THE Association of Islamic Banking Institutions Malaysia (AIBIM), the statutory banking organization for Islamic financial institutions authorized in Malaysia, has recently launched its latest standard agreement, the Wakalah Placement Agreement (WPA), which aims to facilitate deposit placements by corporate clients with Islamic financial institutions (IFIs) under the Wakalah (agency) concept.
So far, a total of 25 Islamic banks and the Malaysian Employees Provident Fund (EPF), the pension fund, have signed the memorandum of adoption of the latest standard agreement launched by AIBIM at the end of November 2009 at a ceremony in Sasana Kijang, Kuala Lumpur, and witnessed by Bank Negara Malaysia (BNM) Gov. Zeti Akhtar Aziz.
The standard Wakalah Placement Agreement (WPA), according to AIBIM, “is the culmination of the Islamic banking industry’s effort to standardize the agreement for deposit placements by corporate customers with IFIs and for interbank placements amongst IFIs under the Wakalah concept.”
According to AIBIM, this is the first standard Wakalah agreement in the world and the fourth master agreement launched by AIBIM in 2009 alone. In August 2009, AIBIM launched the Corporate Murabahah Master Agreement (CMMA), a standard document for deposit-taking between financial institutions and corporate customers. This preceded the launch of two standardized interbank master agreements for Islamic deposit-taking and placement transactions — Interbank Murabahah Master Agreement (IMMA) and Master Agency Agreement (MAA) in April 2009. All these were similarly adopted by IFIs domiciled in or doing business with Malaysia.
A Wakalah transaction, says AIBIM, involves two parties — the Muwakkil as the principal (the depositor) and the Wakil as the Muwakkil’s agent to invest the Muwakkil’s funds in Shariah-approved transactions. The standardized WPA for corporates essentially specifies a common modus operandi for IFIs as the Wakil in investing the deposits placed by their corporate customers under the Wakalah concept. Likewise, the Interbank WPA specifies the modus operandi for deposit placements amongst IFIs.
According to AIBIM, the standardized WPAs are more time, cost and resource efficient for the depositors (Muwakkil) and the IFIs (Wakil) in vetting non-standardized Wakalah placement agreements submitted by each Wakil wanting to source deposits under the Wakalah concept.
The Wakalah placement agreements also provide certainty and standard methodology in ensuring the integrity of the placement and investment transactions. Similarly, they allow almost immediate implementation by both the corporate customers and the IFIs and leeway for the latter to innovate and/or differentiate their Wakalah placement product.
Islamic banks have welcomed AIBIM’s standard agreements and hope IFIs from all over the world would follow in adopting them.
Indeed, signatories to the WPA included financial institutions from four countries, namely Malaysia, Indonesia, Brunei and the UK.
In the UK, Gatehouse Bank PLC, the latest Islamic bank to be authorized by the UK’s Financial Services Authority (FSA), is closely cooperating with Malaysia. Apart from adopting the WPA, Gatehouse Bank also conducted the first international commodity Murabahah transaction with CIMB Islamic Bank of Malaysia in September 2009 using the Bursa Suq Al-Sila Commodity Murabahah platform.
Besides cost and resource savings, AIBIM stresses that the adoption of the standardized WPA would promote transparency, consistency, operational efficiencies and robustness in Islamic deposit placement transactions.
AIBIM maintains that the “WPA would further spur innovations amongst Islamic banking institutions to meet the demand for Shariah-compliant products that are efficient and effective. The formulation of new, innovative financial instruments will ensure that the Islamic banking industry remains active and vibrant. With the current financial crisis still stifling the development of economies all over the world, the adoption of the WPA is a positive contributory move to expedite the recovery of the global financial system.”
Interbank deposits and placements are important features of the financial system whether placed by corporates or between banks. The standard WPA launched by AIBIM should contribute to closing this vital gap in the Islamic finance market and is another important cog in the liquidity management wheel that is driving the development of the global industry.