Transcript Microfinance: Islamic Perspectives

Integrating Waqf and
Islamic Finance
Habib Ahmed
Durham University
Agenda
Introduction
 Waqf



Waqf and Financial Sector



Historical Evidence &Contemporary Status
Demand Side
Supply Side
Conclusion
2
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
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



Waqf and Financial Sector



Historical Evidence &Contemporary Status
Demand Side
Supply Side
Conclusion
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
Potential of Waqf in Enhancing
Welfare
Type
Religious
Philanthropic/
Social
Family
A
B
General Public
C
D
Beneficiaries




Type A—Not too common (tombs)
Type B—Waqf for family members
Type C –Mosques, graveyards, etc.
Type D—Waqf for enhancing welfare
8
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.
9
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)
10
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
11
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
12
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
Agenda
Introduction
 Waqf



Waqf and Financial Sector



Historical Evidence &Contemporary Status
Demand Side
Supply Side
Conclusion
14
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.
2.
Demand side (input to waqf)
Supply side (output from waqf)
15
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
16
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)
17
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
18
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
19
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
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
21
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
Services Provided by Waqf
Management Organization
1.
2.
3.
4.
5.
Services of Mutawalli
Custody Services
Estate Management Services
Investment Management Services
Advisory Services
23
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
24
Advisory Services




Will writing
Advise on waqf/trust accounts/funds
Waqf formation
Investment advice
25
Agenda
Introduction
 Waqf



Waqf and Financial Sector



Historical Evidence &Contemporary Status
Demand Side
Supply Side
Conclusion
26
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
27
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)
28
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.)
29
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)
30
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
Risk-reducing Reserves

Takaful reserves



Profit-equalizing reserves



Contributed by beneficiaries
Used in case of default due to unexpected reasons
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
32
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
33
Waqf-based Takaful Model
Share of Surplus
(100%)
Participants
Wakalah Fee
Contribution
Initial Donation to Waqf
Waqf
Fund
Profit Share
Profit Share
Profit
Investments
Policy
Benefits
Retakaful
Surplus
Shareholders’
Funds
Reserves
Management
Expenses
Profit/Loss of
Shareholders
34
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
35
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
36
THANK YOU!
37