[4]) Retrieved from http://www.financialislam.com/letter-of-credit.html, 03 / 12 / 2013. 1.00 a.m.
[5]) Retrieved from http://www.financialislam.com/letter-of-credit.html, 03 / 12 / 2013. 1.00 a.m.
[6]) Retrieved from http://www.financialislam.com/letter-of-credit.html, 03 / 12 / 2013. 1.00 a.m.
[7]) Retrieved from http://qa.sunnipath.com/issue_view.asp?ID=1708, 03 / 12 / 2013. 1.10 a.m.
[8]) Retrieved from http://qa.sunnipath.com/issue_view.asp?ID=1708, 03 / 12 / 2013. 1.10 a.m.

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