Wakala is a form of sukuk that stems from the concept of a wakala, which means an arrangement whereby one party entrusts another party to act on its behalf. A wakala is akin to an agency agreement, which has a principal and an agent (manager). The principal (investor) appoints an agent to invest on its behalf.
A person seeking to raise capital (the so-called originator) creates a special purpose vehicle (an SPV). The SPV issues the sukuk. Then the SPV enters into a wakala trust management agreement (agency agreement) with the originator. Under the agreement, the originator agrees to invest the proceeds from the sukuk issue into a pool of Sharia-compliant assets. The SPV holds assets or investments in trust for the sukuk holders, each of which holds a proportionate share in the assets according to the value of their investments.
The SPV receives a certain amount of profit from the investment. The originator receives a fee for its investment management duties and for any profit earned in excess of this amount.
The SPV uses the amounts received to make regular distribution payments to the sukuk holders.
If the return on the pool of assets is not sufficient to repay the investors, a part of it may be bought back by the originator. Any income in excess of the expected rate of return is a manager’s fee.
Wakala sukuk may include a built-in option (call). In this case, the originator buys the pool of assets at a certain price, and investors receive the sukuk’s face value and all unpaid income when the option is exercised.
Example of a wakala bond - Tropicana Corporation, 5.5% 30jun2023, MYR
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