Habib Ahmed Durham University

Habib Ahmed Durham University

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

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 3

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 4

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

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) 6

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 7

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. 8

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 (more than the no. of mosques) 9

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 10

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 11

ContemporaryFiqhof 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 Waqf can be limited to time specified by founder 12

Agenda Introduction Waqf Historical Evidence &Contemporary Status Waqf and Financial Sector Demand Side Supply Side Conclusion 13 13

Integrating Waqfwith 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) 14

Waqfand 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 15

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) 16

WaqfFinancing 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 17

WaqfFinancing 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 18

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 19 19

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 20

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 21 21

Services Provided by WaqfManagement Organization 1. Services of Mutawalli 2. Custody Services 3. Estate Management Services 4. Investment Management Services 5. Advisory Services 22

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 23 23

Advisory Services Will writing Advise on waqf/trust accounts/funds Waqf formation Investment advice 24

Agenda Introduction Waqf Historical Evidence &Contemporary Status Waqf and Financial Sector Demand Side Supply Side Conclusion 25 25

Waqfand 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 26

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) 27

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.) 28

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) 29

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 30 30

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 31

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 32

Waqf-based TakafulModel Share of Surplus (100%) Participants Contribution WakalahFee Initial Donation to Waqf Shareholders Funds Waqf Fund Profit Share Profit Profit Share Investments Management Expenses Policy Benefits Retakaful Reserves Profit/Loss of Shareholders Surplus 33

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 34

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 35

QUESTIONS? 36