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To provide the industry with an alternate liquidity management product in order to reduce the over reliance on commodity Murabahah based transactions, IIFM published the Inter-Bank Unrestricted Master Investment Wakalah Agreement on 3rd June 2013.
The standard agreement provides robust operational, legal and Shari’ah certainty for institutions to transact without guaranteeing the principal and profit. The important features of this documentation is Wakil’s discretion to invest the funds, use of general treasury pool (segregated and un-segregated asset pool), anticipated profit, early termination, replacement of asset, on-balance sheet accounting assessment, etc.
The Unrestricted Wakalah standard agreement includes a detailed operational guidance memorandum on the mechanics of this agreement as well as how it should be applied by the transacting parties. In addition, the operational guidance memo also provides valuable recommendations to be taken into the consideration at the time of entering into unrestricted Wakalah investment transactions.
The early take-up of this standard by institutions signifies that it is the most viable liquidity management alternative and Islamic banks particularly in the GCC countries are now transacting on unrestricted Wakalah basis.
The Central Bank of Bahrain has also developed a deposit product for institutions based on IIFM Unrestricted Wakalah Standard and encourages institutions based in its jurisdiction to move to this standard for liquidity management.
IIFM has also developed an accounting assessment for this standard which is available to IIFM members as AAOIFI has not yet published the accounting treatment for Unrestricted Wakalah.
1. UMWA is a master investment agreement to be used primarily between two IFIs for interbank transactions but can be adapted to cater to other situations and counterparties.
Parties and process: The first IFI (Muwakkil) appointing the second IFI (Wakil) to invest its funds in a pool of assets selected by the Wakil in exchange for a fee (Wakalah Fee).
2. Transaction: Once the Muwakkil and the Wakil have entered into the Master Wakalah Agreement, they can enter into a series of Wakalah Investment Transactions under which a deposit in an agreed and certain amount (the Investment Amount) is invested in a pre-determined pool of assets (the Wakalah Pool) for an agreed and certain amount of time (the Investment Period) in relation to which there is an anticipated return (the Anticipated Profit Rate).
3. Wakalah Pool: Wakalah Pool may consist of a general treasury pool comprising of shari’ah compliant assets or, at the Wakil’s discretion, a segregated pool of assets both of which must be described under the Wakalah Investment Transaction. Wakalah Pool can then either be managed on a segregated or co-mingled basis.
4. Profit Sharing: Anticipated Profit Rate is the rate of profit the Wakil projects that it will earn on the Muwakkil’s Investment Amount by investing it in the pre-designated Wakalah Pool. If the actual rate of return (the Actual Profit Rate) exceeds the Anticipated Profit Rate, the Wakil may retain the excess as an incentive payment. If, however, the Anticipated Profit Rate is not met, the Wakil shall only be under an obligation to return the Actual Profit Rate. Where the Wakil determines that the Actual Profit Rate may be lower than the Anticipated Profit Rate, it is under an obligation to notify the Muwakkil of the Revised Anticipated Profit Rate.
5. Wakil Fee: Wakil is entitled to a fee which is to be fixed and not linked to the Actual/Anticipated Profit Rate. Wakil Fee will be deducted from the Muwakkil’s Maturity Proceeds (i.e. the return of the Investment Amount and the Actual/Anticipated Profit Rate).
6. Indemnity: Wakil is not bound to indemnify the Muwakkil in the case the Investment Amount is lost or where the Anticipated Profit Rate is not reached unless there have been genuine actual losses arising as a result of the Wakil’s wilful misconduct, negligence, misrepresentation or breach of the terms and conditions of the Master Wakalah Agreement.
To provide the industry with an alternate liquidity management product in order to reduce the over reliance on commodity Murabahah based transactions.
Use: Reasonably used in Islamic inter-bank market as per the IIFM recent survey, as well as the gathered information during personal meetings by the IIFM secretariat with banks and financial institutions globally.
Further features & clarification: UMWA allows the Wakil to notify the Muwakkil that the Actual Profit Rate could be lower than the Anticipated Profit Rate and gives the Muwakkil the discretion either to accept a lower profit rate or terminate the relevant Wakalah Investment Transaction and get its Investment Amount back subject to the performance of the Wakalah Pool linked to that Wakalah Investment Transaction. Muwakkil is not permitted to withdraw the Investment Amount before the Maturity Date of the relevant Wakalah Investment Transaction. Therefore, the Wakala Transaction Period runs from the Investment Date to the Maturity Date. The Wakalah Transaction Period may, however, come to an early end upon the occurrence of an Event of Default, illegality, revision to the profit rate, or, where the parties mutually agree to end a Wakalah Investment Transaction. UMWA although allows early termination, however, the Wakil is entitled to be compensated for all actual costs it has incurred upon the designation of an Early Termination Date. This can be as a result of an acceptance of early termination at the request of the Muwakkil, the Muwakkil’s exercise of its right to terminate as result of the revision of the profit rate by the Wakil or it if becomes unlawful in any jurisdiction for either parties to perform any of its obligations under one or more Wakalah Investment Transactions. The costs recoverable are any actual administrative costs and out-of-pocket expenses incurred by the Wakil (excluding any opportunity cost or funding costs) as a result of the exercise by the Muwakkil of its right to terminate early.
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