Guide to sukuk Al Wakalah: The investment agency structure

In-Depth Analysis

Wakalah Sukuk have emerged as one of the fastest-growing and most flexible Sukuk structures in recent years. Based on the Wakalah (agency) contract, these instruments involve the appointment of an investment agent (Wakeel) who manages the Sukuk proceeds on behalf of the certificate holders, investing in a diversified portfolio of Shariah-compliant assets and activities. In a typical Wakalah Sukuk structure, the SPV issues Sukuk certificates and collects the subscription proceeds from investors. The SPV then appoints the originator (or a related entity) as the Wakeel, granting authority to invest the proceeds in a defined portfolio. The Wakeel invests the funds in a combination of tangible assets, commodities, equities, and other Shariah-compliant investments. The returns generated by the portfolio are distributed to the Sukuk holders after deduction of the Wakeel's fee. The key advantage of Wakalah Sukuk is their structural flexibility. Unlike Ijarah Sukuk (which require a specific leasable asset), Musharakah Sukuk (which require a joint venture), or Murabahah Sukuk (which create a receivable), Wakalah Sukuk allow the proceeds to be invested in a diversified portfolio. This flexibility is particularly valuable for issuers who may not have a single large asset to securitize or who want to deploy the proceeds across multiple activities. The Wakeel is obligated to exercise due diligence and invest prudently within the agreed investment parameters. If the Wakeel is negligent or breaches the investment mandate, they become liable for any resulting losses. However, if the portfolio underperforms despite the Wakeel's best efforts, the loss is borne by the Sukuk holders. The Wakeel's fee is typically structured as a fixed amount or percentage, plus an incentive fee for performance above a benchmark. An expected profit rate is indicated in the offering documents, providing investors with guidance on anticipated returns. While this is not a guarantee, the Wakeel is expected to manage the portfolio to achieve or exceed this expected rate. In practice, Wakalah Sukuk have provided returns closely aligned with their expected profit rates, making them an attractive alternative to Ijarah Sukuk for investors and issuers alike. Wakalah Sukuk's tradability depends on the composition of the underlying portfolio. If the majority of the portfolio is invested in tangible assets (meeting the 33% or 51% threshold, depending on the applicable Shariah opinion), the Sukuk can be freely traded on the secondary market. Structurers typically ensure that the portfolio composition maintains the required tangibility ratio throughout the Sukuk's tenor.