Guide to wakalah Sukuk — structure and alternative to Mudarabah Sukuk

In-Depth Analysis

The Sukuk market has evolved dramatically over the past two decades, and one of the most significant structural developments has been the rise of Wakalah-based Sukuk. A Wakalah Sukuk is structured around an agency relationship: the Sukukholders (investors) act as the collective Muwakkil, appointing a Wakeel (typically the originator or a special purpose vehicle) to invest their subscription funds in a portfolio of Shariah-compliant assets. The Wakeel manages the portfolio and distributes returns to the Sukukholders after deducting the agreed management fee. At maturity, the underlying assets are sold or redeemed, and the proceeds are returned to the Sukukholders. Wakalah Sukuk have gained popularity as an alternative to Mudarabah Sukuk and Ijarah Sukuk for several reasons. First, the Wakalah structure allows the underlying asset pool to comprise a diversified mix of assets — tangible assets, Ijarah receivables, Murabahah receivables, and even equity investments — whereas Ijarah Sukuk require a predominantly lease-based asset pool and Mudarabah Sukuk require a specific profit-sharing venture. This flexibility in asset composition makes Wakalah Sukuk attractive to issuers who wish to use a broad range of assets to back the issuance. Second, the fee-based compensation structure of Wakalah (as opposed to the profit-sharing structure of Mudarabah) provides more predictable economics for the issuer. The Wakeel receives a fixed fee for managing the portfolio, and any surplus is distributed to the Sukukholders or retained as an incentive by the Wakeel. This structure simplifies the periodic distribution calculation and reduces the potential for disputes between the issuer and investors over profit allocation. Third, Wakalah Sukuk have benefited from the perception that they offer a more transparent governance structure. The Sukukholders appoint the Wakeel with clearly defined investment guidelines and restrictions, and the Wakeel is required to report on the composition and performance of the asset pool at regular intervals. This transparency is particularly valued by institutional investors and has contributed to the growth of Wakalah Sukuk in the sovereign and quasi-sovereign issuance space. Notable examples of Wakalah Sukuk include issuances by the Central Bank of Bahrain, the Government of Malaysia, and several major GCC corporates and financial institutions. The structure has also been used for short-term Sukuk programs (such as the International Islamic Liquidity Management Corporation's IILM Sukuk) where the investment agency concept is well suited to the short tenor and frequent rollover nature of the program.