Institutionalising Waqf for economic development

Waqf is among one of the Islamic institutions, and is believed to be the catalyst of economic development. It has become the foundation for the Islamic social security system in many parts of the globe. Waqf is well known for philanthropic endowments that have a significantly history; it is also very likely that Islam may have been influenced here by earlier civilisations. Ancient Mesopotamia, Greece, Rome as well as the pre-Islamic Arabs certainly knew of such endowments. Islamic Waqf was influenced to a considerable extent by these ancient institutions. Since the very early stage of civilization, the benefits from investment of Waqf assets through infrastructure development had been reaped through two main aspects, i.e utilization of Waqf infrastructure by the public and generation of profit from such an infrastructure.

Waqf is thus a significant institution in the Islamic social framework. It can harness the potential of selfless charitable giving in an effective way for better economic impact in the targeted social segments of society. Under Waqf, an owner donates and dedicates an asset (both movable and immovable) for permanent societal benefit. The beneficiaries enjoy the fruits of its uses and also income perpetually. In the contemporary application of Waqf, it can be established either by dedicating real estate, furniture or fixtures, other movable assets and liquid forms of money and wealth like cash and shares.

The institution of Waqf can fill the gap as a social finance institution by providing intermediation services for effective utilization of perpetual social savings. Flexibility in the rules of Waqf enables it to serve its beneficiaries directly or through financial institutions and to provide a wide range of social services. The institution of Waqf can help harness the potential of selfless charitable giving in an effective way for better economic impact in the targeted social sector of society. Under the Islamic social finance framework, this provides a useful vehicle to fill the gap in social intermediation.

One of the major features of Waqf is that it provides flexibility in fund utilization as compared to Zakah (alms-giving). Zakah funds must be utilised for specific categories of recipients. On the other hand, the institution of Waqf can be used to provide a wide range of welfare services to Muslims as well as non-Muslims, and the beneficiaries could also be other living beings. For instance, animal protection programmes and environmental preservation expenditures can be provided more flexibly through Waqf.

The institution of Waqf can transform social capital into social and public infrastructure. It provides a permanent social safety net in the case of perpetual Waqf to the recipients. Its institution complements the institution of Zakah because the government cannot take more than a prescribed portion of wealth as Zakah. Hence, the private establishment of Waqf helps in sharing the burden of the public exchequer and also provides a source of contentment for the faithful donor in following the Islamic directives on charitable spending. The institution of Waqf is also an excellent source of building infrastructure in Europe, America and Australia. In such countries, Muslims can share infrastructure like schools and hospitals built by the government for all citizens.

Compared to individual charity, the institution of Waqf is more effective in matching right targets with objective screening and providing sustainable sources of funds to the beneficiaries. It is worthwhile to note here that, in individual charity, rich people often face difficulty in finding the right targets because their extended families and social circles normally comprise people like themselves. Besides income support and cash transfers, poor people need training, capacity building and skills improvement to get out of poverty and achieve social mobility. Lack of finance and business training requires institutional support to unleash the potential of micro-entrepreneurs and to establish viable micro-enterprises.

The growth-oriented micro-finance programmes also need to provide training, insurance, and skills enhancement facilities. In this respect, the institution of Waqf can improve the chances of socio-economic mobility by providing a rather permanent, effective and efficient funding source for the health and education infrastructure. The increased and improved provision of education and health infrastructure funded through Waqf can enrich the income-earning potential of beneficiaries.

With regard to management, administrative and governance aspects of Waqf, many scholars also highlight the importance of its professional management and transparent administration for effective outcomes. There must be transparency and accountability between funding and implementing agencies for achieving the ultimate goal of poverty reduction. Professional business management will improve institutional service delivery, quality and effective delegation of responsibility so as to ensure and ease accountability. As such corporate structure is suitable for professional management and perpetuity; transparency is also vital in operations as well as in reporting so that the trust deficit is reduced between the donors and the Waqf administration.

The sustainability of Waqf institutions is another important aspect about the application of Waqf where sustainability is complimented by profitability. Seeking profits could create surplus which can help in expanding or at least sustaining the net of social services adequately and prudently. The preservation of benefits for the intended beneficiaries requires prudent management of the assets and efficiency in their development and investment. The importance of diversity in income sources for Waqf institutions. In making investments, it is better to engage quality investment management specialists to protect and achieve growth in the pooled funds over time.

The permissibility of making Waqf with such as cash and shares increases flexibility and widens participation. The Waqf can be used to establish new financial, commercial and social sector institutions. With large funds, it can also become a superstructure under which other commercial and welfare institutions can be established. In this aspect, scholars propose a Waqf-based Islamic microfinance institution and recommend that 'Shariah'-based banks can use income derived from late-payment penalties and other proceeds to establish these institutions. As commercial banks usually miss the poorer clients, cash Waqf-based Islamic banks can provide more compassionate and free services as the people establishing cash Waqf will not have as much target profit in mind as the investors in commercial banks; the Waqf management can use the funds in a more flexible way in financing social needs as well as providing benevolent loans to the ultra-poor. Hence, the cash Waqf model can be used to provide capital for the Waqf bank for the greater well-being of the humanity.

In developing countries, the masses of poor people do not have access to financial services either because of unavailability of supporting services or supply-side sluggishness. For commercial reasons, microfinance programmes usually miss the ultra-poor and hence commercial microfinance is ineffective in reducing poverty. The findings and data from countries with high penetration of microfinance reveal that poverty has not been reduced by much there. The ultra-poor sternly lack access to harmonizing services, which reduces the marginal benefit of access to finance relative to the moderately poor. So, this is the place where the institution of Waqf could support microfinance beneficiaries in enhancing the non-income aspects of their human capital potential and prosperity.

The purpose and incentive structures for charitable giving in Muslim societies are different from others which arise because of the distinct Islamic worldview and inspiration from Islamic sources of knowledge for social and moral attitudes to life. The institution of Waqf is an important one in the Islamic social framework and that it can harness the potential of selfless charitable giving in an effective way for better economic impact in the targeted social segments of society. In the light of various economic indicators, Waqf can therefore contribute to social finance as a matching alternative to government’s and private-sector financial institutions which cannot undertake all socially desirable projects because of lack of funds or commercial non-viability.

To sum up, charitable spending can be seasonal and impulsive and there is a need for accessible avenues to match targets and mobilize resources efficiently; sourcing philanthropic contributions online in cash, Waqf can be more efficient and bring more participation. It can also help in capitalizing on short-term impulsive empathetic spending on special occasions and events. In soliciting Waqf contributions or investments in Waqf certificates, it is necessary to highlight the positive externalities. For instance, it is important to highlight how much difference a contribution of USD 100 will make in funding one-year schooling of a certain number of children. Also it should have the scope to provide tax incentives to engage more people and corporations in establishing 'awqaf'. The Islamic Development Bank (IDB) can also encourage cash 'awqaf' with tax incentives to the endowers. Tax deductibility for corporations can be one such incentive that should be allowed by countries where tax incentives are yet to be allowed.

 Furthermore, tax rebates on income deducted at source of Waqf investments should be allowed to reduce the tax burden on Waqf. There must also be programmes to create social awareness for creating the right kind of Waqf at the right place. The laws related to Waqf need to be simplified and standardized globally. Bangladesh can work in collaboration with other countries where Waqf has been institutionalized to promote and protect of the wellbeing of all stakeholders.

The writer, a banker is a CERM from Frankfurt School of Finance, Germany and he can be reached at [email protected]