Service Based Contract Used in Islamic Finance: A Comparison of Hawalah, Wakalah, and Kafalah

Abstract

This paper aims to examine the use of service based contracts in Islamic Finance, namely Wakalah, Hawalah and Kafalah. These contracts, though considered secondary to primary contracts such as Musharakah and Mudarabah, are a crucial part of the foundation of Islamic Finance. The differences in each contract will be explained as well as issues on regulations, practices and procedures. Despite the fact that these concepts are widely adopted in Islamic financial products and services, little work has been done in examining the differences and applications in financial institutions. In this paper, the basic principles and rules of service based contracts will be discussed with special reference to their application in modern banking system.