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Agency Agreement (Wakala)
A Wakala is an arrangement whereby a principal investor appoints an agent (wakeel) to carry out a specific task on its behalf.
In a financial context, the investor appoints the agent to invest funds provided by the principal into investments or assets and the agent lends it expertise and manages those investments on behalf of the principal for a particular duration, in order to generate an agreed upon profit return.
Often a group of investors pool their capital into a special purpose vehicle (SPV) managed by a trustee who enters into the agency agreement (Wakala) with the appointed agent.
The flow chart below gives an example of a typical Wakala agency structure:
Steps of the transaction
(1) The agent seeking the investment opportunity establishes a special purpose vehicle (SPV). The investors provide capital for the arrangement and receive an undivided ownership interest in the assets;
(2) The SPV, in its capacity as the principal, enters into a agency (Wakala) agreement with the agent to invest capital in Shari’ah compliant assets, selected by the agent, on behalf of the SPV;
(3) The investment is used by the agent to purchase the selected assets from one or more sellers;
(4) The assets will be held and managed by the agent, on behalf of the SPV, for the duration of the agency arrangement in order to generate an expected profit to be agreed upon by the principal. The assets will generate a profit return, which will be held by the wakeel on behalf of the SPV;
(5) The SPV receives a specified amount from the profits earned from investing the assets. Any profits generated in excess of the agreed amount are paid to the agent as an incentive fee;
(6) The SPV uses its share of the profits to pay periodic distribution amounts to the investors.
Saracens has experience in advising investors and the agent (wakeel) in this type of transaction and can assist parties in structuring the arrangement to ensure compliance with Shari’ah while maintaining profitability.
We can also assist with both parties’ obligations in respect of:
- Duration of the agency (Wakala)
- Fees payable to the agent
- Conditions for termination
- Agreeing the expected profit return
- Determining periodic profit distribution
- Criteria of assets to be selected, in accordance with the relevant Shari’ah board and the Accounting and Auditing Organisation for Islamic Financial Institutions
To discuss using entering into a Shari’ah agency agreement as an investor or agent, please phone our London office on +44 (0) 20 3588 3500 and talk directly to one of our lawyers. Alternatively, you can request a call back and we will be in touch at a time convenient to you.