Integrating Waqf and Islamic Finance

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Integrating Waqf and Islamic Finance

• Habib Ahmed
• Durham University

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Agenda

• Introduction
• Waqf
• 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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Agenda

• Introduction
• Waqf
• Historical Evidence Contemporary Status
• Waqf and Financial Sector
• Demand Side
• Supply Side
• Conclusion

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Waqf-Introduction

• WaqfStand 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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WaqfImportant features

• Good objective or birr good intention
• as if ownership belongs to God
• Waqf is usually perpetualbut 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 Beneficiaries Religious Philanthropic/ Social
Family A B
General Public C D

• Type ANot too common (tombs)
• Type BWaqf for family members
• Type C Mosques, graveyards, etc.
• Type DWaqf for enhancing welfare

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WaqfHistorical 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 Khattabland of Khaybar
• Uthman bin Affanwell 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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WaqfHistorical Experience (2)

• At the dissolution of Ottoman empire¾ 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 TimesStatus (1)

• Due to different reasons, awqaf have degenerated
  nowboth 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 TimesStatus (2)

• In practicemany 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

• Zarqaother 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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Agenda

• Introduction
• Waqf
• 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 sector
• Demand side (input to waqf)
• 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 assetcannot issue ijarah sukuk
• Sukuk al IntifaaZamzam 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)

• SingaporeMusharakah 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 problemgovernments have got
  involved (Ottomans in 1826)
• Not a solutionin most cases, government
  involvement has made the problems worse
• Inefficient/Passive Management
• GovernmentOfficials and bureaucrats
• Privateindividual 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
• Objectivityadministration without any bias

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Corporate Trust Management Organizations-Types

• Two major types
• Banks and financial institutions
• Departmentsome banks offer trust services
• Subsidiarymany 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 Malaysiaprovide 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

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Waqf and Supply of Financial Services

• Social Role of Islamic financial sector
• Islamic firms are not only about fulfilling
  Islamic contractssocial justice and benevolence
• Socio-economic aspects can be fulfilled by
  introducing waqf-based organizations
• Microfinancefinancial 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
  intactsteps 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
Shareholders Funds
Wakalah Fee
Contribution
Initial Donation to Waqf
Waqf Fund
Profit Share
Profit Share
Profit
Management Expenses
Investments
Profit/Loss of Shareholders
Reserves
Retakaful
Policy Benefits
Surplus
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Guarantees

• Guarantees are important for small and medium
  enterprises (SMEs) to get financing
• Shariah issueguarantees are gratuitous
  contracts
• Some Shariah 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 countriesunproduct
  ive 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!