Habib Ahmed

Durham University

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Agenda

� Introduction

� Waqf� Historical Evidence &Contemporary Status

� Waqf and Financial Sector� Demand Side

� Supply Side

� Conclusion

Introduction (1)

� Historically, awqaf played a significant role to bring about economic growth and socio-economic justice in Muslim societies

� Awqaf is stagnant during contemporary times, both as a concept and in practice

� The role of third sector in promoting growth and welfare is increasingly becoming important

� Waqf is not contributing in the growth of economies in general and third sector in particular

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Introduction (2)

� Islamic finance was conceived to provide a just, stable and equitable alternative

� Islamic finance appears to have failed to realize the social objectives

� One way to introduce social goals in Islamic finance is to introduce waqf based organizations and concpets

� This presentation discusses how waqf can be integrated in the financial sector to enhance growth and welfare

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Agenda

� Introduction

� Waqf� Historical Evidence &Contemporary Status

� Waqf and Financial Sector� Demand Side

� Supply Side

� Conclusion

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Waqf-Introduction

� Waqf—”Stand still, hold still, not to let go”

(Maliki- habs)

� Waqf established by founder (waqif) by

dedicating an asset for benefit of a defined

group

� Waqf deed determines:

� Objectives for which waqf is created

� Way(s) its revenues/fruits/services can be used

� Management process and procedures of succession of managers (mutawalli)

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Waqf—Important features

� Good objective or birr – good intention

� “…as if ownership belongs to God”

� Waqf is usually perpetual—but can be temporary and partial

� Can be created for various objectives� Philanthropic or public (khayri or aam)

� Family or private (ahli or khass)

� Mixed (mushtarak)

� Religious and charitable/social

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Waqf—Historical Experience (1)

� The first waqf created by the Prophet (PBUH) was Masjid in Medinah

� Other than these, the first known awqaf were established for social purposes

� Umar bin Khattab—land of Khaybar

� Uthman bin Affan—well in Madinah

� Thereafter many different kinds of waqf were created

� Public utilities, education and research, health care, etc.

� Property, cash, grains for seeds, etc.

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Waqf—Historical Experience (2)

� At the dissolution of Ottoman empire—¾ of

the land and buildings in some Turkish towns

were awqaf

� In some Muslim countries awqaf reached

1/3rd or more of cultivable land

� At the beginning of 20th century

� In Palestine, 233 waqf deeds recorded (owning 890 properties) compared to 92 private ownership deeds (with 108 properties)

� al Quds had 64 operating schools supported by awqaf (more than the no. of mosques)

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Awqaf during Contemporary Times—Status (1)

� Due to different reasons, awqaf have

degenerated now—both as a concept and in

practice

� The concept of waqf is corrupted:

� Waqf is only for religious purposes

� Waqf can be established in real estate only

� Lack of awareness that waqf can be productive

asset/organization used for social/philanthropic purposes

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Awqaf during Contemporary Times—Status (2)

� In practice—many awqaf have become unproductive assets

� Waqf not created for socio-economic

purposes

� Lack of institutional/organizational

development

� Lack of supporting institutions

� Many waqf assets lost

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Contemporary Fiqh of Waqf� Zarqa—other than the concept of birr, everything

in waqf is under the realm of ijtihad

� Some flexibility in fiqh related to waqf

� Waqf of movable properties (books, cash, etc. )

� In certain cases waqf can be exchanged/ substituted

(istibdal)

� IFA Resolution (April 2009)

• Types of assets that be made waqf—moveable item, benefit, money, sukuk, shares, services.

• Waqf can be permanent and temporary

• Waqf can be limited to time specified by founder

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Agenda

� Introduction

� Waqf� Historical Evidence &Contemporary Status

� Waqf and Financial Sector� Demand Side

� Supply Side

� Conclusion

Integrating Waqf with the Financial

Sector� While there are different issues related to

development of waqf, here we examine how it can benefit by integrating with the financial sector

� Waqf and the financial sector

1. Demand side (input to waqf)

2. Supply side (output from waqf)

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Waqf and Demand for Services

from the Financial Sector� Inputs for development of waqf institutions

� Financing

� Financing from financial institutions (FIs)

� Financing from raising funds from the market

� Management Services

� Issues in financing

� The benefit from waqf asset should continue

� Cannot use waqf asset as collateral

� Cannot sell waqf asset

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Financing from FIs � Like any other enterprise, waqf assets can be

developed by investments

� Example: Awqaf Properties Investment Fund

� An entity financing the development of awqafproperties worldwide

� Came up with innovative financing mechanism (Built-Operate-Transfer)

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Waqf Financing Through Sukuk

� Cannot sell waqf asset—cannot issue ijarah sukuk

� Sukuk al Intifa’a—Zamzam Towers in Makkah

� Waqf land leased land to Binladin Group for 28 years on BOT to build complex (4 towers, mall & hotel)

� Binladen leased the project to Munshaat Real Estate Projects for 28 years

� Manshaat raised $390 million issuing sukuk al intifaa(time-share bond) for 24 years by selling usufruct rights

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Waqf Financing Through Sukuk (2)� Singapore—Musharakah sukuk used to raise $60

million to develop 2 projects

� Waqf provided the land, the investors (sukuk holders) provided the funds for investment, and Warees managed the project.

� In one case, a new mosque was built with attached commercial property earning $200,000 annually

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Waqf Management

� Only one dishonest mutawalli needed to

loose assets� To tackle this problem—governments have got

involved (Ottomans in 1826)

� Not a solution—in most cases, government involvement has made the problems worse

� Inefficient/Passive Management� Government—Officials and bureaucrats

� Private—individual mutawalli

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Corporate Trust Management

Organizations

• Provide various trust management related

services for fees/compensation

• Reasons of using corporate entities

� Permanence— Ensures continuity and permanence

(in case of death or disability of originator/settlor)

� Expertise— Ensure professional and expert

management of the assets

� Objectivity—administration without any bias

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Corporate Trust Management Organizations-Types

Two major types:

� Banks and financial institutions

� Department—some banks offer trust services

� Subsidiary—many major banks have trust services

subsidiaries

� Example: Waqf Trust Services Ltd (UAE)—owned by Dubai

Islamic Bank & DIFC Investments LLC (July 07)

� Independent Trustee Companies

� Example: Amanah Raya Malaysia—provide both

conventional and Islamic trust services

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Services Provided by Waqf Management

Organization

1. Services of Mutawalli

2. Custody Services

3. Estate Management Services

4. Investment Management Services

5. Advisory Services

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Services of Mutawally

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� Review & implement waqf terms

� Develop and implement investment strategies for waqf

assets

� Collect, distribute, reinvest income from waqf assets

� Maintain all accounting records and provide regular

information to beneficiaries

� Fulfill financial obligations related to assets (e.g., paying

bills, taxes, etc)

� Seek legal counsel when needed

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Advisory Services

� Will writing

� Advise on waqf/trust accounts/funds

� Waqf formation

� Investment advice

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Agenda

� Introduction

� Waqf� Historical Evidence &Contemporary Status

� Waqf and Financial Sector� Demand Side

� Supply Side

� Conclusion

Waqf and Supply of Financial

Services � Social Role of Islamic financial sector

� Islamic firms are not only about fulfilling Islamic contracts…social justice and benevolence

� Socio-economic aspects can be fulfilled by introducing waqf-based organizations

� Microfinance—financial services for the disadvantaged

� Takaful

� Guarantee

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Waqf-based MFIs� Historically, waqf based institutions did provide

loans to the disadvantaged (Turkey and Iran)� Waqf-based MFI (W-MFI) can be introduced� W-MFI will retain the basic operational format of

MFIs, but will have some distinguishing features� Cash waqf can be used in W-MFI in different

ways:� Corpus of waqf invested and returns used for social

purposes� Corpus of waqf given for financing as interest-free

loans� Corpus of waqf can be used as capital to create

microfinance institutions (W-MFI)

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W-MFI: Special features of Balance

Sheet (1)

� Capital & Liability

� Waqf will form the capital for the MFI

� Savings deposits — mudarabah contracts

� Obtain additional funds from waqf and other sources

(waqf certificates, qard hasan deposits, etc.)

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W-MFI: Special features of Balance Sheet (2)� Assets

� Allocation into fixed income assets and microfinancing activities� Fixed-income assets

� Provides a cushion against expected losses� Financing

� Qard (loan at service charges)� Sale based and hiring modes (murabahah,

salam, ijarah)

� Profit-sharing modes (Musharakah and mudarabah)

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W-MFI: Special Features for

Operations

� To keep the corpus/capital of the waqfintact—steps needed to preserve and enhance the value of the waqf

� Appropriate asset allocation strategies required

� Long term vs. short-term

� Low risk/return vs. high risk/return

� Need to create a reserve for negative shocks

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Risk-reducing Reserves� Takaful reserves

� Contributed by beneficiaries

� Used in case of default due to unexpected reasons

� Profit-equalizing reserves� Contributed by depositors

� Used to maintain competitive returns

� Economic capital reserves� Contributed from the surplus of MFI (no dividend

distribution)

� Used in case of negative shock

Waqf-based Takaful� Different Models of Takaful

� Mudarabah, Wakalah, and Waqf

� Waqf based model appears to have less controversies

� Can be used for:

� Takaful

� Re-takaful

� Mirco-takaful

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Share of Surplus (100%)

Contribution

Profit Share Profit Share

Wakalah Fee

Initial Donation to Waqf

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Waqf-based Takaful Model

Waqf Fund

Participants

Shareholders’Funds

Investments

Surplus

Profit/Loss of Shareholders

Management Expenses

ReservesRetakafulPolicy

Benefits

Profit

Guarantees� Guarantees are important for small and medium

enterprises (SMEs) to get financing

� Shari’ah issue—guarantees are gratuitous contracts

� Some Shari’ah scholars have allowed fees for providing guarantees under certain conditions

� Waqf based institutions can provide guarantees, mainly to the small and medium enterprises

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Conclusion� Current status of waqf in many countries—

unproductive assets

� There is great potential to revive the institution of waqf

� This presentation showed some areas in which waqfand Islamic finance can benefit from each other

� Need to come up with new ideas & concepts whereby waqf can be integrated into the financial sector

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QUESTIONS?

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