al-Wakalah lil Istithmar الوكالة لاستثمار

The term can be translated as agency for the purpose of investment. Originally it is a kind of agency contract for the use of variety of purposes acceptable of having agencyship. Much is used in civil dealings including that of commerce, but it is also used in personal such as marriage and even rituals. In modern banking the contract in addition to its original purpose is modified to include the receipt of payment or fee to the agent on the work done which is technically known as al-Wakalah li al-Ajr (الوكالة للاجر). It is a combination between the contract of agency which is gratituos in nature and contract of service (al-Ajir al-Khas). The addition of the word istihmar is a modern innovation to enable Islamic financial institutions to receive incentives from the management of the investments of their clients' funds/deposits. Some contemporary scholars refer this as incentive/encouragement to a manager/bailor. Nothing is odd about this arrangement and it is prefectly permissible. Nonetheless to observant student of the Shariah will also notice this type of Wakalah can also serve as an alternative to Mudarabah or Musharakah which is probably less attractive. Instead of being a partner in a business venture it is much more convenient and secured to act as an agent with a fee. In  this case the bank will solicit from a client to deposit an amount for the purpose of an investment for profit. The bank upon receiving the deposit will manage the fund and utilise it in investment projects or business. Proceeds from the investment if any will be returned to the customer less a certain amount as fee to the bank. In addition to the normal fee under the contract of service, the bank will also receive bonus if the profit is beyond the expected target and hence the arrangement is known as al-Wakalah lil Istithmar. Both customer and the bank suffer loss although bank's loss is nominal being loss of effort and time.