Step by Step Guide to create an Islamic Finance Contract including Transaction steps and diagrams, issues and risks along with the certificates for Shariah and Legal Reviews. The guidance notes are available on http://www.zawya.com/shariah-legal/listing/legaldocuments/

1. TREASURY PLACEMENT:
WAKALA BASED
AUTHORS:
Badrul Hasan and Tarek El Diwany
Legal Review by Shariah Review by Produced by

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WAKALA BASED
Contents
About this Product Guidance Note and Documentation ............................................................................................................3
About Thomson Reuters...............................................................................................................................................................4
About Zawya Islamic....................................................................................................................................................................5
About Freshfields Bruckhaus Deringer........................................................................................................................................6
About Shariyah Review Bureau....................................................................................................................................................7
Freshfields Bruckhaus Deringer certificate..................................................................................................................................8
Shariyah Review Bureau certificate..............................................................................................................................................9
Introduction................................................................................................................................................................................ 10
Transaction steps and diagrams................................................................................................................................................. 11
Key difference between the equivalent Islamic and non-Islamic products............................................................................... 12
Key Islamic provisions in the principal documents.....................................................................................................................13
Regional practices in the Middle East and South East Asia regions......................................................................................... 15
Shariah issues and risks............................................................................................................................................................. 15
Basic commercial issues typically negotiated between parties..................................................................................................17
Appendices................................................................................................................................................................................. 18
Master Agreement for Treasury Placement: Wakala Based.................................................................................................. 21

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About this Product Guidance Note and Documentation
Islamic banks, like their conventional counterparts, require financial vehicles for short-term liquidity
management. The two principal Islamic financial products used for placing or obtaining short-term
funds are commodity Murabaha and Wakala.
In a typical Wakala treasury deposit, the muwakkil, or principal, appoints the bank as its wakeel to invest the deposit amount in a sharia-
compliant manner. This guidance note and accompanying Master Wakala Agreement explains the steps, illustrated with diagrams, for
wakala treasury transactions.
This document also distinguishes between the comparable Islamic and non-Islamic products along with the key requirements in the
principal document. It also covers differences in practice between the Middle East and Southeast Asia in regards to the Wakala contract.
The guidance note goes on to discuss the sharia issues and risks associated with the Wakala structure and the basic commercial issues
typically negotiated between parties in a Wakala agreement, such as profit rate and withdrawals.
An example/template of the legal document is attached.
PRODUCT GUIDANCE NOTES AND DOCUMENTS AVAILABLE
Sharia compliant asset & housing finance: Ijara and forward Ijarah based contract
Sharia compliant asset finance: Murabaha based
Sharia compliant deposit products: Saving and current accounts
Sharia compliant trade finance : L/C facilities
Sharia compliant credit cards: Fee or tawarruq based
Sharia compliant guarantee contract
Sharia complaint overdraft facility
Treasury Placement: Wakala based
FX-spot and forward contract: Wa’d based
Working capital finance: Mudaraba Based
Investment Sukuk – Sukuk al Wakala, Sukuk al Musharaka and Sukuk al Mudaraba structures
Islamic syndicated financing: Mudaraba based
Islamic Project finance: Istisna plus forward Ijara based
Islamic Project finance: Musharaka and diminishing Musharaka based

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WAKALA BASED
About Thomson Reuters
Thomson Reuters is an integrated knowledge services provider that assists the Islamic Finance industry
through providing solutions that enhance transparency, clarity and accessibility of Islamic Finance to
the global audience of businesses and professionals. We are proud to have been at the heart of Islamic
banking since the first commercial Islamic bank was launched in 1975.
Our knowledge solutions help you gain clarity and transparency in the rapidly emerging Islamic finance industry by providing you with data
services, research products and consulting services.
DATA SERVICES
Thomson Reuters Eikon and Zawya products provide access to a full spectrum of all relevant Islamic asset classes and content sets to give
us¬ers the best of class research capabilities.
RESEARCH
Built on the back of the world’s most extensive data capabilities, Thomson Reuters leverages its global network to provide primary source
in¬telligence on markets, industries and institutions relevant to Islamic finance.
CONSULTING
Thomson Reuters can provide bespoke service harnessing our global knowledge network com¬bined with our deep expertise
in Islamic finance.
ISLAMIC FINANCE GATEWAY COMMUNITY
Islamic Finance Gateway (IFG) Community is the one dedicated knowledge Gateway for profes¬sionals from across different countries to
converge and interact on industry issues that matter in order to generate actionable outcomes to shape and speed up the industry’s growth.

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About Zawya Islamic
Our comprehensive platform provides the transparency and clarity of information you need to
conduct business more effectively. We also provide you with tools you can use to better shape
investment decisions.
Our intelligence includes all Islamic finance and Shariah-compliant asset classes, databases, research, news and market data, and is
supported by other data that serves as a benchmark against conventional fundamentals.
Zawya Islamic addresses the needs of any investment manager or consultant – Islamic or otherwise – by giving you access to the full
spectrum of legal, Shariah and market information.
We are powered by data from Thomson Reuters and also partner with other global Shariah and Islamic finance market players, standard
setters and authorities. We have developed for your use a well-connected and networked platform that makes Shariah-compliant
investment and decision making easier. Zawya Islamic is all of the following on one single platform:
• Fatawa, standards, regulations, legal documentation and product guidance notes, intelligently connected with scholars and instruments;
• Deep fundamental data on global sukuk, Islamic funds, Islamic banks and financial institutions, and Shariah -compliant equities;
• Islamic finance news, research, indices, money market and benchmark rates; and
• The ICD Thomson Reuters Islamic Finance Development Indicator and the Islamic Finance Gateway Community.
www.zawya.com/Islamic-finance

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About Freshfields Bruckhaus Deringer
Freshfields was founded in 1743 in the City of London, making it the oldest existing law firm in the world.
Today, we are host to over 2,500 lawyers located across 28 offices in 16 countries throughout the Middle
East, Europe, the Americas and Asia.
While we have offices in all the main financial and regulatory centres globally, over 30 per cent of our
work is in countries where we do not have an office. Therefore our lawyers are deeply experienced in
working outside their home markets. Moreover, the proportion of our work outside our “home markets” is
growing, and is likely to continue to do so, as businesses invest in those places which are growing faster
than the developed world. We are focused on being able to provide our advice where our clients need it,
not just where we happen to have an office.
Our market leading practice areas
Our firm is organised into nine international practice groups in line with our clients’ business needs – they include Finance (both Islamic
and conventional); Corporate; Antitrust, Competition and Trade; Dispute Resolution; Employment, Pensions and Benefits; Environment,
Planning and Regulatory; Intellectual Property and Information Technology; International Tax; and Real Estate (including Construction).
We are proud of the fact that all our practice groups and many of our lawyers are consistently recognised by the most renowned legal
research directories and market commentators to be among the market leaders in their respective areas of law.
What sets us apart from our competitors is that on every instruction on a profoundly consistent basis, we bring to bear the unique
benefits and advantages of our global coverage, comprehensive platform, true integration and client-centric mindset. We are
committed to excellence in the legal advice and support we provide to our clients for their entrepreneurial decisions – no matter the
geography, scope or mandate.

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About Shariyah Review Bureau
Shariyah Review Bureau (SRB) is the Corporate World’s leading Shari’a Advisor with scholarly presence
in more than 12 countries from US, Europe, Africa, GCC and Asia. The breadth of geographical reach
crossing national boundaries makes it a unique Shari’a consultancy body that can meet clients true
international business requirements.
Licensed by the Central Bank of Bahrain it is a natural proxy to institutes seeking Shari’a Compliant Funds and Islamic windows and
transactions. Apart from clients in UK, Canada, France, Australia, Hong Kong, Switzerland and the GCC, it is the Shari’a Advisor for 21%
of the Co-operative Insurance Firms Listed on the stock-exchange market in the Kingdom of Saudi Arabia. SRB also serves 12% of the
Saudi Investment Companies licensed and regulated by the CMA and has a diverse set of experience in Islamic banking and non-banking
institutions, including securities firms, Shari’a compliant national banks, energy firms and information providers. It also has an extensive
experience in helping clients cover a wide spectrum of transactions ranging from Sukuk’s, Private Equity Funds, Equity projects, Trade
Finance transactions, Margin Trading, Real Estate Developments, Land Funds, ICT Deals, Money Market, Textile, Sports and Pharma Funds.
With almost a decade experience of Shari’a Advisory and Shari’a Audit, srb has sustained a record in innovation and impact for transactions
in Shari’a compliant Corporate debt, Sukuks and Islamic equity markets, initial public offerings screening & Investment Banking Practice.
To learn more visit www.shariyah.com

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Freshfields Bruckhaus Deringer certificate

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Shariyah Review Bureau certificate

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1 Introduction
Islamic banks usually have capital structures that are similar to non-Islamic banks and, like their non-
Islamic counterparts, require financial products for the purpose of short-term liquidity management.
This may especially be relevant for Islamic banks that invest into long-term instruments such as sukuk
or provide project finance and ijara-based real estate finance using funds obtained under short-term
customer deposits.
The two principal Islamic financial products used for placing or obtaining short-term funds are commodity murabaha and wakala. Islamic
banks may also use money market instruments and short-term sukuk for liquidity management and, where the procedure is commercially
feasible, a securitisation process may be used to provide liquidity to otherwise illiquid assets. This practice note and accompanying Master
Wakala Agreement describe how the wakala deposit product is structured.
In a typical wakala treasury deposit product, the customer as Muwakkil or principal appoints the bank as its Wakeel or agent to invest the
deposit amount in a Shariah compliant manner. The product is used in both retail and wholesale banking. A minimum deposit amount
usually applies, and deposit periods typically range from one to twelve months. An “unrestricted wakala” as opposed to a “restricted
wakala” is usually used, allowing the deposit to be utilised by the bank in its general treasury pool. The parties agree an Expected Muwakkil
Profit and an agency or Wakala Fee to be paid to the Bank.
On the Maturity Date, if a profit is made on the investment, the customer receives his principal Deposit Amount and the actual profit yielded by
the investment less any profit over and above the Expected Muwakkil Profit which the bank keeps as an “incentive fee” or “performance bonus”.
If however, there is a loss on the investment, the customer as principal bears the loss which could in theory be anything up to the whole
of the customer’s principal amount. Therefore, the wakala treasury deposit is a hybrid product, resembling an equity investment in a loss
scenario, a preferred equity product where profit is made up to the amount of the Expected Muwakkil Profit, and a debt product where profit
is made over and above the Expected Muwakkil Profit as the Customer’s return is effectively capped by the bank’s “performance bonus”.
In order to compete with non-Islamic banks, some Islamic banks promise customers that they will make up any shortfalls in the Expected
Muwakkil Profit, or any losses of wakala principal, from the Bank’s reserves. This wa’d or promise is documented as a separate document
provided in ancillary marketing materials or stated verbally at or prior to the point of contract. This practice renders the wakala deposit
product commercially akin to a protected deposit account yielding a fixed return, although there remain issues of legal enforceability.
The wakala treasury deposit has grown in popularity over the last few years owing to the commodity murabaha falling out of favour with
many Shariah scholars in the industry. Even with the practice of profit smoothing, the wakala is seen as a more genuine Islamic financial
product than the more synthetic commodity murabaha structure. In addition, wakala is simpler and cheaper to transact as it does not
require exchanges of physical commodities and the related transaction costs are therefore lower.
Wakala capital is typically entered on the Bank’s balance sheet as an unsecured subordinated debt obligation of the Bank and qualifies as
Tier 2 capital. This indicates that although the bank is acting as an agent of the investing client under Shariah, it transacts in its own name
with regard to the deposited funds themselves.