Islamic finance body AAOIFI issues #standard for agency contracts

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued its first standard covering wakala, or investment agency contracts. The guidance aims to address the use of wakala in areas such as over-the-counter instruments, treasury placements and Islamic bonds. Wakala is common as a standalone product, but AAOIFI opted to focus its standard on more complex instances where it is combined with other contracts. Islamic banks use wakala for both their short and long-term funding needs, and in recent years have incorporated the contract into hybrid sukuk versions. In wakala, one party acts as agent for another and the AAOIFI standard focuses on this principal-agent relationship. It states that the relationship does not transfer ownership rights of the assets to the agent, the principal should account for the assets in its accounting books. The standard also requires the principal to evaluate the nature of the investment at inception.