Wakala contract in collecting deposits and providing financing in islamic banking

Abstract

This thesis investigates the application of the Wakala contract in Islamic banking, particularly for collecting deposits and providing financing. The Wakala contract, an agencybased agreement rooted in Islamic finance, enables banks (acting as agents or Wakiil) to manage funds on behalf of depositors (Muwakkil), ensuring that all transactions are compliant with Sharia principles. This study comprehensively analyses the Wakala contract’s theoretical foundations, legal structures, and operational mechanisms. It compares Wakala with other Islamic financial instruments such as Mudaraba and Musharaka, emphasising the contract’s potential to reduce risk, increase transparency, and enhance customer trust. The research highlights that Wakala-based products have gained popularity due to their compliance with Islamic law, offering a clear framework for ethical financial management. Using case studies from banks in Turkey, Bosnia, and other regions, the study demonstrates how Wakala is effectively used to replace conventional banking products, promoting Shariacompliant alternatives that appeal to a broader client base. The findings reveal that banks using Wakala have been able to improve financial inclusion, foster customer loyalty, and provide competitive, ethical investment opportunities. Additionally, the thesis explores the public perception of Islamic banking and finds that, despite limited awareness in some regions, there is significant potential for growth as more consumers become informed about the benefits of Wakala. The research also delves into the legal and regulatory aspects of Wakala contracts, addressing how these agreements ensure the protection of depositors’ funds while maintaining compliance with both Islamic and conventional regulatory frameworks. Through interviews, surveys, and data analysis from Islamic banks, the thesis identifies the operational challenges and advantages associated with Wakala contracts, such as risksharing, the ability to offer fixed returns, and their suitability for short-term financing. The thesis concludes by predicting that the demand for Sharia-compliant products, including those based on Wakala contracts, will continue to grow, driven by increasing consumer interest in ethical banking and the expansion of Islamic finance in non-Muslim-majority countries. Future research opportunities are suggested, focusing on enhancing the efficiency of Wakala contracts and exploring their integration with modern financial technologies.