ISLAMIC ECONOMICS MEF 3043

1. ISLAMIC ECONOMICSMEF 3043 Topic 13 Voluntary Re-Distribution in Islam

2. LEARNING OUTCOMES In this topic students will know the following, Definition, role and function of Sadaqah Definition, role and function of Takaful Definition, role and function of Waqf as perceived in Islam The relation between Waqf and al‐Qard al‐Hassan The relation between Waqf and the secular taxation

3. CONTENTS The institution of sadaqah The institution of takaful The institution of waqf Concept of al‐Qard al‐hassan

4. RE- DISTRIBUTION OF WEALTH Non-Muslim (living in Muslim country) Compulsory Muslim (through halah means) Jizyah Kharaj Voluntary Compulsory Zakah Awqaf Takaful Sadaqah Others Continued from previous topic.

5. SPENDING IN THE WAY OF ALLAH (infaq fi sabil Allah) “And those whose wealth is a recognized right. For the (needy) who asks and the deprived.”(Al-Ma’arij, 70:24-25) Re-distribution of wealth in the form of sadaqah can be compulsory such as zakat, kharaj, jizya, ‘ushur; but it can also involve voluntary spending (infaq) that includes waqf, takaful and qard al-hasan.

6. Introduction to Waqf • When the following verse was revealed, it was reported that almost all of the sahabah gave away in charity whatever they owned: • “By no means shall you attain Al-Birr (righteousness, it means here Allâh's reward, i.e. paradise), unless you spend (in Allâh's Cause) of that which you love; and whatever of good you spend, Allâh knows it well” (Âl-'Imrân, 3:92) • Land, orchards, wells, utensils were given away as waqf for the benefit of others. • Thus waqf represents one of the most important processes of wealth planning in Islam, i.e. wealth purification, the purifying of wealth we own by giving it away in charity, for the sake of Allah (s.w.t.)

7. Concept & Implication Narrated Ibn 'Umar: “In the lifetime of Allah's Apostle , Umar gave in charity some of his property, a garden of date-palms called Thamgh. 'Umar said, "O Allah's Apostle! I have some property which I prize highly and I want to give it in charity." The Prophet; said, "Give it in charity (i.e. as an endowment) with its land and trees on the condition that the land and trees will neither be sold nor given as a present, nor bequeathed, but the fruits are to be spent in charity." So 'Umar gave it in charity, and it was for Allah's Cause, the emancipation of slaves, for the poor, for guests, for travelers, and for kinsmen. The person acting as its administrator could eat from it reasonably and fairly, and could let a friend of his eat from it provided he had no intention of becoming wealthy by its means.”(Bukhari 51:26, Muslim 13:4006). By stopping the original property and give away the fruit (proceeds) constitutes the basic concept of waqf, where the property will not be sold and remain intact in perpetuity with its proceeds continuously available for the beneficiaries. Waqf developed, not only as a wealth purification process, but also as a very important institution for economic and social development: e.g. the University of Al-Azhar (the oldest University in the world) was and continues to be based on waqf.

8. Definition of Waqf Legitimacy of Cash-Waqf Legal Conditions for Waqf Legal Condition for a Non-Muslim Classification of Waqf Property Ten Stipulations for the Creation of Waqf Modes of Investing and Financing Waqf Properties Historical Role of Waqf The Legal Framework for the Institution of Waqf

9. Waqf (pl. awqaf), or habs (pl. ahbas) means ‘to stop, to prevent, to restrain’ by detaining or preserving, in the form of sadaqah (charity), the use or disposition of property, for the purpose the property is dedicated, in the way of Allah (fi sabil Allah). Imam Abu Hanifah (r.a.) defined it as: “the detention of a specific property from the ownership of the waqif (founder of the waqf), and devoting its profit or proceeds in charity for the poor or other beneficiaries” Definition: The confinement of a private property, movable or immovable, by a founder(s) and the dedication of its usufruct in perpetuity to the welfare of society (to the public or the family). Legally, it involves the retention of an asset (maal) and preventing its consumption for the purpose of extracting its usufruct with the objective of charitable righteousness. Economically, a waqf diverts funds (and other resources) from consumption and invests them in productive assets that provides usufruct or revenues for future consumption by individual(s). Definition of Waqf

10. Generally, all schools of fiqhHanafi, Maliki, Shafi’i & Hanbali would agree upon immovable and movable properties as a subject matter of waqf including the creation of “cash waqf”. “By no means shall ye attain righteousness unless ye give (freely) of that which ye love; and whatever ye give, of a truth God knoweth it well” (Surah al-’imran 3:92) “It is not righteousness that ye turn your faces towards East or West, but it is righteousness to believe in Allah, and the Last Day, and the Angels, and the Book, and the Messengers, to spend of your substance out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves, to be steadfast in prayer and practice regular charity.” (Surah al-Baqarah 2:177) Legitimacy of Waqf & Cash-Waqf

11. Evidence from the Sunnah “Abu Huraira (Allah be pleased with him) reported Allah's Messenger (may peace be upon him) as saying: When a man dies, his acts come to an end, but three, recurring charity, or knowledge (by which people) benefit, or a pious son, who prays for him (for the deceased)” (Muslim, 13:4005) Majority of Muslim jurists understood that recurring charity serves as the basis of waqf. Legitimacy of Waqf

12. Legitimacy of Cash-Waqf • Abu Yusuf (d.798, student of Imam Hanafi r.a. d.767) did not approve movable property due to the perpetual nature of waqf assets, which may not be apparent if cash, although by the 8th century, Imam Zufar (d.158H), also a student of Imam Hanafi (r.a.) approved all movable properties, including dinars & dirhams as the object of waqf (waqf al-nuqud) or cash waqf, citing the act of Hafsah, the wife of the Prophet (s.a.w.s.) and daughter of `Umar al-Khattab (r.a.) whom dedicated her jewelry as waqf and lent it to her relatives and did not pay zakat on it (Ibn Qudamah, al-Mughni 6:235). • Hence, jurists approved cash-waqf, if the cash is use for loans or investment, i.e. mudharabah, and the revenue generated could be used for charitable purposes. • This reflected the view of Imam az-Zuhri (d.124H/741) who approved cash-waqf. Az-Zuhri was one of the foremost Sunni authorities on hadith and recruited into the administration of Umayyad Caliph Abd al-Malik ibn Marwan (646-705). Az-Zuhri was asked “If somebody found an endowment of 1000 dinars and gives the sum to his boy who is a trader to invest it in business and declares that the profit of the money will be given in charity to the poor and the relatives, does the founder have the right to use anything of the profit of the 1000 dinars? And if he does not assign its profit to the poor?” Az-Zuhri said “He does not have the right to use anything of it (i.e. in either case)” (Bukhari Vol.4, Bk.51, Ch.32).

13. Administration of Waqf as highlighted in the Hadith • The Hadith narrated ibn ‘Umar: In the lifetime of Allah’s Messenger (pbuh), ‘Umar gave in charity some of his property, a garden of date palms called Thamgh. ‘Umar, said, “O Allah’s Messenger! I have some property which I prize highly and I want to give it in charity.” The Prophet (pbuh) said, “Give it in charity (i.e. as an endowment) with its land and trees on the condition that the land and trees will neither be sold nor given as a present, not bequeathed, but the fruits are to be spent in charity.” So ‘Umar gave it in charity, and it was for Allah’s Cause, the emancipation of slaves, for the poor, for guests, for travelers, and for kinsmen. The person acting as its administrator could eat from it reasonably and fairly, and could let a friend of his eat from it provided he had no intention of becoming wealthy by its means. Bukhari, Vol.4, Bk.51, no.33

14. Hadith Highlights Perpetuity of the Waqf: once the property becomes a waqf it MUST NOT be sold or inherited or given away as a gift. Beneficiaries: it is up to the founder to specify his beneficiaries, either to the public or to his family. In this hadith Caliph ‘Umar devoted it to both i.e. WAQF MUSHTARAK (combined waqf). Administration of the waqf: the founder himself can administer his own waqf and at the same time he can benefit from its REVENUE in a reasonable manner as long as he lives.

15. Legal Condition for a Non-Muslim The Shafi’i school permitted the creation of waqf from a dhimmi (non-Muslim subject). The Shafi’is based their opinion upon the following hadith:The Prophet (s.a.w.s.) said “Allah does not deal unjustly with a believer about a good deed as he is given blessings for it in this world and is rewarded for it in the Hereafter; but the disbeliever is given in this life the reward for good deeds he has performed, and when he comes to the Hereafter, there is no good deed for which he can be rewarded." (Muslim) However, the Malikis stipulated that a waqf by a non-Muslim could not be in favour of a Mosque (Tauqir Khan, 2007:235).

16. Mixing of Cash Waqf • Fatwa from Kuwait Awqaf Public Foundation (web-site) “It is permissible to mix the cash-waqf of a non-Muslim with the cash-waqf of a Muslim as long as it satisfies with the legal condition for the creation of waqf”

17. Five Conditions for a Valid Waqf Founder (waqif) must be ‘aqil (sound mind), baligh (adult) and hurr (a free man/women) and capable to transfer the ownership to the ownership of Allah (s.w.t.) Dedicated property can either be movable or immovable Appoint a muttawalli (or nazir) either himself or someone else as the waqf manager (trustee) Beneficiaries can be specified by the founder in his waqfiah (waqf deed), it can be either his family members, society Creation can be either oral i.e verbal or written

18. Al-Mawquf ‘Alaihim (The Beneficiaries)Three types of Waqf Classification Waqf Khayri (public waqf) – is an endowment made by the founder to support the general good and welfare of poor and the needy in society. Al-waqf al-Dhurri, Al-waqf al-Ahli and waqf al-Awlad – are same and refer to family waqf. The founder endows his property to his children, grandchildren, relatives or other persons whom he specifies. If the beneficiaries not longer alive, then waqf property will be given for public welfare purposes. Encouraged by the Prophet (s.a.w.s.) Al-waqf al-Mushtarak (combined public and family waqf) – created by the founder to support both the public and his family.

19. Al Mawquf (Endowment Assets) Immovable and movable property – land field, farms, buildings, orphanages, guest-houses, mosques, schools, hospitals, bridges, roads are immovable.Movableare cattle and implements of animal husbandry, books, money, crops, weapons, and shares of company. Waqf sahih (sound waqf) and waqf ghair sahih (unsound waqf) - waqf sahih is the waqf upon mulk land i.e. privately owned freehold property over which the owner held complete rights of alienation.Waqf ghair sahih are state owned land and whose property belongs to the empire’s public treasury Direct and indirect waqfs – direct waqf is a waqf created to serve the people free of charge like mosque, schools, hospitals, libraries. The creation of indirect waqf is needed in order to cover running expenses, e.g. rental income from properties, to support the direct waqfs.

20. Classification of Waqf Property

21. Characteristics of Waqf Jurists agree that once a property is given away as waqf, it should be placed under 3 key restrictions; Irrevocability– important feature of waqf as there is a consensus among Muslim jurists that the founder cannot revoke the dedication if the property has already been declared as waqf. Perpetuity– waqf must be perpetual once it is created ensure no confiscation of the property either by government or by individual or institutions Inalienability– as property for waqf is transferred to Allah (s.w.t.) and it is in a form of “frozen property” and cannot be subjected to any sale, disposition, mortgage, gift, inheritance or any alienation.

22. Ten Stipulations for the Creation of Waqf

23. Ten Stipulations for Waqf • Ziyadah (increase) and Nuqsan (decrease) – the founder can increase the share of one beneficiary or decrease the share of another. e.g. Equal share for mosque and hospital. Hospital requires more funds, so he founder can change the revenue to increase it for the hospital and reduce it for the mosque. • Idkal (addition) and Ikhraj (removal) – add new beneficiaries and remove another - flexibility for public waqf. • I’ta (granting) and Hirman (dispossession) – allows founder to grant all or a portion of his waqf revenue to whomever he chooses for a specific period and dispossess. e.g. Revenue for a scholarship can be channelled to heart patient in hospital.

24. Ten Stipulations for Waqf • Taghir (replacement) and Tabdil (conversion).Taghir allows the founder to replace use of the waqf revenue, e.g. to purchase hospital equipment instead of paying for maintenance, while tabdil allows the founders the right to change the waqf property. e.g. convert unproductive agricultural land to residential housing to gain revenue. • Istibdal (substitution) and Ibdal (exchange). Ibdal is the actual selling of non-profitable waqf property, while Istibdal is the purchase of another property to replace the former waqf property.

25. Modes of Investing and Financing Immovable Waqf Properties Immovable property can be in the form of agricultural land, real estate and investment through direct rent; with idle waqf properties there are 4 modes of financing to convert unproductive waqf properties to productive ones: al-hikr(long lease right) a large lump sum is payable, equal to the value of the property, for a long term lease, with a subsequent nominal rent payable by the lessee who develops the property, but can also sell, transfer, gift,inherit/will or sub-lease it. The funds can be used to develop the same or another waqf site. al-ijaratain(the lease with dual payment) the title remains with the waqf and leased out for an amount equal to the value of the property with a subsequent nominal rent. Funds can be used to restore damaged property. al-istibdal (substitution) a waqf properties can be exchanged for new ones or renovate other old ones al-mursad - advanced lump sum paid by the lessee to the waqf with periodical rent post-reconstruction. Movable Waqf Properties renting (jewelry, weapons): by renting out waqf jewelry to relatives, the donor/trustee does not pay zakat on it. exchange (crops): an amount of seed can be declared as waqf to be used by farmers, whom should return the same amount upon harvesting, so that the perpetual nature of waqf is evident. mudharabah(cash money): Imam Zufar approved an-nuqud to be dedicated to waqf and invested with the return on investment to be used for pious purposes (cash waqf).

26. The Historical Role of Cash-Waqf • Subsequently, the cash-waqf played a significant role through its’ varied and wide contribution to the economic and social life of the community, especially under the Ottoman Empire (from the 15th century), and penetrated all areas of the economy, such as • the agricultural, • industrial and • social sectors • e.g. mosques, schools, libraries, water conduits, bridges, roads, ports, lighthouses, pavements, hospitals, soup-kitchens, places of lodging, foundations for farmers, educational activities, basic necessities for unemployed and emergency assistance • By the 18th century, according to the cash-waqf register, 6000 citizens or 10% of the population of Bursa borrowed from cash-waqf funds.

27. Concept of Insurance Insurance is a contract between two parties One parties agree to undertake the risk of another in exchange for consideration known as premium and promise to pay a fixed sum of money to other party on happening of an uncertain event or after expiry of ascertain The party bearing the risk is known as insurer The party whose risk is covered is known as insured

28. Type of Insurance • Life insurance • Life insurance provide monetary benefit to: • A decedent family or other designated beneficiary • May specifically provide for income to an insured person family, burial, funeral, and other final expenses 2. General Insurance • An insurance that protect you against losses and damages( unforeseen) other than those covered by life insurance

29. Type of General Insurance Vehicle insurance • Auto insurance protect you against financial loss if you have an accident • Auto insurance provides property, liability, medical coverage Health insurance • An insurance policy which is design to cover the cost of private • Medical treatment which can very expensive especially with hospitalization and surgery

30. Property Insurance • Provides protection against risk to property such as fire theft or weather damages • This include specialized forms of insurance such as • Fire insurance • Flood insurance • Earthquake insurance • Home insurance

31. Home insurance • Provides compensation for damages or destruction a home from disaster • In some geographical areas, the standard insurance exclude certain type of disaster such as flood and earthquake

32. Concept of Takaful • Takaful (Arabic ‘mutual provision of guarantees’): Islamic insurance. System based on the principles of solidarity and mutual assistance, under which the parties to the contract support each other when any of them suffers a loss (which means primarily a monetary compensation). • Takaful means a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose”

33. Types of takaful General Takaful • Creation of fund; • The operator will charge an upfront fee; • Segregation between the fund and the sponsors’ capital; • The investment will be done on the Mudarabah bases; the profits after deducting the operator’s portion will be pooled again in the fund; • Different reserves; • Surplus distribution

34. Family Takaful • Mudarabah (for long term investment) PA; • Tabarru (a small portion for providing Takaful cover) PSA; • Management expenses are deducted from PA; • Operational cost is • One who dies before maturity; • The total amount of installments and profit; • The outstanding installments that would be paid, if he survived till the end will be given to the heirs; Individual family takaful plans; Takaful plans for education; Health/medical takaful

35. One who lives until the maturity; • He will be paid (1) his outstanding amount in PA (2) the net surplus allocated allocated to him; One who cancels before maturity: • He will receive the balance shown in PA; • The installments credited into PSA shall not be refunded;

36. MECHANISMS OF INSURANCEAND TAKAFUL • The contract mechanism • Insurance contract is one of indemnity. It indemnifies the client from having to bear the costs of some mishap just because the client has paid a premium to the insurance company. • On the other hand takaful contract is not just between the company and the participant but it is a group of participants who have come together to donate (tabarru’) a portion of the contribution to the takaful fund which will be used to compensate any of the unfortunate participants who face a mishap or hazard.

37. MECHANISMS OF INSURANCEAND TAKAFUL • According to the working committee for the establishment of Islamic Insurance in Malaysia the important aspects of takaful operation are as follows: • The company does not assume the risk but it is the various participants who mutually cover each other. • The co. acts as trustee on behalf of participants to manage the operation of the takaful business. As such the co. does not have any right to the takaful benefits.

38. MECHANISMS OF INSURANCEAND TAKAFUL All contributions on the basis of donation or tabarru’ (premiums) paid by the participants will be accumulated in the Takaful Fund All payment of the takaful benefits (i.e. claims) will be paid by the Takaful Fund. At the same time money credited to the said fund can be invested in areas approved by the Shariah. Should there be a profit/surplus from the operation the co. will share it with the participants as capital providers (rabbul mal) according to the principles of mudharabah. According to the principles of mudharabah the party which acts as the entrepreneur (mudharib) is entitled to a share of the profit/surplus according to a pre-agreed ratio from the investment of the shareholders fund.

39. TAKAFUL MODELS Basically there are two types of products: family takaful (life insurance) and general takaful (general insurance): eg Takaful Malaysia and eTIQa. General takaful business mainly deals with specific contingencies such as fire, accident and theft. General takaful usually is renewable annually, e.g. motor vehicles. General takaful historically operated with the mudharabah model but most now use the wakalah model, or wakalah-waqf model (S.Africa or Pakistan). Family takaful does not insure the life of the person (unlike life insurance) but provides a lump sum payment to the family of the deceased. Family takaful can adopt the mudharabah model but most operators employ the wakalah model.

40. MECHANISMS OF INSURANCEAND TAKAFUL The relationship between the company and the participants can also be based on wakalah (agency) contract. The wakalah contract is more popular now. The co. takes the fee of managing the business upfront and will not share the underwriting surplus.

41. WAKALAH MODEL Under this model risk sharing is done on a co-operative basis amongst the participants while Takaful operator acts as a wakil or Agent and is entitled to charge a fee for managing the operations and a performance incentive for better performance but is not entitled to any share in underwriting profits which exclusively belongs to the participants. However, if the underwriting results show a loss the same is made good through Qard al-Hasan raised from shareholders fund. However, surplus distribution among the participants will give rise to the problem of inheritance in the event of demise of a participant.

42. Differences between Insurance and Takaful

44. QARD AL-HASAN Qard-al hasanis an act of charity and is an interest-free or gratuitous loan defined as the lending of a fungible commodity that could be weighed, measured and counted, and, as a consequence, involved the transfer of the ownership of the property and required the return of a similar commodity upon maturity: it is a consumption loan(Hasan, 2011:593/onw; Al-Zuhayli, 2003, 1:367/onw). ‘Ariyahdenoted a temporary, but gratuitous, loan of non-fungibles that only transferred the usufruct of the property: it is a simple loan of use(Hasan, 2011:593/onw; Majallah, art.804).

45. QARD AL-HASAN During the time of the sahabah, Az-Zubair (r.a.) would borrow on the basis of qard al-hasan rather than on the basis of wadiah (bailment), and be legally obliged to return the principal rather breach any trust associated with losing a deposit; “If somebody brought some money to deposit with him, Az-Zubair would say, ‘No, (I won’t keep it as a trust), but I take it as a debt, for I am afraid it might be lost’.” (Bukhari 4:358) Az-Zubair (r.a.) would then invest the borrowed money (nuqud) accepting the risk of ownership, often in property, and earning a lawful reward, which was not determined by the time value of money, and with full recourse to the individual in case of default (no corporate veil).

46. QARD AL-HASAN Nevertheless, morality in taking or lending a consumption loan (qard al-hasan) should be done with four principles in mind: principle of genuineness principle to contract principle of repayment principle of help

47. I. PRINCIPLE OF GENUINENESS Giving a qard al-hasan is an act of charity, and taking it should only be done only to meet the minimum wants. Taking loan without any valid reason is discouraged. Anas b Malik (r.a.) reported that the Messenger of Allah (s.a.w.s) said, “At night during which I was made to perform the mi’raj, I saw at the door of Paradise (the words) written, “A sadaqa is equivalent to ten like that (in reward) while lending has eighteen times reward”. I said, “Oh Jibril, what is the reason that lending is more excellent than sadaqa?” He said, “The beggar asks while he possesses it (money) while the one who demands a loan does not demand it but because of his need” (Ibn Majah:2431)

48. II. PRINCIPLE TO CONTRACT The principles of a qard, being a contract (‘aqd) is similar to other transactions, in that both parties must be baliqh, ‘aql and rashid (major with sound mound). Ijab (offer) and qabul (acceptance) of the qard must be clearly stipulated in the contract. Every act of lending and borrowing should be written down clearly. “Oh you who believe! When you contract a debt for a fixed period, write it down.”(Al-Baqarah, 2:282) The creditor & debtor should see that no injustice is being done to each other. Putting it in writing with witnesses removes doubts and avoids future disputes.

49. III. PRINCIPLE OF REPAYMENT A debtor must make every sincere effort to pay back his loan. Abu Huraira reported: the Prophet (s.a.w.s.) said, “The best of you is he who is the best of you in repayment of debt” (Ibn Majah:2423) Narrated Abu Huraira: The Prophet (s.a.w.s.) said, “Whoever contracts a debt intending to repay it, Allah will pay it on his behalf, and whoever contracts a debt intending to ruin it, Allah will ruin him.”(Bukhari, 3:572) Narrated Jabir ibn Abdullah: The Apostle of Allah (s.a.w.s.) would not say funeral prayer over a person who died while the debt was due from him. (Abu Dawud, 16:3337) Narrated Abu Musa al-Ash'ari: The Prophet (s.a.w.s.) said: After the grave sins which Allah has prohibited the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off, and meets Him with it. (Abu Dawud, 16:3336)

50. IV. PRINCIPLE OF HELP A qard al-hasan is free of interest and any benefit to the lender: “Allah has permitted trading and forbidden riba”(Al-Baqarah, 2:275) Taking a voluntary payment in excess of the principal sum is permissible: Narrated Jabir bin Abdullah: I went to the Prophet while he was in the Mosque. After the Prophet told me to pray two rakat, he repaid me the debt he owed me and gave me an extra amount. (Bukhari, 3:579)