Integrating Waqf and Financial Sector by Habib Ahmed

Habib Ahmed
Durham University

Agenda
Introduction
Waqf
Historical Evidence &Contemporary Status
Waqf and Financial Sector
Demand Side
Supply Side
Conclusion
2

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
5
5

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
1/3 rd or more of cultivable land
At the beginning of 20 th 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
10

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
11

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
13
13

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 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
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
25
25

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
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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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Waqf-based Takaful Model
Share of Surplus
(100%)
Participants
Contribution
Wakalah Fee
Initial Donation to Waqf
Shareholders’
Funds
Waqf Fund
Profit Share
Profit
Profit Share
Investments
Management
Expenses
Policy
Benefits
Retakaful
Reserves
Profit/Loss of
Shareholders
Surplus
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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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QUESTIONS?
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