Guide to wakalah Bil Istithmar in treasury placements and the Islamic money market

In-Depth Analysis

The Islamic interbank money market has grown substantially over the past two decades, and Wakalah Bil Istithmar has emerged as the dominant instrument for short-term interbank placements. When an Islamic bank has surplus liquidity, it can place those funds with another Islamic bank through a Wakalah arrangement — the placing bank acts as the Muwakkil and the receiving bank acts as the Wakeel, investing the funds in Shariah-compliant assets for an agreed period and at an expected profit rate. This mechanism serves the same economic function as conventional interbank deposits but operates within a Shariah-compliant framework. The mechanics of an interbank Wakalah placement are straightforward. The placing bank and the receiving bank agree on the placement amount, the tenor (which can range from overnight to several months), the expected profit rate, and the Wakeel's fee. The expected profit rate is a benchmark figure — it is not a guaranteed return but rather an indication of the return the Wakeel aims to achieve. If the actual investment performance exceeds the expected profit rate, the surplus typically accrues to the Wakeel as an incentive fee. If the performance falls short, the Muwakkil receives only the actual return generated, which may be less than the expected rate or even a loss. Treasury management departments at Islamic banks use Wakalah placements extensively for liquidity management purposes. Short-tenor Wakalah placements — overnight, one-week, or one-month — provide Islamic banks with a flexible tool to manage their daily liquidity needs while earning a return on surplus funds. The expected profit rate for these short-tenor placements is typically benchmarked against LIBOR (or its successor rates such as SOFR) plus a spread that reflects the credit quality of the receiving bank and the prevailing market conditions. The International Islamic Financial Market (IIFM) has played a pivotal role in standardizing the documentation for interbank Wakalah placements. The IIFM Interbank Unrestricted Master Investment Wakalah Agreement, first published in 2008 and subsequently updated, provides a comprehensive framework for these transactions. The agreement covers the appointment of the Wakeel, the investment parameters, the expected profit rate mechanism, the fee structure, the settlement procedures, and the events of default. This standardization has been critical in facilitating cross-border Wakalah placements between Islamic banks in different jurisdictions, reducing documentation costs and legal uncertainty. The author notes that during the COVID-19 pandemic in 2020, short-tenor Wakalah placements proved remarkably resilient. While longer-term Islamic investment products faced uncertainty and redemption pressures, short-tenor Wakalah placements continued to function smoothly because their brief duration allowed both parties to reassess market conditions frequently and adjust their expected profit rates and tenors accordingly. This flexibility demonstrated the structural advantage of Wakalah over longer-duration Mudarabah deposits during periods of market stress.