Integrating Waqf and Financial Sector by Habib Ahmed

Habib Ahmed

Agenda

Introduction

Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side Supply Side

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

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

Agenda

Introduction

Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side

Supply Side

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

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)

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

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

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

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

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

Agenda

Introduction

Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side

Supply Side

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

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

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

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

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.

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

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

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

Services Provided by

Waqf

Management

Organization

1.

Services of

Mutawalli

2.

Custody Services

3.

Estate Management Services

4.

Investment Management Services

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)

Advisory Services

Will writing

Advise on

waqf

/trust accounts/funds

Agenda

Introduction

Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side

Supply Side

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

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

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

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

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

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)

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

Share of Surplus (100%)

Contribution

Profit Share Profit Share

WakalahFee

Initial Donation to Waqf

Waqf

-based

Takaful

Model

Waqf Fund

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

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