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As a financial charitable institution, Waqf has been the most significant contributor to social services in the Muslim world. Although the concept of waqf or endowment predates Islam, the comprehensive regulatory framework that promotes, guides, protects and fosters the development of the institution of waqf is a contribution from the Islamic law. However, the challenge of under-developed waqf land and abandoned waqf property that provides little to no benefit to their rightful beneficiaries requires urgent consideration. In fact, it is an opportune moment for Islamic financial institutions to contribute to the socio-economic development and gain points on the value-based intermediation scorecard through the financing of waqf assets throughout Malaysia. Which is in the case of Malaysia, current statistics show that Malaysia has approximately 13,400 hectares which are left idle, unproductive and require funds for the restoration process.
Waqf is an endowment of property, cash or land for purposes that are in agreement with the principles that has existed since the beginning of Islamic law. Prophet Muhammad (PBUH) encouraged his companions to contribute or create waqf (endowment) as a technique to support future generations by encouraging contemporary society to contribute: an indication that sustainable finance concepts have been advocated in the earliest tenets of Islamic philosophy. Waqf is established by withholding immovable and movable properties to perpetually spend its revenue or benefit on fulfilling public or family needs, depending on the preferences of and conditions set by the founder. Once the property is created as waqf, it can no longer be gifted, inherited or sold. The waqf property should be placed under three key restrictions: irrevocability, perpetuity and inalienability.
Underdeveloped waqf property in Malaysia becomes a burden to future generations as significant portions of land are untouchable once designated as waqf. Maintenance strategies are required as a key component of property endowments to ensure that the sanctity and objective of the waqf is achieved perpetually. Through an effective strategy, waqf activity may provide significant impact to the beneficiary community as it enhances economic growth, provides education and promotes social development as it fulfils the spiritual objectives of the founder of the waqf.
Some of the primary challenges in the development of productive waqf assets are:
- Under-developed waqf property and land
Most waqf founders tend to opt for the a ‘top-of-mind’ approach in designating waqf property as mosques, schools and cemeteries. Unfortunately, few endowments end up generating revenue for the waqf and its beneficiaries. With limited cash flow, these waqf assets make little progress often standing still in time – certainly not the intention of the perpetuity principle of waqf!
- Limited Islamic financial sector participation
This may be due to a number of reasons, including issues of legality of ownership in waqf land, lack of expertise in understanding the legal and/or Shari’ (Islamic legal) implications of waqf development, inadequate cash-flow plans or revenue forecasting, etc. Islamic financial institutions must ensure the protection of their deposits and value generation for their shareholders, all whilst managing risk. Hence, it is possible that the risk of financing such projects may simply be too high.
- Perceived inadequacy in transparency and governance of waqf
The high financial risk is often supported by a perceived lack of transparency and governance in managing waqf assets. Waqf founders for example, tend to create waqf assets informally, driven by the intention to do good and reap rewards in the after-life with little to no knowledge of the waqf requirements and potential. State Islamic religious councils (SIRCS) as waqf administrators, face problems in the registration of waqf land titles, where the land sometimes cannot be identified and registered.
What are the potential approaches to encourage the financing of waqf land in Malaysia?
- Understanding Waqf potential
On the back of the challenges mentioned earlier, it is suggested that understanding and awareness of waqf be increased substantially. An appreciation for the potential of waqf should be gained as it is an extraordinary technique for the provision of social services through the generations. The Ottoman State in the 18th century for example, had more than one-third of total land under waqf management and was the primary vehicle for financing. Once it is understood that previous waqf contribution provided even consumption goods such as water provision, using freight ships and providing scientific education. The possibilities for waqf development are immense. However, its potential may only be achieved through understanding the conceptual framework and the many practices over the centuries. Some examples of opportunities that could be explored within the Malaysian context is by building affordable residential towers or even university hostels that may support university funding and converting old waqf assets into multi-purpose building with commercial rental value.
- Innovative finance solutions
The risk of providing finance to waqf entities is often high as they have weak or no financial plans and strategies for the future generation of revenue. In order to bridge the gap, a potential solution is that advisory, consultation and capacity building be provided to waqf entities to explore the possibilities. In addition, preparing these entities for creditworthiness will instill confidence for banks to provide financing for waqf development.
The trust in waqf management, in Malaysia and abroad, is arguably at an all-time low. The use of innovative technology including blockchain and smart-contracts is expected to reduce the challenges in transparency and disclosure. For larger and more complex waqf projects, BOT (Build, Operate & Transfer) or even ROTs (Rehabilitate, Operate & Transfer) may be coupled with Islamic finance solutions that utilize more sophisticated capital market approaches such as hybrid waqf-sukuk as a source of funding.
- Rejuvenation of Waqf Assets
Another approach to financing would be to rejuvenate waqf assets similar to the successful case of Majlis Ugama Islam Singapura (MUIS) which their objective is to accelerate waqf development throughout Singapore. The subsidiary is managed by qualified professionals from the industry and operates with an asset management approach, focusing on building a portfolio of waqf properties in strategic locations, providing high rental returns.
In summary, the recent revival of waqf is based on its contribution to socio-economic development in the past. The development of waqf property in Malaysia requires a multi-pronged approach to deal with its limitations. For Islamic finance to support financing waqf property development and rejuvenation, capacity building and advisory is required for waqf entities and regulators. A comprehensive approach to waqf development can only be achieved if regulators, financial institutions, Shariah advisors and legal practitioners come together to outline a strategy and action plan in the short to medium term.
By Asst. Prof. Dr. Ziyaad Mahomed
*This article first appeared in New Straits Times on 18 March 2019.