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The role of Awqaf in support of small and medium scale projects

The role of Awqaf in support of small and medium scale projects. Dr. Hisham Dafterdar, February 2010. Awqaf in Muslim history.

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The role of Awqaf in support of small and medium scale projects

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  1. The role of Awqaf in support of small and medium scale projects Dr. Hisham Dafterdar, February 2010

  2. Awqaf in Muslim history • The history of awqaf dates back to the early days of Islam and is rich with impressive achievements, contributing to economic growth and development and supporting the poor and enhancing social welfare. • Historically awqaf has been an integral part of the economies of Muslim nations. Awqaf was the Main provider of many services that the modern welfare state today strives to offer. • Awqaf is now recognized as an important sector contributing significantly to the country’s social and economic development

  3. Definition of Awqaf • Awqaf is an Islamic concept of transferring ownership of assets by a person to be held in trust for the purpose of using it or its usufruct for a general or a specific charitable purpose. • Charitable purposes are not limited to a finite list and may include the relief of poverty, the relief of the needs of the aged, the relief of sickness or distress, the advancement of religion, education and other purposes that enhance the quality of life.

  4. Awqaf is a socio-economic sector • Awqaf organisations, by mandate, are Islamic not-for-profit entities that represent a vast array of economic, social, and cultural activities. Together they are a major force in the national economy. • The importance of the sector is seen in terms of the huge assets it controls, in its social expenditure, in the number of people it employs, and in its significant contribution to the economy. • Awqaf organisations have the capability to raise funds. Awqaf annual fund raising is estimated between US$10 – 15 billion, about 60% of which comes from individuals and 40% from business corporations and other institutions. • Receipts of zakat and the popular rise of cash waqfs (waqf al-nuqud)are additional sources of funding for awqaf operations and investments.

  5. The importance of the SME sector • In most economies, SMEs account for more than 95% of the company population, and more than 60% of the workforce and between 50% and 75% of the GDP. • SMEs are efficient and more flexible in their processes and more responsive in their approach to changing market conditions. • SMEs assist in local and regional development. • SMEs help achieve fair and equitable distribution of wealth by regional dispersion of economic activity. • SMEs have a positive effect on trade balance since they generally use indigenous and locally available raw materials. • SMEs assist in fostering a self-help entrepreneurial culture. • SMEs offer growth potential and some grow into large scale enterprises.

  6. The nexus between awqaf and SMEs • Awqaf, as an Islamic institution to combat poverty and enhance welfare has a developmental role to boost the economy and compliment government’s social initiatives. • Awqaf organizations have the mandate and the means to play an effective role in the development of the SME sector. • SMEs represent vehicles for awqaf to deploy stagnant capital and earn good return in diversified projects that comport with awqaf purposes. • Awqaf and the SME sector can complement each other. SMEs are means to increase employment and reduce poverty. Awqaf can provide capital and financial support.

  7. Constraints and challenges facing SMEs Financial constraints • Inadequate fixed and working capital. • Inadequate access to finance. • Lack of collateral security. • Lack of financial planning. • Lack of corporate governance Non-financial constraints • High mortality rate. • Weak business management and marketing skills. • Lack of necessary training and development of skilled manpower. • Lack of access to improved technology. • Problems in achieving economies of scale in procurement of inputs, such as equipment, raw materials and consulting services. • Low productivity and inability to achieve economies of scale. • Inadequate quality control. • Tough competition from large enterprise and global markets. • Lack of succession planning.

  8. Awqaf support of SMEs Financial support • Participatory support • Concessionary support • Project financing • Ancillary financial services (e.g. guarantees, takaful insurance, financial planning) Non-financial support • In-kind asset contribution • Advisory services • Training

  9. Modes of financing awqaf projects Suitable Shariah compliant modes of financing awqaf projects: • Istisna’a • Murabaha / instalment sale • Mudarabah • Leasing • Diminishing musharaka • Indefinite musharaka • Long lease and Hukr modes • B.O.T.

  10. Awqaf project-selection criteria • The project must comply with Shariah and conform to awqaf ethos and objectives. • The partners should be qualified, experienced and trusted people with business acumen. • The project should bring a socially useful product to the marketplace or provide a needed community service. • The project should have a high developmental and social impact such as poverty reduction. • The project should develop, utilize and support local skills and capacity building. • The project should be technically sound, economically and financially viable, environmentally safe, and socially desirable.

  11. Awqaf private sector partnerships (APP) • Partnership with the private sector is a fast track to bring a project to the market. • Partnership with the private sector works like an extension of awqaf’s own facilities and resources. • Partnership with the private sector can assist awqaf to deal with the complexities of project development and management. • Partnership with the private sector provides opportunity for awqaf to focus on their core social services.

  12. Build-Operate-Transfer The B.O.T. Concept • BOT is a means of developing awqaf properties through self-financing of projects. • BOT represents an opportunity for a waqf to generate cash through leasing of land to a developer for a specific period. • The BOT model offers flexibility, lower project establishment cost, risk mitigation, process expertise. • At the end of the concession period, the project is transferred to awqaf to become a permanent source of revenue.

  13. Restrictions imposed by awqaf • Shariah compliance in all operations and financial dealings by the SME. • Restriction on the admission of new partners and investors. • Structuring or restructuring of the company’s vision, mission, objectives and operations to fit with awqaf’s purposes and principles. • Restrictions related to the pledging of assets. • Fiduciary and moral responsibility of the SME management to use available resources efficiently in pursuing business and awqaf’s objectives. • Imposition of strategies to protect awqaf assets in the event of business failure or other matters. • Awqaf are less likely to become involved in later financing rounds.

  14. What are the benefits Benefits to awqaf: • Small projects are ideal for awqaf because they require less capital and are easier to manage. Average capital requirements are in the range of $250,000 - $500,000. • Small projects can be established and put into operations quickly. • Small projects help diversification and spread of risk. • Small projects provide awqaf with a steady source of income and cash flows. • Awqaf investment in small projects can be aligned to awqaf’s objectives of community development through job creation and economic output. • Awqaf investments promote Islamic values and Shariah compliance of these projects.

  15. What are the benefits Benefits to SMEs: • Awqaf’s sponsorship is most useful in achieving a higher profile for the project and enhances the corporate image of the SME. • Awqaf’s emphasis on capital preservation and asset protection eliminate risky speculation and assist capacity building. • Awqaf can increase the success of the business by providing assistance with enterprise development and access to finance. An SME tied to awqaf has access to funds and assistance not available to competitors of equal size. • Awqaf can assist in growth to move from micro to small, to medium and even to large scale enterprise. Many of today’s big corporations started as small family businesses. • Awqaf’s investments in SMEs increase awareness of awqaf work and stimulate integration between economic development and social welfare.

  16. What are the benefits Social and economic benefits • Awqaf investments in SMEs play a pivotal role in the health of the economy. They create an environment of innovation, help diversify economic activity, help stimulate private ownership and entrepreneurial skills, and enhance inter-regional decentralization. • SME’s are a source of affordable consumer goods and services for the poor. They represent a countervailing force against the economic hegemony of large enterprise. • Partnership with awqaf works to involve the private sector in the social safety net system for the country. • Awqaf investment provides seed capital to develop the SME sector and give the entrepreneurial poor access to finance. • Awqaf can also play an intermediary role as they can assist Islamic banks and financial institutions in doing their corporate social responsibility by financing these projects. • Awqaf’s small projects create employment opportunities and help the entrepreneurial poor to generate income and alleviate poverty. • SMEs provide potential for women and disadvantaged groups to gain access under better conditions to productive and sustainable work opportunities.

  17. Sample SME projects • Furniture manufacturing. • Metal working / machining • Garment making. • Agri-food processing • Cattle, poultry, and dairy farming • Hand made carpet weaving • Wholesale and retail trade. • Building materials manufacturing, e.g. bricks, tiles, etc. • Health and community service • Property and business services. • Accommodation, cafes and restaurants. • Transport and storage.

  18. Conclusion and recommendation Conclusion Awqaf are a major force in the national economy and can play a vital role in alleviating poverty by creating employment and fostering development. The integration of awqaf and small business is an effective way to overcome the constraints and challenges faced by SMEs as this relationship grows and develops to become an integral part of the Islamic financial system. Recommendation Awqaf organisations should develop strategies for investment in SME projects that include training and incubator facilities for start-up businesses. Governments should create an enabling environment for awqaf SMEs by relaxing certain laws and developing simplified taxation regime that is conducive to promote innovation, diversification, and growth of the sector. Islamic banks and financial institutions should be encouraged to make awqaf-SME project financing part of their corporate social responsibility by providing special credit lines and risk-sharing schemes for awqaf SME projects.

  19. Thank you Contact details: Dr. Hisham Dafterdar Unicorn Investment Bank PO Box 31700 Kingdom of Bahrain Phone: +973 17566000 www.unicorninvestmentbank.com

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