The International Islamic Financial Market issues new guidelines governing Wakalah agreements (By IFN)

The International Islamic Financial Market issues new guidelines governing Wakalah agreements

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GLOBAL: The International Islamic Financial Market (IIFM), which is backed by central banks including those in Bahrain and Malaysia, has issued new global guidelines for Wakalah agreements to diversify current liquidity management tools for lenders. This is expected to reduce the industry’s current reliance on Commodity Murabahah. According to Ijlal Alvi, CEO of the IIFM, the newly-launched memorandum will be “very useful” to the industry as it details the use of the standard and provides comprehensive recommendations. It is hoped that the documentation standard will also encourage the increased utilization of unrestricted Wakalah in the market. One of the challenges that have resulted in limited use of Wakalah in the market concerns legal and regulatory issues. In a December 2012 presentation on the use of Wakalah by the IIFM; in which it was mentioned that the standards for the instrument was being worked on, the paper read: “When restructuring the classical Wakalah arrangement, the challenge is to transform the risk of Wakalah to rank pari passu  (on equal footing) with a normal senior unsecured obligation of the deposit-taking institution, while retaining the key Shariah feature of no explicit capital guarantee. It is essential that a comprehensive operational risk process is put in place for on-balance sheet unrestricted Wakalah for the Islamic inter-bank market.” Amongst the issues that were discussed in the December 2012 presentation included the implementation of robust front and middle office systems to monitor compliance with legal structures and to achieve the objectives of not having to repay an early deposit as to not affect liquidity; the use of long-term assets for short-term Wakalah placements, and more transparency amongst deposit taking institutions.