Waqf is a viable mechanism to address some of the financial or economic problems faced by the Muslim ummah. In addition to property endowment and management, cash waqf has evolved into a promising alternative to conventional asset management instrument. Waqf is considered as a sleeping giant of Islamic finance.

The September 26th issue of Islamic Finance News exposed the current trend in the waqf sector. It claims that the sector could be worth up to US$1 trillion globally. In Malaysia, waqf assets is estimated at around $325 billion, while in Egypt it is about $82 billion, and $267 in Saudi Arabia.

With this scale and potential, waqf is seen as a sustainable source of funding for many Islamic financial and charitable institutions, including commercial banks, charity, Islamic asset management and Islamic microfinance. The key features of waqf that provides sustainable and consistent flow of funding stream attract many institutions, including conventional fund managers and asset management firms.

However, most of waqf assets are either poorly managed or invested in low yield instruments. The regulatory structure is as poor and inappropriate. In many countries, waqf funding portfolio is eschewed towards property as high as 80%, with the remaining balance kept in cash or near cash assets.

This asset structure earns a meagre return. Property assets in the waqf funds basket have been generating unsatisfactory returns in the recent years, and the fact that investment in property and real estates has been problematic aggravates the problem.

The other problem is confused regulatory environment. Waqf is not treated as an economic instrument, but a religious entity per se. The main authority for waqf management in Malaysia and Pakistan, for example, are the state/provincial religious authority, with limited access to federal/central government oversight and integration with other national economic sectors. The regulation and legislation for waqf development is also less supportive. Many countries do not have a legislation or regulation for waqf.

Waqf in the Muslim world

Waqf has several names, as it is known in different parts of the Muslim world. In Turkey is known as vakfi, or foundation in the formal language of Turkish Republic legislation. In Pakistan, waqf is known auqaf or wakf, while in Malaysia or Indonesia it is called wakaf.

A report by Ernst & Young in 2010 provides some interesting findings on waqf. It reveals that waqf is becoming more prominent, especially in the Gulf Cooperation Countries (GCC) region. Among the key growth factors of the waqf sector are:

1. Increased in wealth: wealth in the GCC increased from US$0.8 trillion in 2003 to US$ 1.5 trillion in 2009
2. Public, private and government support: Corporate social responsibility disclosure requirements in many countries lead to increase in donations or charitable activities
3. Success of endowment model internationally has highlighted their greater potential, ie. IKEA corporate structure, Bill and Melinda Gates Foundation
4. Evolution of Waqf models: Innovation in cash or shares waqf model, including corporate waqf
5. Growth of Islamic finance globally.

EY also identified core funding base for most of awqaf and donations to many foundations or charitable organisations.

1. Low/middle income individual, who allocate small donations and on a frequent basis
2. High net worth individuals, who make a reasonably sized donations – usually provide large cash lump sums and other contributions, including property.
3. Corporations, generally provide large frequent donations for publicity or corporate social responsibility
4. Government institutions, contribute through entities such as Sovereign wealth funds (SWFs), government institutions and independent Waqf institutions

However, despite strong fundamentals, broad funding base and favourable drivers in waqf donation, the growth of waqf has not been supported by improvement in quality of waqf asset management. Ernst & Young’s report suggests that waqf sector management suffers from two primary inefficiency areas, namely performance inefficiencies and governance inefficiencies.

Performance inefficiencies constitute low historical returns and low asset class diversification. Waqf institutions currently have two main return-generating investment classes for wealthy investors namely real estate and cash Waqf.

Due to poor management of the real estate properties and the failure to convert the properties into viable and high income yielding assets, a large portion of the asset base is yielding a very low return. Moreover, the waqf institutions are finding it hard to identify appropriate investment opportunities for cash Waqf. As a result, many of the Awqaf institutions are placing a large amount of cash and other assets in low yield portfolio.

Waqf institutions also suffer from low diversification. This is evident at two levels; at the primary level, the real estate asset class constitutes a substantial part of the asset base of all Awqaf institutions, and at the secondary level, for the cash Waqf, the institutions are utilising very limited investment alternatives.

Governance inefficiencies make of high level bureaucracy and low operational and performance transparency in the part of waqf institutions and assets managers.

Further, Ernst & Young suggests that there is a high level of bureaucracy in some waqf institutions, especially in the management of waqf assets and with the disbursement of the proceeds to charitable causes. As a result, there is a substantial delay in identifying investment opportunity, making decision to invest and mobilising waqf resources.

Lack of transparency remains a feature common to almost all waqf institutions. There is no clear procedure to monitor the use of Waqf funds for operational expenses or disbursement to charitable/social causes. Performance also suffers from transparency issue, as it is difficult to find data on the returns generated by waqf institutions on their investments.

Emerging solution: corporate waqf

Cash waqf enjoys a growing interest recently, although it has once reached its peak during the Ottoman leadership of the Muslim world. Many initiatives emerge in Muslim countries. For instance, Malaysian government created a foundation Yayasan Waqaf Malaysia in 2008 dedicated to mobilize cash waqf at national scale. However this is a small step compared to the scale to mobilize zakat funds, especially from private individual and companies.

The number of program to mobilize waqf funds is less extensive compared to zakat fund raising. Zakat is obligatory, and possibly much easier to promote among business communities and their employees. Some companies even allocate certain percentage of company profits for zakat. It is compulsory for Islamic financial institutions to allocate 2.5% of their net profit for zakat. In 2011, the largest Islamic bank in Malaysia (MayBank Islamic) contributed MYR9.15 million (US$2.98 million) from its revenues to zakat.

Waqf does not have this privilege. The prevailing perception of many Muslims does not help as well; waqf is considered only as a piece of land endowed by a rich person to build a mosque, madrasah or grave yard. Waqf is not considered as an avenue for cash or other donation.

Corporate waqf is one of the emerging models to mobilise cash waqf from companies and private institutions. It suits many existing settings within corporations, ie. the model is suitable with philanthropic or CSR programs that many corporations already have. It allows companies to design the use of waqf funds (benefits from cash, property or other endowments) to the best use and maximum benefit of the corporation, ie. to serve its main stakeholders.

For waqf or charity organizations, corporate waqf also provide a sustainable and significant size of funds that may enable their programs to create significant impact.

There are few models currently emerged, notably the foundation form common in Turkey and corporation model developed in Malaysia. However, the basic structure for both models is similar and applied the corporate waqf structure, as indicated by Magda Mohsin (2008) from INCEIF University, Malaysia in a widely quoted conference paper.

Corporate waqf model: this structure or model is found in three countries, and perhaps most common in Turkey. Typically, a pious owner or executives (in the case of government linked companies in Malaysia) dedicated some or all of his shares in the company to a waqf institution, which is normally affiliated with or administered by the founder himself or his family. The model is as the following chart:

The waqf institution then conducts all social, educational or cultural activities that serve the purpose of its establishment. All these activities are funded by the proceeds received from the investments of the waqf funds or other assets. In some cases, the waqf institution is not just a ‘subsidiary’ or an affiliated institution, but also the shareholder of the corporations.

CSR model: another approach that may be worth exploring is mobilization corporate waqf through CSR activities of private companies and government linked corporations. CSR has become a more effective strategy for corporations to reach out the communities beyond their customers and display social character or humane face of the corporations.

As the case of Waqaf An-Nur in Malaysia will amplify, corporate waqf has gain further momentum with the formalization of corporate social responsibility into corporate strategy. As (listed) companies are required by most capital market authorities or by social pressure, to disclose and implement some kind of corporate social responsibility program, waqf emerges as a viable alternative. While zakat is consumptive in nature, waqf gives the benefactors a tool for long-term CSR program with a one-time endowment or fixed regular budget allocation.

However, the value of CSR funds allocated for waqf is not well documented. It may require further analysis to identify potential of waqf funds from CSR activities in the Muslim world. I will follow-up on this issue in another article, insha Allah. **

Courtesy:

Tamanni Views