Thursday 21 June 2018

Wakala new alternative to Murabaha deals

Manama, December 10, 2012

Islamic interbank lending is now starting to move away from Murabaha contracts to Wakala, which is seen as a stronger Sharia-compliant process, said report.

The International Islamic Financial Market (IIFM), the global standardisation body for the Islamic capital and money market, is currently working on standardised agreements in the use of Wakala contracts, a key issue in interbank lending in the industry, reported the Gulf Daily News, our sister publication, citing banking experts.

Wakala are seen as an alternative to Murabaha, which have come under increasing criticism from Sharia scholars as compliant instruments.

In a debate at the pre-conference workshops before the opening of the WIBC today KPMG Bahrain Islamic financial services partner Mahesh Balasubramanian said Wakala was a Sharia-compliant agency structure wherein the agent invests funds received from the customer in a pool of assets for a fee.

"The International Commodity Murabaha (ICM) structure, primarily based on the underlying purchase and sale of metals, was often used for interbank treasury transactions as this imposed a liability on the bank receiving the funds and the return was fixed," said Balasubramanian.

"However, the lack of economic substance in terms of a true purchase or sale in this structure was a constant matter of debate and was criticised by many Sharia scholars," he noted.

"Wakala are now seen as a more appropriate transaction mode for interbank lending, which is why the IIFM is working on standardising these transactions more clearly," he stated.

"The Wakala form of treasury placement has emerged as a viable alternative to ICM which provides more flexibility. This structure has been in use in the UAE for some time and has become popular in Bahrain recently.

"Although this may be preferable from a Sharia perspective, there are potential challenges on how the Wakala structure can be operationalised in practice.

"IIFM is working with law firms and KPMG as advisers to develop a standard master Wakala interbank agreement, which should largely address concerns on operationalisation of the Wakala model for treasury type transactions," he said.

"Some challenging areas that need to be addressed in practice are what happens if the anticipated rate is not earned, the extent of disclosures required for incentive fees and whether offsetting would be permissible.

"The preference of IIFM is to get this as an on-balance sheet product as this would improve the confidence of the regulator and counterparties to deal more frequently with each other and across geographies," he said.

"The wider acceptance of a standardised product structure is key for money markets being developed across geographies," he added.-TradeArabia News Service

Tags: Islamic Finance | Murabaha | lending | Wakala |

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