What is Wakala Accounting?
Wakala accounting refers to the financial reporting treatment of investment contracts in which one party (the muwakkil) appoints another (the wakil) as agent to invest funds in a shariah-compliant manner in exchange for a fixed fee, with profits and losses accruing to the principal.
How It Works
- Document the wakala agreement, agency fee, and expected profit rate.
- The principal recognises the wakala investment as a financial asset.
- The agent recognises only the agency fee as income and does not consolidate the underlying portfolio.
- Distribute actual returns to the principal net of any agreed performance share.
- Disclose the wakala arrangement and any expected profit shortfall in the notes.
Saudi Context
Wakala is widely used by Saudi banks and Islamic windows for interbank liquidity, deposits, and structured products. AAOIFI guidance complements IFRS in shariah-supervised entities, and SAMA monitors wakala-based liquidity ratios for Islamic banks.
Example
A bank places SAR 50,000,000 on a 1-month wakala with another bank at an expected profit rate of 5% and a 0.10% agency fee. The principal expects to receive about SAR 208,000 of profit, less the agency fee.