Integrating Waqf and Islamic Finance

  Integrating Waqf and Islamic Finance Habib Ahmed Durham University

Agenda

   Introduction

   Waqf _

  Historical Evidence &Contemporary Status 

  Waqf and Financial Sector _ Demand Side _ Supply Side

   Conclusion

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

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

Agenda

   Introduction

   Waqf _

  Historical Evidence &Contemporary Status 

  Waqf and Financial Sector _ Demand Side _ Supply Side

   Conclusion

  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)

  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

Welfare Type Religious Philanthropic/ Beneficiaries

  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

  (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.

  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 _rd 1/3 or more of cultivable land _th

  

  At the beginning of 20 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

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

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

  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

Agenda

   Introduction

   Waqf _

  Historical Evidence &Contemporary Status 

  Waqf and Financial Sector _ Demand Side _

  Supply Side 

  Conclusion

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)

  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

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)

  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

  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

  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

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

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

Services Provided by Waqf Management Organization

  1. Services of Mutawalli

  2. Custody Services

  3. Estate Management Services

  4. Investment Management Services

  5. Advisory 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) Seek legal counsel when needed

Advisory Services

   Will writing

   Advise on waqf/trust accounts/funds

   Waqf formation

   Investment advice

Agenda

   Introduction

   Waqf _

  Historical Evidence &Contemporary Status 

  Waqf and Financial Sector _ Demand Side _

  Supply Side 

  Conclusion

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

  

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)

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.)

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)

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

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 Share of Surplus _(100%) Contribution Profit Share Profit Share ^{Wakalah Fee Initial Donation to Waqf}

  Waqf-based Takaful Model Waqf

  Fund Waqf

  Fund Participants Participants

  Shareholders’ Funds Shareholders’ Funds

  Investments _{Profit/Loss of} Shareholders ^{Managemen t Expenses}

  Reserves Retakaful ^Policy _Benefits Profit 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

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