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 socioeconomic 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
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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 integrated in the financial sector to enhance growth and welfare
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Agenda
Introduction Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side Supply Side

Conclusion

Waqf-Introduction
WaqfStand

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)
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WaqfImportant features
Good

objective or birr good intention as if ownership belongs to God Waqf is usually perpetualbut 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
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WaqfHistorical 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 Khattabland of Khaybar Uthman bin Affanwell in Madinah Public utilities, education and research, health care, etc. Property, cash, grains for seeds, etc.

Thereafter many different kinds of waqf were created

WaqfHistorical Experience (2)

At

the dissolution of Ottoman empire 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)
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Awqaf during Contemporary TimesStatus (1)

Due

to different reasons, awqaf have degenerated nowboth 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

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Awqaf during Contemporary TimesStatus (2)

In

practicemany 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

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Contemporary Fiqh of Waqf

Zarqaother 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 waqfmoveable item, benefit, money, sukuk, shares, services. Waqf can be permanent and temporary Waqf can be limited to time specified by founder
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Agenda
Introduction Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side Supply Side

Conclusion

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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
1. Demand side (input to waqf) 2. Supply side (output from waqf)

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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 Cannot sell waqf asset
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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 Came up with innovative financing mechanism (Built-Operate-Transfer)

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Waqf Financing Through Sukuk

Cannot sell waqf assetcannot issue ijarah

sukuk Sukuk al IntifaaZamzam 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
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Waqf Financing Through Sukuk (2)

SingaporeMusharakah 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

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Waqf Management
Only

one dishonest mutawalli needed to loose assets

To tackle this problemgovernments have got involved (Ottomans in 1826) Not a solutionin most cases, government involvement has made the problems worse

Inefficient/Passive

Management

GovernmentOfficials and bureaucrats Privateindividual mutawalli

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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 Objectivityadministration without any bias
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Corporate Trust Management Organizations-Types

Two major types:
Banks

and financial institutions

Departmentsome banks offer trust services Subsidiarymany 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
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Example: Amanah Raya Malaysiaprovide both conventional and Islamic trust services

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Services Provided by Waqf Management Organization

1. 2. 3. 4. 5. Services of Mutawalli Custody Services Estate Management Services Investment Management Services Advisory 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) Seek legal counsel when needed
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Advisory Services
Will writing Advise on waqf/trust accounts/funds Waqf formation Investment advice

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Agenda
Introduction Waqf

Historical Evidence &Contemporary Status

Waqf

and Financial Sector

Demand Side Supply Side

Conclusion

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Waqf and Supply of Financial Services

Social Role of Islamic financial sector

Islamic firms are not only about fulfilling Islamic contractssocial justice and benevolence

Socio-economic aspects can be fulfilled

by introducing waqf-based organizations

Microfinancefinancial services for the

disadvantaged Takaful Guarantee

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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 interestfree loans

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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 (waqf certificates, qard hasan deposits, etc.)

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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 mudarabah)
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W-MFI: Special Features for

Operations
To

keep the corpus/capital of the waqf intactsteps 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

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Risk-reducing Reserves

Takaful reserves

Contributed by beneficiaries Used in case of default due to unexpected reasons Contributed by depositors Used to maintain competitive returns Contributed from the surplus of MFI (no dividend distribution) Used in case of negative shock

Profit-equalizing reserves

Economic capital reserves

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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 Mirco-takaful

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Waqf-based Takaful Model

Share of Surplus (100%)

Participant s
Wakalah Fee Initial Donation to Waqf Profit Share Profit Share

Contribution

Shareholders Funds

Waqf Fund

Profit Investment s

Manageme nt Expenses
Profit/Loss of Shareholder s

Policy Benefits

Retakaful Surplus

Reserve s

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Guarantees
Guarantees are important for small and

medium enterprises (SMEs) to get financing Shariah issueguarantees are gratuitous contracts
Some Shariah scholars have allowed fees for

providing guarantees under certain conditions

Waqf based institutions can provide

guarantees, mainly to the small and medium enterprises

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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 whereby waqf can be integrated into the financial sector
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QUESTIONS?

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