The third Global Islamic Economy Summit (GIES) to be held in Dubai on October 11 and 12 will set a special focus on new forms of Islamic investments and the utilisation of Islamic funds for social and entrepreneurial development.
One particularly interesting plenary session will deal with the issue of Islamic charity funds or trusts (waqf) created by philanthropic giving in Muslim communities which experts say remain an underused social development instrument, even a “sleeping giant” in Islamic finance. These funds, in fact, contain significant assets, estimated by some to exceed a value of $500bn annually, capital that in its present form generates low returns and is far from having the desired social impact on the societies it is meant to support.
What is waqf? In its traditional form, it is a religious endowment that typically encompasses donating a building or a plot of land for religious or charitable purposes with no intention of reclaiming the assets. Everything that is built on such donated land can be used under usufruct rights or be leased to generate Shariah-compliant income from the charity fund or trust, and this can be used for constructing and operating schools, shelters, hospitals, mosques, roads and other public utilities.
That said, waqf can not only be used just in its traditional, real estate-related form, but also in movable form of cash, potentially creating wide-reaching opportunities for “social investment” within the Islamic finance industry through so-called cash-waqf or waqf istithmari, i.e. waqf assets that are intended for investment and can also contain assets from zakat collection.
Being traced back to the Ottomans, the concept re-emerged in present days in the 1980 and 1990, for example in form of certificates in Bangladesh where cash was collected from the rich and put into managed funds as registered entities from where gains were distributed among the poor as an alternative to the rather ineffective ways zakat was collected and distributed — but the concept was not widely used elsewhere at that time. The idea was to create “social savings” and transform them into social capital, increase social investment in the process and eventually develop a “social capital market” as a basis for social development for less fortunate parts of the population.
Later on, as other Islamic jurisdictions also developed or reinvented the cash-waqf concept, it was transformed further into halal investment schemes that involved shares, takaful, mutual funds, corporate investments and deposits, soon used by investors as niche products of Islamic finance all over the Muslim world across Southeast Asia, South and Central Asia, as well as the Middle East and Africa, with particular prominence in Iran, Iraq, Pakistan, Syria, Egypt, the GCC countries, Yemen, Turkey, Sudan, the Muslim Balkan states, Muslim communities in India, as well as in Malaysia. To some extent in Indonesia and among Singapore’s Muslims.
“It is about harnessing the abundance of underutilised capital for social development,” says Abdul Aziz al-Ghurair, chairman of Dubai-based Al Ghurair Foundation for Education, who will be a keynote speaker at GIES, adding that by adopting innovative investment models, waqf funds can yield far higher returns and thus are able to make stronger social impact.
The operational areas to put such returns to use are widespread. The Al Ghurair Foundation utilises them to provide high-achieving, but underserved Arab students with the opportunity to study at a top university. Other foundation use waqf income for healthcare and community development to make poverty alleviation efforts more effective in Muslim communities and advance wealth distribution to low-income people.
In the recent past, it has also started to be used as a support for underfunded business communities such as startups and entrepreneurs in the Muslim world. The Dubai government, in its aim to create an Islamic economy ecosystem, is now channelling income from Islamic endowments as venture capital to assist Emirati entrepreneurs and youths in launching their own businesses. This August, the world’s first waqf crowdfunding platform, WaqfWorld.org, was launched in Malaysia.
So, there is no doubt that waqf in its various modes, but particularly in the flexible from of cash-waqf, can indeed be a powerful social investment tool. There is plenty of potential for that large pool of waqf capital that currently still remains underserved, including waqf properties that sit idle or are underutilised, and unmanaged social funds kept somewhere without unlocking their yield potential.
But it should also not be forgotten that there are challenges in unleashing the full potential of waqf. These include the fact that particularly the concept of cash-waqf, or the general investment potential of waqf funds or assets, needs better promotion in order to increase contributions and its appeal for investors. As in other fields of Islamic finance, there is also still a lack of regulations and standardisation with regards to waqf-related investments, let alone best practices related to waqf fund management. Furthermore, waqf investment products need to be developed that are competitive in their fee structures, and project costs need to be kept in line with the social purpose of a waqf investment to prevent a fund’s capital erosion.
