84 Islamic Finance in Practice
sometimes both). In terms of security, the decision as to whether to use a
security trustee or a security agent will depend on the applicable governing
law where the security is located. If the jurisdiction follows an English
common law system which recognizes trusts (or if it is a civil code jurisdiction
but which has passed specific laws recognizing trusts) the representative of
the syndicate will be termed a security trustee. If theapplicable jurisdiction
does not recognize trusts, then the role will be that of a security agent. In
some financings (for example withsukuk), one sometimes sees both roles
being used (one being documented under English law and one under the
local law); often this is done out of abundance of caution although, as
security would normally be enforced in the jurisdiction where the security is
located, if that jurisdiction does not recognize trusts, the local courts will
probably either not enforce the trust arrangements or would interpret them
as being agency arrangements.
The same sort of issues will arise with awakalaarrangement. Thewakil
is an agent and therefore would, on the face of it, act as the agent of the
participating Islamic financiers and hold the security as agent. Nonetheless,
there may be reasons why the Islamic financiers would want thewakilto
hold security as a trustee, if this was recognized under applicable law. The
reason for this centres on what would happen if thewakilbecame insolvent.
Here the security might, as a matter of local law, fall into the general asset
pool of thewakilsuch that the participating Islamic financiers would only
have an unsecured claim against thewakil. If a trustee is recognized under
applicable local law then, if the trustee became insolvent, the usual outcome
will be that the security will remain the property of the beneficiaries, being
the participating Islamic financiers.
Awakil, while an agent, does have various “trust” obligations towards its
principals under Shari’a principles, and as such there would not appear to
be any restriction on awakiltaking on trustee obligations as these do not
cut across the broad concept that thewakilis supposed to be acting and
holding property on behalf of and in the interests of, its principal.
In practice, the participation agreement between thesyndicate members
and thewakilcontains provisions that are very similar to those found in a
conventional loan agreement. For example, one will normally find the
following provisions:- Appointment of the agent;
- Participation of the participating financiers;
- Prepayment (where applicable) and increased costs (although there are
certain Shari’a issues relating to increased costs); - Payments by the participants and by the agent;
- Refund, sharing and further payments;
- The role and duties of the agent;
- Costs and expenses; and
- Assignmentprocedures.