A method (Arabic for وكالة الاستثمار) whereby Islamic financial institutions manage funds on behalf of their customers. This involves providing agency (wakala) services against specific fund management fees. These fees are typically pre-agreed and don’t vary with the profit and loss associated with the managed funds. The fees may be fixed (charged as a lump sum amount) or a percentage of invested funds or their net asset value. For instance, an Islamic bank may agree with a customer that in return for its agency services, it will receive, at the end of every financial year, 3% of the net asset value of the funds provided by the customer. In wakala structure, the investment agent (the bank) can deduct its fees from the fund no matter how the amount of profit or loss turns out to be.
Wakalatul istithmar functions in the same way as mudaraba, except that the profit in mudaraba is divided between the parties according to pre-defined percentages, while in wakala the agent (investor) receives only the agreed ratio in return for its efforts and expertise.
Wakalatul istithmar is also spelled as wakalah bil istithmar.
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