Many argue that this is simply another method of charging interest. However, the difference lies in the structure of the contract. In a Murabaha purchase agreement, the bank buys an asset and then resells it to the customer with a profit fee. This type of transaction is halal or valid, according to Islamic Sharia / Sharīʿah. Murabaha, also known as cost-plus financing, is an Islamic financing structure in which sellers and buyers agree on the cost and premium of an asset. The markup is interesting, which is illegal under Islamic law. As such, Murabaha is not an interest-bearing loan (qardh ribawi), but an acceptable form of credit sale under Islamic law. As in the case of a lease agreement with an option to purchase, the buyer does not become the true owner until the loan is paid in full. Additional fees cannot be charged after a Murabaha due date, making Murabaha`s default a growing problem for Islamic banks. Many banks believe that defaulting debtors should be blacklisted and should not receive future loans from an Islamic bank to reduce Murabaha`s default. Even if it is not expressly mentioned in the credit agreement, this regulation is allowed in the Sharia. If a debtor is faced with a real emergency and cannot repay a loan on time, a respite can be granted, as described in the Qur`an. However, the Government may take action in the event of intentional default.
Failures under the Murabaha accords have become a problem for companies operating under Islamic law, and there has been no clear consensus on how to deal with them. The current practice of the Islamic finance industry is to increasingly adopt wakalah as opposed to the Mudarabah structure. Although the latter had an earlier start in the industry, there are several factors that need to be considered in determining whether Wakalah or Mudarabah should be used for Islamic syndicated financing. One consideration is that a Wakalah relationship as an agency may attract the specific application of the agency`s laws into the jurisdiction of the applicable law. Tax issues are another consideration. There may be different tax implications under local tax laws for each structure depending on how the laws interpret relationships. There may also be a different treatment of funds received from Wakeel or Mudarib, which will cause significant problems in the event of insolvency of Wakeel or Mudarib. Another problem is that if Wakeel is not one of the participating FIs, Wakeel would probably have no incentive to pursue the union`s interests. The Wakeel will earn agency fees regardless of the execution of the transaction and will therefore focus on completing as many transactions as possible instead of ensuring the quality of the transactions.
For example, Wakeel may compromise on restrictive covenants imposed on the borrower to close the transaction quickly, exposing participating financial institutions to more risk. To mitigate these problems, Islamic principles are flexible enough for the syndicate to include incentive fees or performance-based fees to be paid to Wakeel in the Wakalah relationship, as in the case of excess profit after distribution of expected periodic returns to participating financial institutions and deduction of expenses and taxes. The Decision of the English High Court of Justice in the case of Investment Dar Co v Blom Development Bank (of 11 December 2009) raised concerns among Islamic financial market participants about the use of wakalah agreements and broader Islamic financing operations. One of the arguments put forward by the applicant (the defendant at first instance) in support of her ultra-vires argument was that the Wakalah agreement did not comply with Sharia law, since it merely concealed the existence of interests and guaranteed the return to the principal. Although the Supreme Court did not expressly rule in this case that the Wakalah Agreement at issue or the Wakalah Agreement in general was not in conformity with Sharia law, it noted that “if, as is done in this Master-Wakalah Treaty, a way is found to allow what at least to some eyes appears to be the payment of interest in another form, it is at least an indirect practice of non-Sharia law activity. This raises concerns about whether the debates of Sharia councils on whether a transaction is Sharia compliant are relevant, and whether a secular court is allowed to make its own observation in this regard; but it`s a very different discussion. Despite the uncertainties that this case entails, the use of Wakalah in the financing of Islamic trade unions continues, mainly because participants are waiting for a more definitive decision on the issue. Participating financial institutions will enter into an investment agency agreement with the lead bank and designate them as wakeels to receive the funds advanced with the borrower, invest and transact with the borrower. The borrower will use the funds received in the agreed manner. The main bank as Wakeel assumes all rights and obligations of an agent, which are usually determined by explicit or implicit terms of the investment agency contract.
The investment agency agreement sets out the conditions for participation, distribution of capital and profits to participating financial institutions, the extent of wakeel`s powers and powers, as well as matters that may be decided by Wakeel in its sole discretion or that require the unanimous consent, super-majority or majority approval of the participating financial institutions. If such conditions are not provided for in the investment agency contract, wakeel`s rights and obligations may arise from the fiduciary nature of the relationship with Muwakeel. The Wakalah relationship may also be subject to the applicable laws of local authorities. As an agent, the lead bank is entitled to an agency fee for its role, although wakeel is sometimes granted the right to receive a performance or incentive fee. In the mudarabah structure, participating financial institutions, such as Rab Al Mal, appoint the main bank Mudarib through a Mudarabah agreement. The Mudarib administers the Mudarabah. To some extent, the terms contained in the Mudarabah Agreement are similar to those in the Investment Agency Agreement. However, in the Mudarabah Agreement, the Mudarib does not support the obligations of an agent and the agency`s laws applicable in the jurisdiction are not applied to the relationship. Instead of a royalty, the Mudarib has the right to participate in the percentage of the profit made by investing the funds, but the losses are only borne by rab Al Mal.
