February 12, 2015

An Islamic social finance institution is essentially a non-profit or charity organization that seeks to operationalize the concepts of waqf, zakah, sadaqah and qard hasan. It has unique assets and liabilities, income and expenditure. By definition, an Islamic non-profit rules out return-seeking share capital. It creates assets through (i) waqf of “permanent” physical assets (ii) cash waqf (iii) qard hasan and (iv) sadaqa. The cost of various social and charitable activities are covered by revenues and cash flows generated from profitable employment of the assets and liquid funds mobilized through sadaqah. It may create and operate a separate Fund to mobilize zakah from the muzakki (those who are entitled to pay zakah) and distribute among the mustahiq (those who are entitled to receive zakah). As an amil-zakah the Fund may recover its cost of administration from the zakah proceeds mobilized (one-eighth at the maximum).

Masjid Sultan in Singapore

In what follows we argue in favor of developing governance and accountability standards for Islamic charity and non-profit organizations. The standards are needed to help donors in taking prudent and rational giving decisions and to promote public trust in such organizations. The standards are expected to foster fair and transparent philanthropic practices, promote ethical conduct and encourage altruism and benevolence.

The Securities Commission (SC) of Malaysia is now proactively promoting the idea of using a variety of sukuk to raise funds from the capital market for waqf development. It has identified a range of sukuk that may be used for waqf development, (e.g. sukuk ijarah, sukuk wakalah bi al-istithmar, sukuk murabaha, sukuk mudharabah, sukuk musharakah) similar to those used in Singapore and Saudi Arabia. The Securities Commission has also set several criteria for retention of a licensed or supervised intermediary to professionally manage waqf assets. Such an intermediary must (i) adopt international best practices and standards, (ii) have technical knowledge and resources, (iii) must be subject to strong governance providing adequate level of investor protection and (iv) must have an established technology infrastructure. The SC has also come up with a range of Principles (that encapsulate broad concepts underpinning good corporate governance and that the waqf institutions should apply) and Recommendations to be implemented by the waqf institutions.

Principle 1. Strengthening the Oversight of Waqf Institutions
Recommendation 1.1. The waqf trustee should establish clear roles and responsibilities reserved for them and those delegated to the waqf institutions,
Recommendation 1.2. The waqf trustee should ensure that the waqf institutions are governed by a satisfactory code of conduct.
Recommendation 1.3. The waqf trustee should oversee and monitor the business operations and conduct of the waqf institutions.
Recommendation 1.4. The waqf trustee should be given access to information and advice.

Principle 2. Strengthening the Effectiveness of Waqf Institutions
Recommendation 2.1. The waqf institutions should have the necessary expertise to manage waqf assets.
Recommendation 2.2. The waqf institutions should have a clear strategy in managing waqf assets.
Recommendation 2.3. The waqf institutions should have in place adequate internal controls including risk management and internal audit.
Recommendation 2.4. The waqf institutions should produce an annual report which is made public.

Principle 3. Strengthening the Engagement with Stakeholders
Recommendation 3.1. The Waqf Institution should continuously engage its stakeholders.
Recommendation 3.2. The Waqf Institution should establish a clear and effective communication policy to manage relationships with its stakeholders.

The suggested Malaysian framework is however, a departure from our earlier view of an Islamic social financial institution being a not-for-profit entity. The SC recommended framework seeks to create a new breed of profit-driven financial institutions as intermediaries that would “take over” the task of waqf management from the mutawallis, traditionally defined as trustee-managers. This may have its merits in the context of Malaysian and Singaporean laws that disallow private mutawallis and where the State Islamic Religious Councils are the sole mutawallis. However, in other regulatory regimes where private mutawallis are entrusted with development and management of the awqaf, a profit-seeking financial institution has a limited role restricted to infusion of private capital for waqf development only. A good example of such an institution is the Awqaf Properties Investment Fund managed by the Islamic Development Bank as also the newly established Indian entity, the National Waqf Development Corporation (NAWADCO).

There is a general consensus on several issues relating to use of private capital for waqf development.

One, private capital should be welcome only where not-for-profit and philanthropic capital is not forthcoming. The SC could have ushered in a new era by suggesting new, creative and innovative instruments to raise such funds. Unfortunately, the various sukuk structures suggested would facilitate raising profit-seeking capital alone. The mobilization of not-for-profit and philanthropic capital should never be relegated to a secondary role. Indeed, this would go against the spirit of the institution of waqf itself, which is to mainstream benevolent acts.

Two, the mixing of private capital with waqf capital is permitted only in a limited way, i.e. without diluting the “perpetuity” feature of awqaf assets. The use of Musharaka Bonds in Singapore by the Majlis Ugama Islam Singapura (MUIS) for development of Wakaf Syed Omar Ali Aljunied (Bencoolen)was largely welcome by observers, as this was a pioneering attempt to create a win-win situation for all stakeholders. (What the Waqf Boards in India may Learn from MUIS (Singapore)) As a result of the development, the waqf got a brand new mosque with doubled capacity and four stories of commercial properties to provide income for the mosques to maintain and run its operation. The permission by Shariah scholars to extend lease of waqf to 99 years was tolerated, since it facilitated a development that in the ultimate analysis, enhanced the benefits for the waqf designated beneficiaries. The latest development by MUIS – the Alias Villas – has redeveloped the Wakaf Al Huda bequeathed in 1905 (a land parcel approximately 30,450 square feet in size, currently housing a 110-year-old mosque), that essentially allows the mosque to be financially sufficient without requiring it to undertake major fundraising campaigns.

Indeed, every waqf development project that involves application of private capital must pass this litmus test – whether the project would lead to enhanced, sustained and significant benefits to designated beneficiaries of the waqf.