‫التمويل االجتماعي اإلسالمي‪:‬‬

‫الواقع وآفاق املستقبل‬

‫‪The Integration of Waqf Product‬‬

‫‪Through Islamic finance Industry‬‬
‫”‪“Review of the Literature‬‬

‫‪Dr. Abdulbari Mashal‬‬

‫‪Dr. Tawfik Azrak‬‬

‫الراعي الرسمي‬ ‫اجلهة املنظمة‬ ‫الشريك املصرفي الرسمي‬

‫الراعي الشريك‬ ‫الشريك اإلعالمي‬ ‫اجلهة الداعمة‬ ‫الشريك املعرفة‬

 • Introduction: Islamic Finance Industry

➢ Overview of Islamic Finance Industry

Islamic economics and finance derive from immutable principles rooted in the rulings of the
Shariah legal code. Unlike legal systems that are limited to secular aspects of daily life, Shariah
jurisprudence does not distinguish between religious and other aspects of life, including
transactions falling under either the political, economic, or social sphere (Mu’amalat) (Hussain, et
al., 2015). In Islamic economics, productive human activity is mandatory. Islam does not endorse
every human wish, and it prohibits on moral grounds activities related to tobacco and other drugs,
alcohol, pork products, gambling involving money and non-money assets (Maysir), speculation,
pornography, and armaments and destructive weapons (Hussain, et al., 2015). The two
fundamental principles of Islamic Finance are the sharing of profit and loss and the prohibition of
the collection and payment of interest by lenders and investors. However, Islamic finance industry
has grown rapidly over its age. Its activities of competition and effects on financial markets are
getting more and more recognition worldwide and also importantly for its impact on economic
development. Islamic finance industry has been accommodating growing demand for Shariah-
compliant finance for more than 40 years and now reached $2.2 trillion with hundreds of
specialised institutions located in more than 60 countries (reuters, 2017). Finally, its known that
Islamic finance industry consists of two parts, profit-based sector which consists of banking,
capital market, and takaful. And charity-based sector which consists of Waqf, Zakat, and Sadaqah.

1- Profit-Based Sector Components of the Islamic Finance Industry

As it’s known that Islamic finance industry is

similar to its counterpart (conventional financial
system) in certain aspects. It consists of Islamic
banking, Capital market including sukuk market,
and takaful as the main component of Islamic
finance industry. The pie chart shows that with
its percentage.
1- Islamic Banking
Islamic banks dominate the Islamic financial
industry, despite continued growth in sukuk and
other shariah-compliant financial assets such as
Islamic funds and takaful. Islamic banking assets
account for about 76 percent of total assets of the Islamic finance industry, while the other sectors
represent almost 24 percent of the global IFIs. At the end of 2013, there were about 410 Islamic
banking institutions worldwide. In recent years, Islamic banking has spread to Africa, Europe, and
North America: Islamic banks are in operation in countries such as Denmark, France,
Luxembourg, Nigeria, South Africa, Switzerland, and the United Kingdom. In addition, a number
of large European and American banks (such as Citibank and HSBC) are operating Islamic
banking windows to take advantage of this fast-growing sector (Hussain, et al., 2015). The Islamic
banking sector has grown at an annual rate of about 17 percent in the period 2009–2013, even
allowing for the post-2008 global crisis period. According to a Reuters (2017), Islamic bank assets
reached $2.7 trillion while total Sharia-compliant assets are expected to grow to $3.5 trillion by
2021. At mid-2013, Islamic banking had reached a systemic stage in nine countries. According to
IFSB’s banking assets data, these countries include Iran and Sudan (both with 100 percent Islamic
banking), Bahrain, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates.
In a 2013 survey of central banks by the Islamic Financial Services Board (IFSB) and the Islamic
Research and Training Institute (IRTI), similar countries reported that Islamic banking assets
comprised 10 percent or more of their overall banking assets. According to the survey, of the
institutions offering Islamic banking services, nearly 70 percent are “standalone” Islamic banks,
while the remaining 30 percent are conventional banks offering Islamic banking services through
“windows.” Except in Iran and Sudan, Islamic banks operate side by side with conventional banks,
increasing the competitive intensity in the banking industry (IFSB, 2018).

2- Islamic Capital Market

The very initial entrants in the field of Islamic finance were Islamic savings and investment
companies at small level. Mit Ghimar Bank (1961) in Egypt is earliest example of this. A very
early review and identification of shariah compliant stocks was undertaken in 1983 by Bank
Malaysia Berhad., which lead to introduction of a centralized process of such identification of
Securities Commission of Malaysia in June 1997. According to IFSB (2018), Islamic capital
markets saw positive developments during 2017 in all segments: the sizeable growth of the sukuk
market was driven by large sovereign issuances, the Islamic banking sector’s share of the industry
is expected to decline over coming years, to 64% by 2022 from 73% in 2016, as a result of the
larger role played by other Islamic finance sectors and asset classes. The Islamic asset management
sector has the highest potential despite its volatile nature, given that many Islamic funds are
invested in equities and so are easily impacted by market movements. The reasons for the sector’s
high expected growth, to US$ 403 billion by 2022, are the same as for Islamic banking, and growth
will focus on the largest markets: Malaysia, Saudi Arabia and Iran. Malaysia, IFDI’s most
developed market, has released a blueprint specifically for this sector and is working to benefit
from the common mutual demand for Islamic and SRI funds. However, sukuk has significant
growth potential as there is still high demand for this Sharia compliant debt instrument, particularly
from investors with an Islamic mandate. This is best illustrated by the low yields for Saudi Arabia’s
latest international and domestic sukuk issuances. Successful corporate issuances such as Saudi
Aramco’s could encourage issuance by other corporates. Meanwhile, those that have previously
issued sovereign sukuk are planning to return to the market, such as the UK’s planned issue after
Brexit in 2019, which could raise up to GBP 1 billion. In addition, Africa has the highest potential
for further sovereign issuance given recent announcements by North African nations and issuance
by countries such as Nigeria (reuters, 2017).
3- Takaful (Islamic Insurance)
The concept of takaful, or Islamic insurance, where resources are pooled to help the needy does
not contradict Shariah. The very first Takaful company was established in 1979 – the Islamic
Insurance Company of Sudan. Today there are more than 28 registered Takaful companies
worldwide writing takaful directly and 10 more as Islamic windows or marketing agencies placing
insurance risk with conventional and takaful companies. Takaful industry in the Middle East is
under-developed compared to other markets such as Malaysia. The more successful companies in
the Middle East have grown at 10% p.a. whereas in Malaysia the rate of growth has been 60% p.a.

The global takaful contributions were estimated at 14.9 USD billion in 2015 (IFSB, 2018).

2- Charity based Sector of Islamic Finance Industry

Islam strongly endorses socio-economic and welfare-friendly practices, supporting and promoting
philanthropic and charitable deeds. There is no doubt that Islam has made charity a core component
of belief. The word “charity” implies that an individual may have a choice about making the
contributions but, for Muslims, Islam makes it clear charity is an obligation. Zakat, Waqf and
Sadaqah play an important role in promoting social justice as well as alleviating poverty. A
management of zakat, waqf and sadaqah will help an individual to establish a good sense of
sincerity and accountability for the rich. In addition, it creates favourable conditions for the needy
to recover from the financial difficulty and has a positive significance in nation building.
1- Waqf
Waqf refers to a religious endowment i.e. a voluntary and irrevocable dedication of one’s wealth
or a portion of it – in cash or kind, and its disbursement for Shariah-compliant projects. With
proper structuring and administration, it can provide perpetual benefit to the society. Waqf is
considered as a virtuous act, and was seen as the pillar of the religious, social, cultural, scientific,
economic and political life of the Islamic society. The economic success of waqf was manifested
during the reign of the Ottoman Empire, where waqf were highly developed and played a crucial
role in the social and economic order of the Empire. Through waqf, the Empire managed to
accumulate large revenue and savings and achieved budget surpluses. Historically, the waqf
system has generated revenue to support education, welfare and even hospitals in both Turkey and
Egypt, and till today it is still functioning effectively. From an economic perspective, waqf can be
regarded as a type of savings-investment mechanism where funds are diverted from consumption
and invested in productive assets that provide revenue. The proceeds can be used to achieve social
objectives such as building hospitals, orphanages, universities and etc, thus unlocking both its
economic potential and philanthropic objectives. (Finance, 2015)
2- Zakat
Zakat is an obligation and a pillar of Islam, its regular payment being the single most important
act in the life of a Muslim after the five daily prayers. The Prophet Muhammad (peace be upon
him) reminded us of this by indicating that unpaid Zakat causes a spiritual rot within one’s entire
wealth. A person may live their entire life avoiding Riba (interest/usury) and investing in Shariah
compliant products but it might all be for nothing if he or she is unmindful of Zakat. However,
Zakat institution is an integral part of the Islamic socio-economic system, its role is to collect zakat.
The respective state authority involved in zakat administration carries out the following
responsibilities: promotion, collection and distribution of zakat; organized assistance to the poor
and needy; including other asnaf in accordance to guidelines prescribed by the Shariah (Hitay &
Salman, 2012).

3- Sadaqah
Assisting somebody to establish himself in trade, giving someone a good education; assisting and
helping someone to improve from some sickness, illness and disease by financial assistance or
giving fiscal and monetary help to clinics and hospitals all such charitable works, come under
sadaqah-e-jaria (an everlasting Sadaqah), this is why many centers of social welfare have
continued to function in the Muslim community. The reward for giving charitable contribution in
secret is seventy times that of giving it publicly. According to the teachings of Islam, the giving of
charity and Sadaqah helps a number of functions. Firstly, act of Sadaqah is expiation for sins. The
believers are asked to give Sadaqah immediately following any transgression. Sadaqah also gives
protection against all kinds of evil. Sadaqah wards off affliction in this world, and punishment on
Judgment Day. It is therefore recommended to give Sadaqah by night and by day, in secret and in
public to seek God's pleasure (Quran, 2:274). The constant giving of a little is said to please God
more than the occasional giving of much (Hitay & Salman, 2012).
The Relationship Between Both Sector
In the past, Zakat and Awqaf institutions have played significant roles towards mitigating poverty
in Islamic societies. Meanwhile, in the current era of Islamic finance industry, Zakat and Awqaf
institutions doesn’t perform well since there is a lack of expertise, professional management, and
liquidity issue. In addition, profit-based sector also didn’t achieve the most important shariah goal
which is to improve the life of Muslims nations and achieve prosperity for them. However, since
Islamic finance industry consists of two sectors, and both sectors have its weaknesses, thus, the
integration between both sectors will lead to more success, especially when it comes to Waqf since
there are huge number of unutilized waqf. Thus, through integration between waqf and Islamic
financial institutions, we might see the light of success in Muslims nations.

• Secondly: The lack of Integration between the financial and charitable sectors in
IFIs Industry

Based on (Global Islamic Finance Report 2015) Islam endorses socio-economic and welfare-
friendly practices, supporting and promoting philanthropic and charitable deeds. As Islamic Social
Business will be an interest-free and profit-loss-sharing (PLS) based business, which will maintain
Corporate Social Responsibility (CSR) and the principles of brotherhood. The business itself and
the profit will be devoted to mitigate social problems and alleviate poverty. The business will
follow the Islamic principles, and, ultimately, will be motivated by the satisfaction of Allah (SWT).

Islam does not allow any interest-based transaction (financing or investment). In addition, Islam
does not permit selfishness profit maximization. Hence, although Islamic social business will be
motivated by profit, just the same as any general business, it has to be in accordance with the basic
principles of Islam, such as, practising ‘non-interest-based transactions’, maintaining the
competitors’ rights and consumers’ rights, and ensuring corporate social responsibility (fair-trade,
environment-friendly production, labour rights). Eventually, the profit from business will help to
eradicate social problems including poverty. Hence, typically, the method of ‘social business’ in
capitalism and the ‘Islamic social business’ method, cannot be the same. Islamic social business
has to follow the fundamentals of Islam. However, in this new financial order, all risks and returns
must be taken into account by any type of business, which is common for both social business and
Islamic social business.

Based on the previous explanations, and although it is very important for Islamic banks to achieves
certain levels of charitable and social responsibility, but based on literature on reality we find that
Islamic banks fail to achieves these required levels. While on the other hand, we find the Islamic
charitable sector need lots of improvements and enhancements in terms of management, structures
and lack of liquidity.

• Thirdly: The Missing Link: Cash Waqf

Al-Tasuli in his commentary of Tuhfat al-Hukkam, defined the meaning of cash waqf in the Maliki
School, “as the process of dedicating cash as waqf for the purpose of lending it to those designated
as the beneficiaries without interest” (Al-Tasuli, 1998, v.2, p:369). Also, Zufar Ibn Al-Huzail
(110AH-158AH) of the Hanafi School defined it “as the process of dedicating cash as waqf and
investment of same so that the profits are used for the waqf’s stipulated charitable deeds”
(IbnNujaym, n.d, v. 5, p: 219). In the same vein, Cizacka (2004) defines cash waqf as “a charitable
endowment established with cash capital”.

Based on global Islamic finance report 2015 and as we mentioned previously, there is an urgent
need for amendments to the current law and administration of waqf in almost all Muslim countries
to encourage more founders to create waqf, especially cash waqf. The cash waqf can play at least
two roles in reinvigorating the old waqf properties and financing other socio-economic projects in
Muslim societies. The cash waqf is a special type of endowment that differs from the ordinary real
estate waqf in that its original capital consists, purely or partially, of cash. Although the institution
has existed in the Islamic history since the fifteenth century, it has been developed as a banking
product only recently. Social Islamic Bank in Bangladesh has been offering a cash waqf deposit
for a few years now. Other banks offering deposits based on the cash waqf include Islamic Bank
Bangladesh, EXIM Bank, Bank Asia, Shahjalal Islami Bank, Al-Arafah Islami Bank, Prime Bank
(all in Bangladesh) and Bank Islam in Malaysia. All these are examples of indirect cash waqf
models.

This is a very positive development, as these deposit programmes will bring institution of cash
waqf under decentralised yet tightly regulated financial regime. Furthermore, this allows Islamic
banks to introduce cash waqf as a retail product that may be used to collect small amounts of
donations and charity from a large number of people (global Islamic finance report 2015).

Beside above, the main benefit of cash waqf in Islamic bank is collecting small amounts of money
by a large number of people. especially in countries with huge populations. Small donations can
be efficiently put into a cash waqf structure to invest on a long-term basis. These investments may
be made into large infrastructure projects like urban transit rails, airports and seaports and other
similar infrastructural projects. From the income of these projects / investments other socially
relevant goods and services can be produced for the specifically targeted beneficiaries or for
general public.
Moreover, Deposits based on cash waqf offer a distinct advantage as it allows authorities to
monitor charitable flows, something that has assumed paramount importance in the world facing
terrorism and other security threats (global Islamic finance report 2015).

• Fourthly: Cash Waqf Applications

➢ Waqf Selangor Muamalt:

Based on Ramli & Jalil (2014) Waqf Selangor Muamalat is the first milestone of corporate waqf
in Malaysia concerning the cooperation between a state-owned waqf management institution and
an Islamic commercial bank i.e. Perbadanan Wakaf Selangor Berhad (PWS) and Bank Muamalat
Malaysia Berhad (BMMB). Thus, such cooperation between these strategic partners in developing
waqf through corporate waqf strategy is worth for study.

The management structure was from PWS and BMMB have established a joint committee to
manage the operation of Wakaf Selangor Muamalat which is known as “Jawatankuasa Pengurusan
Bersama (JPB)” or Joint Management Committee which is responsible for channeling the waqf
fund to the agreed waqf projects, helping the needy beneficiaries for the educational and health
purposes, and reinvest the proceeds of waqf fund and et cetera.

Fund Accumulation Management Distribution

Bank Muamalat
Perbadanan Wakaf
Malaysia Berhad
Selangor (PWS) 25% for PWS’s activities
(BMMB)

Jawatankuasa
Individuals Pengurusan Education
Bersama
(JPB)

Health
Institutions

Investment Return on
Investment

75% for activities determined by JPB

Muamalat Invest
Sdn Bhd. Investment Manager
(MISB)

The financial and operational framework for the waqf. Ramli & Jalil (2014)

The waqf fund is obtained through the Bank Muamalat banking services from the individuals and
institutions. The minimum contribution is RM10 by individuals and RM100 by institutions and
there is no maximum amount for contribution by both. The waqf fund aims to accumulate a sum
of RM50 million in three years’ time and Bank Muamalat itself has endowed RM1 million into
the fund and its staff has contributed RM74,040 at the launching ceremony of Wakaf Muamalat-
Selangor. The fund will be managed and channeled by JPB to three main sections as explained in
the previous graph.

Muamalat Invest Sdn. Bhd. - a fund management company - will invest the allocated fund
professionally in Shariah compliant instruments to generate return. 25% of the return will then be
distributed to the PWS and 75% of them will be channeled back to JPS for redistribution in areas
deemed appropriate by them. The two main sectors aimed as beneficiaries of Wakaf Selangor
Muamalat are healthcare and education for the needy people, both Muslim and non-Muslim. These
two sectors have been the major area of waqf distribution in the history of Islamic countries. Murat
Cizakca (2011) believes that waqf distribution to the public will eventually help to mitigate the
cost of living and government spending.

➢ Waqf Bank

Based on (Mohammad 2011) The waqf bank can be the bank of the poor and underprivileged. It
can be permissible in Islam based on validity of cash waqf and the need of waqf, its beneficiaries
as well as the society. It can maintain the waqf capital due to its business model and internal as
well as external supervision. It is therefore viable legally and practically.

The institutions of waqf have the unrealized potential to establish a Waqf Bank. If there is
favourable political will, the institution of waqf, through waqf bank, can greatly contribute to
society. The bank will enable waqf institutions not only solve their current problems of inadequacy
and illiquidity, but can make them more self-reliant. In view of current economic uncertainties
throughout the globe and the unequal distribution of wealth, one can strongly argue that there is
need for the revival and further development of such an old noble ideas.

At the same time, a waqf bank can protect cash waqf. All cash waqf funds need to be protected
from losses and misappropriation. When used as the capital of a waqf bank, cash waqf may have
higher chance of perpetuity, as required by many jurists. This is so because the business of banks
is the making of money and aversion of unreasonable risky ventures. Additionally, banks are
corporations and need to manage its affairs according to strict rules of relevant law. Banks are also
subject to further restrictions from the Central Bank for maintenance of its capital, including the
various transactions in which its capital is used. A waqf bank will additionally be regulated
according to the principles of waqf. It can be audited and supervised by the Shariah advisory board.
Some of these facilities are not available to cash waqf funds. The institutions of waqf will not have
to worry about loosing the waqf assets to non-waqf entities. They can obtain loans from the waqf
bank on investment basis. Upon repayment of the sum, the bank can benefit from its investment
and the borrower institutions from the increased generation of income from the recently developed
waqf property. In case the borrowing waqf institution is unable to meet its obligations, the bank
either can extend repayment time and restructure the terms of the contract or take possession of
the waqf property for the purpose of better management. A third independent party can manage
the property. Once the bank receives its capital plus the agreed sum of the profits, it can return the
waqf assets to the original trustee (Mohammad 2011).

➢ Other Waqf applications:

• Bank Muamalat Malaysia Bhd allocated RM100 mil to develop wakaf land in 2018 via
collaboration with UDA Waqf Sdn Bhd, a wholly-owned unit of UDA Holdings Bhd. As
it identified about 120 ha of wakaf land to be developed over two or three years. Beside
that, the development was based on the Ijarah concept, or leasing, where the State Islamic
Religious Council (SIRC) in various states lease the property to the buyer at a certain rate
and terms agreed upon during the lease period.
• Six Malaysian Islamic banks got together for a collaboration which advance the value-
based intermediation function of the Islamic banking industry within the Waqf segment,
the banks was: Affin Islamic Bank Berhad, Bank Islam Malaysia Berhad, Bank Muamalat
Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Maybank Islamic Berhad and
RHB Islamic Bank Berhad signed the Waqf Fund Strategic Collaboration Agreement,
The focus areas of the waqf projects surround four (4) sectors: economic empowerment,
education, health and investment. Currently, eight (8) MAINs have agreed to participate in
this initiative and together, the Islamic banks and MAINs established a Joint Management
Committee to closely monitor the project.
• RHB Islamic Bank Bhd had partnership with Tabung Baitulmal Sarawak (TBS) to drive
Waqf (Islamic endowment) funds as part of the bank's My Wakaf initiative. "TBS opened
and maintain a collection account with RHB Islamic and manage the Waqf fund together
via a joint management committee (JMC). The fund collaborates with six other Islamic
banking institutions to make banking services easier for contributors to channel cash
endowments for the development of Waqf projects.
• Islamic Tadamun Fund for Development.
• Islamic Development Bank Waqf Fund.
• Awqaf Property Investment Fund.

• Conclusion
In conclusion, one may safely contend that waqf, either immovable or movable, can play an
important role in economic development and social uplift of Muslim societies. Cash-waqf, in
particular, can be sued to develop a new model of banking and financial intermediary that can in
due time be used to replace the current interest based financial system.
Understanding the significance of decentralisation of its administration, and creating a favourable
environment will enhance waqf’s financial role not only in providing the goods and services
needed in Muslim and Muslim minority countries but will also assist governments in providing
these services without any cost to them.
References:
➢ Cizacka, M. (2004). INCORPORATED CASH WAQFS AND MUDARABA, ISLAMIC
NON-BANK. Paper submitted during the International Seminar on Non-bank Financial
Institutions, Kuala.
➢ Finance, M. W. I., 2015. Waqf: realising the social role of islamic finance, Malaysia:
MARKETPLACE, WORLD’S ISLAMIC FINANCE.
➢ Global Islamic Finance Report 2015. – Waqf and Islamic Banking and Finance: The
Missing link.
➢ Hitay, S. & Salman, S., 2012. Integrating Zakat, Waqf And Sadaqah, Kuala Lumpur: IIUM
Institute of Islamic Banking and Finance
➢ Hussain, M., Shahmoradi, S. & and Turk, R., 2015. An Overview of Islamic Finance , s.l.:
International Monetary Fund
➢ IFSB, 2018. Islamic Financial Services Industry Stability , Kuala Lumpur : Islamic
Financial Services Board
➢ Mohamad, Tahir (2011) Towards and Islamic Social (Waqf) Bank. International Journal
of Trade, Economics and Finance, Vol. 2, No. 5, October 2011
➢ Ramli & Jalil (2014) Banking Model of Corporate Waqf: An Analysis of Waqf Selangor
Muamalat.
➢ Reuters, T., 2017. Islamic Finance Development , s.l.: ICD