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

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

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

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

Important features

  Waqf—

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)

Historical Experience (1)

  Waqf—

  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

  during Contemporary Awqaf

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

  during Contemporary Awqaf

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

  Waqf of movable properties (books, cash, etc. )

  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

  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.

Agenda

  Introduction Waqf

  Historical Evidence &Contemporary Status Waqf and Financial Sector

  Demand Side Supply Side Conclusion

  

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)

  

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 Came up with innovative financing mechanism (Built- Operate-Transfer) 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

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

  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 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

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)

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)

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 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

  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

  Special Features for W-MFI: 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 Participants

  Shareholders’ Funds Investments

  Management Expenses 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

  QUESTIONS?