Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 12Wadiah

Wadiah is a contract that is used on the liability side of the balance sheets of Islamic banks. Classically speaking wadiah is a contract by virtue of which one party keeps an asset with a counterparty for safekeeping purposes for a specific period of time (Figure 12.1).¹ The counterparty accepts the responsibility of looking after the asset voluntarily and typically does not charge a fee for this service.

Figure 12.1 Party A Uses Party B as Counterparty

Party A owns an asset and places the asset for safekeeping with Party B. Party B accepts the asset and the responsibility for safekeeping without charging any fee. Party A can ask for the asset back without any conditions at any time. The asset kept for safekeeping is referred to as wadiah. So far this contract seems simple enough; now let us complicate it. We do not get into the different interpretations of the contract of wadiah of the four traditional schools of legal thought. We examine the features of the contract using some common sense.

The classical usage of this contract had an element of trust in it. Party A trusted Party B with an asset; the latter accepted without consideration. As there is no element of consideration, it is difficult to understand the rationale behind this concept as a bilateral contract for commercial usage. Unfortunately the architects of Islamic finance adopted the closest ...