WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia

1. WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia “Beyond Charity: Harnessing Waqf for Economic Prosperity” 5 JUNE 2014 LE MERIDIEN JAKARTA, INDONESIA

2. WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia Islamic Philanthropy: Role of Waqf in Poverty Alleviation and Socio Economic Development Role Players: Dr. H.M. Anwar Ibrahim,Head, Executive Council, Indonesian Waqf Board, Prof. Datuk Dr. Mohd. Azmi Omar,Director General, Islamic Research and Training Institute (IRTI) Moderator: Mr. ZeinoulAbedienCajee,Founding CEO, Awqaf South Africa

3. WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia Dr. H.M. Anwar Ibrahim Head, Executive Council Indonesian WaqfBoard

4. WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia Prof. Datuk Dr. Mohd. AzmiOmar Director General Islamic Research and Training Institute (IRTI)

5. Islamic Philanthropy: Role of Waqf in Poverty Alleviation and Socio Economic Development Prof. Dato’ Dr. Azmi Omar Director General Islamic Research and Training Institute A Member of Islamic Development Bank Group Presentation at WIEF-IDB AWQAF ROUNDTABLE Jakarta 5 June 2014

6. Objective • How to utilize waqf funds more effectively in poverty alleviation and socio-economic development • The role of waqf institutions in assets redistribution, capacity building and wealth creation

7. CONTENTS • Defining Waqf • Motivation For Waqf • Popularity Of Waqf • Waqf Types • Waqf As The Basis Of Islamic NPOS • Integrating Philanthropy With Microfinance • Deprived Families Empowerment Program, (Deep) Palestine • Fa’elKhair Program, Bangladesh

8. Defining Waqf • A perpetual endowment, also known as Habs • Setting aside certain assets by the donor (wāqif) and preserving it so that benefits continuously flow to a specified group of beneficiaries or community • Corpus of waqf may be real estate or cash • Waqf has unique characteristics distinct from zakāh and ordinary sadaqah

9. Motivation For Waqf • “You shall never attain piety until you give from what you love” (Al-Quran 3:92) • The Prophet (peace be upon him) said: “When a person dies, all his good deeds cease except for three: an ongoing act of charity, beneficial knowledge and a righteous son who prays for him.” (Al-Tirmidhi, n.d.: 3/660; Al-Darimi, 1986: 1/148)

10. Popularity Of Waqf • Assigned to Waqf were: • Three-quarters of all the arable land in the former Ottoman Empire • Half of the lands in Algeria, under French occupation in the 19th Century • One-third of the lands in Tunisia in the same period

11. Waqf Types • Direct Waqf: donated asset may be directly used for fulfillment of the intended community need • Investment Waqf: donated asset may be put to productive use so that the earningsthere from are used for fulfillment of the intended community need; involves a careful investment decision so that earnings from the asset(s) are maximized

12. Waqf Types • Religious Waqf: Building and maintenance of Masjids, religious schools • Philanthropic Waqf: Addressing social needs of the poor and underprivileged - General Purpose Waqf - Restricted Purpose Waqf • Family Waqf: Descendants of the wāqif have a first right on the benefits and revenues of the Waqf

13. Waqf Types Cash Waqf: • Cash is endowed and the earnings generated out of the investment of the cash funds are used to fulfill the intended social needs • More efficient in mobilization as cash donation can take any value • More efficient in application of waqf resources allowing for a rational selection of projects to maximize returns while keeping risks at acceptable levels

14. Waqf Types • Corporate Waqf: endowment of corporate stocks and securities - “Active” owner of corporate assets • Irsad: Endowment by Sovereign - Property not owned - Designated beneficiaries

15. Waqf As The Basis Of Islamic NPOs • Institutionalization of charity • Professional management • Combine other forms of charity:zakāh, sadaqah • Can undertake a range of financing and investment activities to maximize earnings (very similar to a for-profit corporation) with a benevolent motive

16. Waqf As The Basis Of Islamic NPOs • Need for a progressive interpretation of fiqhi rules • Undue rigidity may not be necessary as fiqh of waqf is analogy-based • Undue rigidity may not be desirable as it may curb benevolent action; Waqf is driven by benevolence • The fundamental purpose of waqf is to provide benefits

17. Integrating Philanthropy With Microfinance

18. Integrating Philanthropy With Microfinance • Islamic Microfinance Program creates a Zakah Fund with contribution from muzakki; • Program facilitates Waqf of physical assets as well as monetary assets. The physical assets are used to facilitate education and skills training. The monetary assets may be in the form of a cash waqf, or simply as ordinary sadaqah; • Program carefully identifies the poorest of the poor and the destitute who are economically inactive and directs a part of zakah fund towards meeting their basic necessities as grant, seeks to provide a safety net;

19. Integrating Philanthropy With Microfinance • Program provides skills training to economically inactive, utilizing community-held physical assets under waqf; • Beneficiaries graduate with improved skills and managerial acumen; • Beneficiaries are formed into groups with mutual guarantee under the concept of kafala; • Financing is provided on the basis of qardhasan to the group; also to individuals backed by guarantee under the concept of kafala;

20. Integrating Philanthropy With Microfinance • Group members pay back and in turn, are provided higher levels of financing; • Guarantee against default by the group is provided by the Zakah Fund and actual defaulting accounts are paid off with zakah funds; this is indeed the distinct feature of this model; • Group members are encouraged to save under appropriate micro-savings schemes; • Groups members are encouraged to form a Takaful Fund to provide micro-insurance against unforeseen risks and uncertainties resulting in loss of livelihood, sickness and so on

21. Integrating Philanthropy With Microfinance Real-Life Examples from IDBG Experiments: • Deprived Families Empowerment Program, (DEEP) Palestine • Fa’elKhair Program, Bangladesh

22. DEEP, Palestine • Started In 2008 as 3 years pilot program funded by IDB and executed by UNDP in partnerships with the Palestinian Authority. • Package of financial and non-financial (PSSN) services. • Started by providing the MFIs capacity building services (intensive training, opening new branches, marketing campaign, office equipment) in order to enable them to implement the Islamic Microfinance in Palestine. • First revolving fund (Apex fund) in Palestine that finance the MFIs through soft loans. • Targeted 4500 household poor families through in kind grants to establish new businesses. In terms of sector targeting, 37% were in the agriculture sector, 34% in the trade sector, 21% in the services sector, and only 8% were in the industrial sector. 54% of the enterprises created under DEEP generated a new job opportunity.

23. DEEP, Palestine • Demand on Islamic Microfinance in Palestine: requested amount estimated to reach US$ 203 Million in two years. MFIs used Murabaha mainly, Istisnaa, and Musharaka to target individuals in the 1st phase of DEEP. • In the next phase DEEP plans to target about 10,000 clients through Islamic microfinance tools. • DEEP will finance the MFIs by Mudaraba instead of soft loans to encourage them to do business with the poor and with the vulnerable people. • It will end with International Waqf fund (US$ 500 Million capital) to provide for a safety net as well as other components of the IsMF package.

24. Fa’elKhair, Bangladesh A single donation of SAR500 million or USD130 million placed with the Islamic Development Bank (IDB) with an express intention that the same would be used for the benefit of victims of cyclones and natural calamities in Bangladesh Two main components: • The Fa’elKhair project with a corpus of USD110 million involved the construction of school-cum-cyclone shelters. • The Fa’elKhair microfinance program with a corpus of USD20 million, which aims to rehabilitate and restore livelihoods of cyclone victims; registered as the Fa’elKhair Waqf under the provisions of Waqf Ordinance 1962.

25. Fa’elKhair, Bangladesh • Three-year (extendable) agreements with four NGOs – Islami Bank Foundation (IBF), Muslim Aid, Voluntary Organaization for Social Development (VOSD) and BRAC that would implement the Microfinance program. • Microfinance intervention involves provision of interest-free (qard) microloans as well as training to the cyclone victims in order to help them make up for their losses and live a decent life.

26. Fa’elKhair, Bangladesh • In 2012 the implanting NGOs start implementing their exit plan by repatriating one third of the Program funds back to the Fa’elKhairWaqf • Repatriated funds put in Islamic investment avenues generating returns in the range of ten percent per annum that could now be used to cover the administrative costs of the Fa’elKhair Rehabilitation Program • An excellent example of how a benevolent cash donation could be used to engineer a waqf and how high administrative costs of a poverty alleviation program (with finance as well as skill enhancement inputs) may be absorbed by returns generated on a waqf dedicated to the poverty alleviation objective

27. Lessons and Policy Implications • Waqf law should provide a comprehensive definition of waqf that includes both permanent and temporary waqf. However, it must be recognized that once the waqf has been declared, it is irrevocable. It must explicitly cover various types of waqf: family and social waqf, direct and investment waqf, cash waqf, and corporate waqf.

28. Lessons and Policy Implications • The legal framework must clearly articulate the permanent nature of waqf arising from the principle of “once a waqf, always a waqf”. At the same time, it must clearly recognize the importance of sustaining and enhancing the benefits flowing out of the waqf, this being the ultimate purpose of the act of waqf. This is possible only when the importance of the development of waqf is clearly recognized. An undue emphasis on preservation (e.g. constraints on leasing) would lead to neglect of developmental possibility with private participation. Similarly, an undue emphasis on development, to the extent that it results in loss of full or partial ownership of asset to private developers would dilute and vitiate the very concept of waqf. The regulatory framework must seek to strike a balance between concerns about preservation and development.

29. Lessons and Policy Implications • The legal framework must not put undue restriction on creation of new waqf. There is no reason to disallow individuals from making waqf beyond one-third of their assets, since fiqhi rules permit this unless made on a person’s deathbed. Legal requirements that make the process more difficult, e.g. approval from the head of the state, are both unnecessary and undesirable. A simple process of registration with the regulatory body is both desirable and adequate. While obstacles to waqf creation must be avoided, the legal framework should actually encourage creation of new waqf by minimizing financial and non-financial costs of waqf creation and management.

30. Lessons and Policy Implications • Awqaf in general, have fallen behind common trusts and other forms of organizing charitable and not-for-profit activities in terms of responding to evolving societal needs. Creation and management of waqf is a relatively more complex and demanding process and involves additional financial and non-financial costs. Incentivizing waqf in a manner similar to secular trusts and other forms of not-for-profit organizations, e.g. tax rebate on contributions for the donor/ endower would make the system both efficient and fair.

31. Lessons and Policy Implications • The legal framework should not restrict making a waqf only to Muslim individuals and should permit both non-Muslims and institutional waqif as long as the purpose of waqf is religious or charitable. • The legal framework should not restrict the definition of the endowed asset to immovable tangible assets such as real estate, but should also explicitly recognize movable, financial and intangible assets, e.g. cash, stocks, bonds and financial securities, transportation vehicles, rights on land and building, rights of leasing, rights of intellectual property. Given the many benefits of cash and corporate waqf, law must explicitly provide a framework for them including their investment dimension.

32. Lessons and Policy Implications • The institution of family waqf must be revived. Since the distinction between family and public waqf is largely a matter of the nature of beneficiaries, the law must provide for an explicit basis of distinction. For example, where more than 50 percent of the net available income of a waqf property is exclusively applied for religious and charitable purposes, such a waqf may be deemed to be a public waqf. Similarly, endowments where more than 50 percent of the net available income is meant for the waqif’s descendants, such a waqf may be treated as family waqf.

33. Lessons and Policy Implications • Waqf is originally an institution, and is always meant to be in the voluntary sector, with management of waqf entrusted to private parties. However, the state has often sought to play a role in the ownership and management of awqaf, at times governed by motives to expropriate and at other times, by a need to curb corrupt practices of private trustee-managers. Whether ownership and management of awqaf should be in private hands or with the state, has no clear answer. There seems to be some positive evidence that the state can indeed play the role of an efficient manager of awqaf. Contrary to general belief, state control may not necessarily hamper creativity and innovation in awqaf development (e.g. corporate waqf as well as cash waqf in Malaysia and large-scale development of existing awqaf in public-private mode in Singapore).

34. Lessons and Policy Implications • Where waqf management is in private hands, the state agency as regulator should clearly stipulate and clear eligibility criteria for a mutawalli or nazir or trustee-manager not only covering aspects of integrity and trust-worthiness but also professional competence. Given that the individual or institution so nominated meets the criteria, the regulator must respect the expressed intention of the waqif or endower. Laws must clearly articulate the responsibility of waqf management, which should not only emphasize preservation and protection of waqf assets, but also their development. The responsibility should also include transparent and honest reporting of financials. Laws must clearly stipulate the method of determination of remuneration of managers, sufficiently incentivizing sound and professional management of waqf assets.

35. Lessons and Policy Implications • There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, and transparency. The measures must act as effective deterrent against further acts of apathy, neglect and misappropriation. At the same time, the state should not be allowed to wield absolute power to engage in irrational or whimsical action against the mutawalli. Instances of unfair and unlawful action by the state are numerous, as are cases of corrupt mutawallis. There needs to be effective checks and balances in the law against wrongful acts both by the state as well as the private mutawallis. Power has a tendency to corrupt and the possibility of such action can significantly increase the non-financial cost of creating new waqf. Endowers are likely to seek alternative forms of organizing their charitable activities if there is a possibility of undue state interference in the management of the endowed assets or outright usurpation of the endowed assets by the state.

36. Lessons and Policy Implications • The law must explicitly prohibit the waqf asset from being used as a mortgage, confiscated, given away, sold, inherited, exchanged or being alienated into any form of right. The waqf asset may however be exchanged as an exception to the above general rule, when this is deemed to be in the public interest. Such exchange would however, require prior permission from the regulator with additional conditions that the same is (i) necessary or beneficial to the waqf; (ii) consistent with the objects of the waqf; (iii) against another asset of equal or higher value;(iv) and with due respect to the inalienability of religious awqaf.

37. Lessons and Policy Implications • Waqf development must be a mandatory obligation of the waqf management. Innovating financing methods may be employed that bring in new waqf capital for development of existing awqaf. Innovative methods may also be employed that facilitate private-public partnerships (e.g. involving issue of sukuk) that involve transfer of rights to lease as distinct from ownership rights to private financing entities for finite, yet long enough period to provide a fair return on investment capital. Legal constraints motivated by preservation concerns, such as those on long-term leasing of awqaf assets should be removed.

38. Lessons and Policy Implications • Financial penalties, especially when these are expressed in absolute numbers tend to lose their effectiveness as deterrents with time. These should either be subjected to continuous revision or be linked to the quantum over misappropriation. Physical punishments are potentially more effective.

39. Lessons and Policy Implications • It is compulsory to invest waqf assets, be they real estate or moveable assets like cash. Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created. The assets purchased using the waqf investment returns do not form part of the waqf and therefore, may be resold unlike the original assets that have been given as waqf. Further, the conditions given by the waqif with regard to the investment of the waqf and/or that the returns from investment are to be spent on specific areas, is also binding. It would be rational to seek risk minimization through diversification or avoidance of high risk investment avenues. Risk minimization may however not be sought if the purpose of the waqf itself is to engage in specific risky ventures.

40. Thank you Contact Details: P.O.Box 9201, Jeddah 21413 Kingdom of Saudi Arabia Email: azmiomar@isdb.org Together We Build a Better Future

41. WIEF-IDB AWQAF ROUNDTABLE Jakarta, Indonesia End Of Session

42. 10th World Islamic Economic Forum 28- 30 October 2014 MadinatJumeirah Conference Centre, Dubai Thank You, See you in Dubai!