Integrating Waqf and Islamic Finance

Habib AhmedDurham University

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AgendaIntroductionWaqf

Historical Evidence &Contemporary Status

Waqf and Financial Sector Demand Side Supply Side

Conclusion

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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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AgendaIntroductionWaqf

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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Potential of Waqf in Enhancing Welfare

Type

BeneficiariesReligious Philanthropic/

Social

Family A B

General Public C D

Type A—Not too common (tombs) Type B—Waqf for family members Type C –Mosques, graveyards, etc. Type D—Waqf for enhancing welfare

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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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Fatawa on Waqf Zarqa—other than the concept of birr, everything

in waqf is under the realm of ijtihad The waqf deed is binding The organizational format and governance

structure is up to the founder In certain cases waqf can be exchanged/

substituted (istibdal) Default of waqf (in case of loss of waqf deed,

absence of beneficiaries, etc.)—used for poor and needy

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AgendaIntroductionWaqf

Historical Evidence &Contemporary Status

Waqf and Financial Sector Demand Side Supply Side

Conclusion

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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 sector1. Demand side (input to waqf)

2. Supply side (output from waqf)

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 awqaf

properties 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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AgendaIntroductionWaqf

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 waqf intact—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 FundWaqf Fund

ParticipantsParticipants

Shareholders’ Funds

Shareholders’ Funds

Investments

Surplus

Profit/Loss of Shareholders

Management Expenses

ReservesRetakafulPolicy

Benefits

ProfitProfit

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 waqf and 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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THANK YOU!