Integrating Waqf and Islamic Finance
Habib AhmedDurham University
2
AgendaIntroductionWaqf
Historical Evidence &Contemporary Status
Waqf and Financial Sector Demand Side Supply Side
Conclusion
3
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
4
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
55
AgendaIntroductionWaqf
Historical Evidence &Contemporary StatusWaqf and Financial Sector
Demand Side Supply Side
Conclusion
6
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)
7
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
8
Potential of Waqf in Enhancing Welfare TypeBeneficiaries
Religious 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
9
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.
10
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)
11
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
12
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
1313
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
1414
AgendaIntroductionWaqf
Historical Evidence &Contemporary Status
Waqf and Financial Sector Demand Side Supply Side
Conclusion
15
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
16
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)
17
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
18
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
19
2020
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
21
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
2222
Corporate Trust Management Organizations-TypesTwo 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
23
Services Provided by Waqf Management Organization
1. Services of Mutawalli2. Custody Services3. Estate Management Services4. Investment Management Services5. Advisory Services
24
Services of Mutawally
24
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
25
Advisory Services
Will writing Advise on waqf/trust accounts/funds Waqf formation Investment advice
2626
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
27
28
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)
29
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.)
30
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)
3131
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
32
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
33
Share of Surplus (100%)
Contribution
Profit Share Profit Share
Wakalah Fee
Initial Donation to Waqf
34
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
35
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
36
37
THANK YOU!