The International Islamic Financial Market (IIFM) has taken another important positive step by introducing a new standard master agreement for the global Islamic interbank financial market: the Islamic Interbank Unrestricted Master Investment Wakalah Agreement. In order to assist the market potential users in the application process, this global standard document is supplemented with an Operational Guidance & Recommendations Memorandum.
IIFM’s primary objective of producing this document is to minimize the over reliance on the use of the commodity Murabahah in the Islamic interbank market transactions and enable Islamic financial institutions (IFIs) to manage their liquidity requirements through alternative means.
The IIFM master agreement is unique from others being used in the market. A few distinct features are as follows:
Wakalah pool
The Wakalah pool may consist of a general treasury pool comprising Shariah compliant assets or, at the Wakil’s discretion, a segregated pool of assets both of which must be described under the Wakalah investment transaction. The Wakalah pool can then either be managed on a segregated or co-mingled basis.
Profit-sharing
The 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 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 obliged 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 obliged to notify the Muwakkil of the revised anticipated profit rate.
Early termination
Early termination can be caused by the occurrence of an event of default on the part of the Wakil. An early termination date is designated and all Wakalah investment transactions are terminated and the maturity proceeds are paid in relation to each Wakalah investment transaction. A single Wakalah investment transaction may be terminated (a) at the request of the Muwakkil with the agreement of the Wakil, (b) at the discretion of the Muwakkil after the receipt of a notice of a revised anticipated profit rate or (c) on an illegality.
An early termination date is designated for the relevant Wakalah investment transaction and the maturity proceeds are paid, provided that where the early termination date has occurred at the request of the Muwakkil, the Wakil is entitled to retain an amount from the maturity proceeds for actual administrative costs and expenses including opportunity or funding costs.
Indemnity
The Wakil is not bound to indemnify the Muwakkil in 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.
Operational Guidance & Recommendations Memo
The Operational Guidance Memorandum for this Wakalah agreement is one of the unique features of IIFM’s efforts to enhance the development of the Islamic finance industry. The memorandum explains how the standard is to be used and it provides very comprehensive recommendations.
This welcome achievement by IIFM is proving to be a catalyst in increasing the use of unrestricted Wakalah in the Islamic interbank market and signs are that it has prompted several jurisdictions to consider the implementation of the IIFM Unrestricted Wakalah standard as well as address any accounting or regulatory requirements in their respective jurisdictions.
IIFM standard documentation on collateralized liquidity management tool
After few months of internal procedural work, IIFM will now be moving forward with full force to publish this standard documentation on collateralized liquidity management tool in coming few months as per IIFM standard documentation development process under the guidance of its Shariah advisory panel.
The IIFM board of directors has appointed Clifford Chance as the external legal counsel for this project.
IIFM standard documentation on Islamic hedging products
IIFM is currently working on Islamic cross currency swap (ICCS) standard documentation and the draft document is in circulation to working group. Moreover, IIFM will commence work on foreign exchange forward product documentation in the coming months.
IIFM Sukuk standardization possibilities — consultative meeting
IIFM board has approved the Sukuk standardization initiative. IIFM is currently working on the white paper and will organize a consultative meeting in coming few months as per its standard development initiation procedure.
IIFM Sukuk report (third edition)
IIFM published the third edition of its Sukuk report which consists of a comprehensive study of the global Sukuk market. The research sheds light on the growth and development of international and domestic Sukuk issuances from 2001 to January 2013.
The report also highlights the different Sukuk structures used by international Sukuk issuers as well as Sukuk structures used at domestic level by various jurisdictions active in issuing Sukuk.
The report has briefly touched on the risk arising from currency or reference rate of return mismatches which can be managed by Islamic hedging products standard documentation being published by IIFM and ISDA and will provide further confidence to investors in Sukuk.
Another salient feature of this report is the clarification on the meaning and types of Sukuk Al Istithmar (Investment Sukuk) in order to provide more beneficial information to the market.
IIFM upcoming industry events
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