Wakalah Sukuk explained: Why the market is shifting toward agency-based structures

In-Depth Analysis

The shift toward Wakalah Sukuk in the global Islamic capital market has been one of the most significant structural trends of the past decade. Understanding the drivers behind this trend provides insight into how the Sukuk market is maturing and adapting to the needs of both issuers and investors. The post-2008 AAOIFI reform on purchase undertakings in equity-based Sukuk had a catalytic effect on Wakalah Sukuk's growth. When AAOIFI restricted face-value purchase undertakings in Musharakah and Mudarabah Sukuk, market participants sought an alternative structure that offered flexibility without the equity-based complications. Wakalah Sukuk provided that alternative — the Wakeel manages a portfolio with an expected profit rate, and the purchase undertaking at face value (for the tangible asset component) is permissible because the Sukuk is not an equity-based instrument. Issuers have also gravitated toward Wakalah Sukuk because the structure allows for more efficient use of proceeds. In an Ijarah Sukuk, the proceeds must be used to acquire a specific asset that is then leased back. This can be constraining for issuers who need the funds for general corporate purposes or who want to deploy capital across multiple projects. Wakalah Sukuk allow the proceeds to be invested in a diversified portfolio, which can include a mix of tangible assets, commodity Murabahah transactions, and other investments, giving the issuer maximum flexibility. From the investor perspective, Wakalah Sukuk offer a more sophisticated investment proposition. The diversified portfolio reduces concentration risk compared to single-asset structures. The expected profit rate provides return guidance while maintaining Shariah compliance. And the growing body of market practice and documentation standards has increased investor comfort with the structure. Several of the largest Sukuk issuances in recent years have used Wakalah structures. The Islamic Development Bank (IsDB), one of the most frequent Sukuk issuers globally, has standardized on Wakalah Sukuk for its benchmark issuance program. Major sovereign issuers including Saudi Arabia, Indonesia, and Turkey have also used Wakalah structures for their international Sukuk issuances. The IILM exclusively issues Wakalah Sukuk for its short-term liquidity management program. The growing standardization of Wakalah Sukuk documentation, led by AAOIFI and IIFM, has further accelerated adoption. Standard templates for the Wakalah agreement, investment plan, and purchase undertaking have reduced structuring costs and time-to-market, making Wakalah Sukuk increasingly competitive with Ijarah structures in terms of execution efficiency.