Integrating Waqf and Islamic Finance

1. Integrating Waqf and Islamic Finance Habib Ahmed Durham University

2. Agenda • Introduction • Waqf • Historical Evidence &Contemporary Status • Waqf and Financial Sector • Demand Side • Supply Side • Conclusion

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 economies in general and third sector in particular

4. 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

5. Agenda • Introduction • Waqf • Historical Evidence &Contemporary Status • Waqf and Financial Sector • Demand Side • Supply Side • Conclusion 5

6. Waqf-Introduction • Waqf—”Stand still, hold still, not to let go” (Maliki- habs) • Waqfestablished 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)

7. 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

8. Potential of Waqf in Enhancing Welfare • Type A—Not too common (tombs) • Type B—Waqf for family members • Type C –Mosques, graveyards, etc. • Type D—Waqf for enhancing welfare

9. 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 • Public utilities, education and research, health care, etc. • Property, cash, grains for seeds, etc.

10. 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 awqaf (more than the no. of mosques)

11. 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 • Lack of awareness that waqf can be productive asset/organization used for social/philanthropic purposes

12. 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 • Lack of supporting institutions • Many waqf assets lost

13. 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 13

14. Agenda • Introduction • Waqf • Historical Evidence &Contemporary Status • Waqf and Financial Sector • Demand Side • Supply Side • Conclusion 14

15. 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)

16. 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

17. 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)

18. Waqf Financing Through Sukuk • Cannot sell waqf asset—cannot issue ijarahsukuk • 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

19. 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

20. 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 20

21. 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

22. 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 conventional and Islamic trust services 22

23. Services Provided by Waqf Management Organization Services of Mutawalli Custody Services Estate Management Services Investment Management Services Advisory Services

24. 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 24

25. Advisory Services • Will writing • Advise on waqf/trust accounts/funds • Waqf formation • Investment advice

26. Agenda • Introduction • Waqf • Historical Evidence &Contemporary Status • Waqf and Financial Sector • Demand Side • Supply Side • Conclusion 26

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 • Guarantee

28. 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)

29. 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, qardhasan deposits, etc.)

30. 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)

31. 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 • Need to create a reserve for negative shocks 31

32. 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

33. 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

34. 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 Policy Benefits Retakaful Reserves Surplus

35. 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

36. 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

37. THANK YOU!