IIFM Interbank Unrestricted Master Investment Wakalah Agreement

IIFM Interbank Unrestricted Master Investment Wakalah Agreement IIFM Industry Seminar on Islamic Capital and Money Market Pre-Conference Day, 5 th Annual World Islamic Banking Conference: Asia Summit 2014 Monday, 2 nd June 2014, Pan Pacific Singapore Hotel, Singapore Ijlal Ahmed Alvi Chief Executive Officer IIFM What is the IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement? The IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement is a framework agreement which sets out the terms upon which the Muwakkil (Investor) will transfer certain funds to the Wakil (Agent) as its agent to invest such funds in a Shari ah compliant manner Entering into the Master Agreement does not of itself give rise to any transactions. After the Parties have entered into the Master Agreement, they may subsequently enter into Wakalah Investment Transactions which will be subject to and governed by the Master Agreement Note that the Governing Law of the Master Agreement may be decided by the Parties, although the Agreement had been prepared on the implicit understanding that English Law will be the Governing Law predominantly used 1 1

What is the purpose of entering into an Unrestricted Inter-Bank Wakalah Agreement? For many years, IFI s have relied mainly on commodity Murabahah for their wholesale liquidity management purposes notwithstanding issues and concerns related to commodity Murabahah transactions, such as the cost of commodity brokerage, or the amount of Shari ah compliant commodities available at any particular moment in time to cover transaction volumes etc In order to diversify the range of liquidity management solutions available to the IFI s, the last few years have witnessed the active use by IFI s of Wakalah arrangements/transactions particularly Unrestricted Wakalah as an alternative liquidity management tool. The objective of this activity has been to reduce the over reliance by the IFI s on commodity Murabahah 2 What are the Key Features of the Master Agreement? The key features of IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement are: Clause 1 (Definitions and Construction) This clause defines terms used in this Wakalah Master Agreement, details the rules of construction which apply to the Master Agreement and explicitly states that only the Parties may enjoy the benefits of this Master Agreement (Clause 1.4). In addition, the purpose of Clause 1.3 (Single Contract) is to clarify that, as the Master Agreement is a framework agreement, when Wakalah Investment Transactions are subsequently entered into, the Master Agreement will apply to such Wakalah Investment Transactions. So, although a Wakalah Investment Transaction will be a separate document, the Wakalah Investment Transaction will be regarded as entered into upon the terms set out in the Master Agreement and covered by the framework created by the Master Agreement. 3 2

What are the Key Features of the Clause 2 (Wakalah Terms and Conditions) This clause deals with the appointment by the Muwakkil of the Wakil as its agent in relation to each Wakalah Investment Transaction Clause 3 (Wakalah Investment Transactions) This clause states that the Master Agreement does not of itself create an obligation on the part of the Wakil or the Muwakkil to enter into any Wakalah Investment Transactions. Clause 4 (Payments) This clause deals with the mechanics of how payments are made under this Master Agreement, the currency of payments 4 What are the Key Features of the Clause 5 (Representations) This clause contains a set of standard representations which each Party is required to make including that they have the power and authority to enter into Wakalah Investment Transactions and that they do not have any proceedings pending against them. Clause 6 (Undertakings) This clause requires each Party to undertake amongst other things that it will comply with all laws and regulations to which it may be subject and that it will notify the other Party of any Default. Clause 7 (Events of Default) The occurrence of certain events will result in termination of any Wakalah Investment Transactions then in existence. Such events include the Wakil failing to pay any amounts under the Master Agreement, misrepresentation by a Party and insolvency. The clause also details what happens upon the occurrence of an Event of Default (See Clause 7.7) and the payments due thereunder (See Clause 7.8). 5 3

What are the Key Features of the Clause 8 (Early Termination) This clause deals amongst other things with the right of the Muwakkil to terminate a Wakalah Investment Transaction, the Wakil s acceptance of an Early Termination Request and the ability of the Wakil to notify the Muwakkil of a Revised Anticipated Profit Rate (See Clause 8.3). Clause 9 (Late Payment Amount) This clause obliges a Party to pay a Late Payment Amount where it fails to pay a sum on a Due Date. Clause 9.2 (Calculation of Late Payment Amount) deals with how the Late Payment Amount is calculated and Clause 9.3 (Payment of Late Payment Amount) covers how such amount shall be applied. 6 What are the Key Features of the Clause 10 (Miscellaneous) This clause contains miscellaneous agreements of the Parties, including a provision that neither Party may assign its rights under the Master Agreement and when notices are deemed to be served. Clause 11 (Governing Law and Jurisdiction) This clause contains the governing law and dispute resolution forum provisions. The governing law is to be selected by the Parties. The forum for dispute resolution will be the courts of the jurisdiction of the governing law unless the Parties choose arbitration. 7 4

What are the Key Features of the The Schedules 1. Schedule 1 (Form of Wakil Offer Notice) (Offer) 2. Schedule 2 (Form of Muwakkil Acceptance Notice) When the Parties wish to enter into a Wakalah Investment Transaction they should do so by completing Schedules 1 and 2 in accordance with the mechanics detailed in Clause 3 (Wakalah Investment Transactions). 8 Are There Any Other Features of the Master Agreement? Yes, this agreement is supplemented with a set of items as follows: 1. Operational Guidance Memorandum which covers the operational procedures to be implemented by the Wakil as well as the Wakil and Muwakkil responsibilities 9 5

Operational Guidance Memorandum Process Flow Offer Start Wakil makes an offer for an Unrestrcited Wakalah transaction. The offer, amongst other things, shall include the following: Anticipated Profit Rate (APR) Maturity Wakalah Pool Co-mingled vs Segeregated pools Acceptance Muwakil accepts the offer Fund Transfer Muwakil transfers the investment amount to the Wakil Early termination No A Yes B Return> APR Investment Amount +APR Wakil Fee and retain the excess (incentive fee) (clause 3.4 (a) 3.5) A At maturity determine the return earned on the contract Return = APR Investment Amount +APR Wakil Fee (clause 3.4 (a)) End Return < APR Investment Amount +Actual Profit Wakil Fee (clause 3.4 (b)) Negative return Investment Amount Negative return Wakil Fee (clause 3.4 (c)) 10 Operational Guidance Memorandum Process Flow (continuation) Default by Wakil (clause 7.8) Muwakil notifies the Wakil of an early termination due to default on behalf of Wakil investment amount + lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil - Wakil Fee End Illegality (clause 8.5) Affected party informs the other party on becoming aware of event Wakil is to pay the Muwakil investment amount + lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil Wakil Fee B Voluntary exit of Muwakkil (clause 8.1) Muwakil sends a notice requesting for a early termination In case the Wakil accepts the request the Wakil shall notify the Muwakkil of the acceptance. Early Termination date shall be the date of acceptance Wakil is to pay the Muwakil investment amount +lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil Wakil Fee Actual Administrative and Out of Pocket Expenses Revised profit rate notice (clause 8.3) Wakil sends a notice to Muwakkil notifying the inability to honour the anticipated return In case the Muwakil decides to continue with the contract Wakil is to pay the Muwakil investment amount + total profit calculated up to the day of notification of Muwakkil + revised profit rate calculated from the notification date to maturity date Wakil Fee In case the Muwakil decides to terminate the contract Wakil is to pay the Muwakil investment amount + Lower of APR and Actual Profit Rate calculated up to the day of notification of Muwakkil - Wakil Fee 11 6

Operational Guidance Memorandum Risk Management Does the agreement require minimum risk assessment procedures and due diligence to be carried out by the contracting parties and what are the contracting parties responsibilities? Muwakkil retains the risk of loss of principal and there is no loss indemnification by the Wakil; (clause 2.4) Muwakkil s minimum due diligence (clause 2.1 (e)) Wakil is expected to communicate with the Muwakkil in a transparent manner both before and after the execution of the Wakalah Investment Transaction until maturity. (clauses 2.3 (a), (b) and (d)) 12 Operational Guidance Memorandum Risk Management (continuation) As a commitment to transparent and enhanced disclosures as an agent in the financial sector, the Wakil should also consider presenting a business plan or a feasibility report to the Muwakkil before the Wakalah Investment Transaction. Such business plan shall include description on the Wakil s investment plan including the targeted Wakalah Pool (mix, sector, geography, asset class, liquidity features etc.), indicative returns that the Wakil expects the Wakalah Pool to generate and the Wakil s assessment of ability to liquidate the Wakalah Pool at the time of Investment Maturity. Burden of proof on Wakil (what it means?) 13 7

Operational Guidance Memorandum Wakalah Pool Commingled or general treasury pool Segregated pool Asset allocation within the Wakalah Pool Replacement of assets in Wakalah Pool 14 Operational Guidance Memorandum Anticipated Profit Rate Actual Profit Rate Actual Profit Rate different from the Anticipated Profit Rate? What are the consequences In case the Actual Profit is in excess of the Anticipated Profit Rate, is Wakil required to disclose the incentive fee to the Muwakkil? 15 8

Shukaran Wassalamu Alaikum International Islamic Financial Market (IIFM) Office No. 72, 7 th Floor, Zamil Tower (Main Tower), P.O. Box: 11454, Manama, Kingdom of Bahrain Tel: +973 17500161, Fax: +973 17500171, Email: info@iifm.net, Website: www.iifm.net Disclaimer: The information herein has been obtained from sources believed to be reliable but cannot be guaranteed. The views or opinions expressed are subjected to change at any time. Neither the information nor any opinion expressed can be construed as a solicitation for the purchase or sale of any securities. International Islamic Financial Market disclaims liability in this respect. 9