Wakalah in practice — interbank placements, corporate treasury, and COVID-19 resilience

In-Depth Analysis

As the comprehensive discussion on Wakalah draws to a close, the author surveys the real-world applications of this versatile contract and reflects on its performance during the unprecedented challenges of the COVID-19 pandemic. Wakalah has established itself as one of the most widely used contracts in the Islamic financial services industry, with applications spanning retail banking, corporate banking, treasury, capital markets, and trade finance. In the interbank market, Wakalah has become the instrument of choice for Islamic banks managing their short-term liquidity positions. According to IIFM market surveys, Wakalah-based placements constitute the largest segment of the Islamic interbank market, surpassing Mudarabah placements in volume and frequency. Islamic banks in the GCC, Malaysia, Indonesia, Turkey, and the UK routinely place and receive funds through Wakalah arrangements, with tenors ranging from overnight to twelve months. The standardization of documentation through the IIFM Master Wakalah Agreement has been a key driver of this growth, enabling cross-border placements with reduced transaction costs and legal friction. In corporate treasury, Wakalah structures are used for a variety of purposes. Corporate treasurers at Islamic companies use Wakalah placements to invest surplus cash in Shariah-compliant short-term instruments, earning a return on idle balances while maintaining liquidity. Companies also use Wakalah arrangements for payroll processing, trade settlement, and other operational cash management functions where the bank acts as an agent to execute transactions on the company's behalf. In the trade finance context, Wakalah is used for letters of credit, documentary collections, and supply chain financing where the bank acts as the company's agent in managing international trade transactions. The COVID-19 pandemic of 2020 provided an unexpected stress test for the Islamic financial system, and Wakalah structures performed notably well. Short-tenor Wakalah placements — particularly overnight and one-week tenors — proved remarkably resilient during the period of extreme market volatility in March and April 2020. Because these placements mature and roll over frequently, both the placing and receiving banks could reassess counterparty credit risk, adjust expected profit rates to reflect the rapidly changing market environment, and maintain flexibility in their liquidity management. In contrast, longer-tenor Mudarabah deposits proved less adaptable, as the profit-sharing mechanics were difficult to adjust mid-term and the economic uncertainty made it challenging to attract new Mudarabah deposits. The author concludes by noting that Wakalah's versatility and adaptability have ensured its continued relevance as the Islamic financial services industry matures. From its origins as a simple agency contract rooted in classical Shariah jurisprudence, Wakalah has evolved into a sophisticated financial tool that underpins some of the most important products and markets in modern Islamic finance. As the industry continues to innovate and expand into new markets — including the United States, the United Kingdom, and other Western jurisdictions — the Wakalah contract will remain a central pillar of Shariah-compliant financial structuring.