Integrating Waqf and Islamic Finance

(1)

Integrating

Waqf

and

Islamic Finance

Habib Ahmed

(2)

Agenda



Introduction



Waqf

 Historical Evidence &Contemporary Status



Waqf

and Financial Sector

 Demand Side  Supply Side

(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

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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

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Agenda



Introduction



Waqf

 Historical Evidence &Contemporary Status



Waqf and Financial Sector

 Demand Side

 Supply Side

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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

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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)

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Potential of

Waqf

in Enhancing

Welfare

Type

Beneficiaries 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.

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Waqf—

Historical Experience

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 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.

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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

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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

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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

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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,

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Agenda



Introduction



Waqf



Waqf

 Demand Side

 Supply Side

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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

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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

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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

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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

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Waqf

Financing Through

Sukuk

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 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

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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

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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

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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}

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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

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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)

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Advisory Services

 Will writing

 Advise on waqf/trust accounts/funds  Waqf formation

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Agenda



Introduction



Waqf



Waqf

 Demand Side

 Supply Side

(27)

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

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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

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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}

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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

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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

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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)

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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

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Share of Surplus (100%)

Contribution

Profit Share Profit Share Wakalah Fee

Initial Donation to Waqf

34

Waqf

-based

Takaful

Model

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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

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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

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