A waqf is a social institution. It is central to the Islamic ecosystem. As an act of piety, a waqf provides connect between religion and economic development. Awqaf initiatives dovetail into major sectors of the economy – commercial and developmental – including real estate, education, healthcare, social welfare, food and water security and climate management. Development in these areas in the framework of the new Sustainable Development Goals (SDG) framework requires massive injection of capital. While the SDG framework envisages the role of both public and private sectors in the process, the possible contribution of Islamic endowments or awqaf is no less significant. In this section, we examine how waqf can play a role in incentivizing private investments so as to achieve common social goals.
Tipping the balance in favor of development projects
Development finance – private and public – refers to all financial flows directed at the SDGs which relate to ending poverty and hunger; ensuring healthy lives, access to quality education; lifelong learning and employment opportunities, energy, shelter; and gender equality. The goals also include promoting inclusive economic growth, industrialization, building infrastructure, with a view to reducing income disparities. With balanced emphasis on areas of critical importance for the planet as much as for the people, the SDGs also include combating climate change and its impact, conservation and sustainable use of marine resources, protection and sustainable use of terrestrial ecosystems, management of forests, combating desertification, land degradation and biodiversity loss. SDGs also have a social dimension and include promotion of peaceful and inclusive societies, with access to justice for all, and building effective, accountable and inclusive institutions at all levels. Financing directed at these goals includes local, national or transnational financing, which may be drawn from public, private and alternative sources of financing.
Development finance would largely require funds to flow into investments in long-life assets. Overall, experts feel that development finance would not demand enlarged investments, but wiser investments with a move away from seeking short-term gains. For example, a significant share of climate projects and assets to be financed involve capital intense technologies, i.e. require significant upfront investments but benefit from low and stable operating costs.
The availability of long-term capital at appropriate financing costs will therefore be crucial to meet the development target. Currently, however, short-termism dominates the planning of private sector in the financial markets, which implies an excessive focus on short-term results at the expense of long-term interests. A traditional solution is to make a differentiation between upfront financing and incremental costs/benefits. A capital intense clean energy project requiring higher upfront financing can be more profitable than a less capital intense traditional energy project if the expected incremental benefits in the form of cost-savings are high enough to make the project financial viable. If these are not high enough, then subsidies may be introduced and create additional cash flows, which would ensure financial viability of the project, i.e. ensure that the capital intense project generates sufficient cash flows to pay back the upfront investment.
In brief, the private sector financers require a viable business case to get involved. Therefore, if a project cannot generate sufficient cash flows to repay the initial investment and interest/dividends, subsidies must be introduced to create a viable business case. Such subsidies will not be repaid by the project but can help make it financially viable.
The public sector sources can be used to potentially alter both upfront and recurring financial flows. By using for example concessional, low interest lending, a development finance institution can “subsidize” a project and cover a component of the upfront investment. In many countries, feed-in tariff schemes have built the basis for investments in renewable energy. To the extent the feed-in tariff (FiT) is above the average generation costs, the difference is the element of subsidy. On the other hand, if these incremental costs are added to the ratepayers’ bill, the ultimate sources of financing are the ratepayers, i.e. households and commercial customers of a utility.
In addition to public sector resources, the resources from the voluntary sector, such as, awqaf may be used to alter the cash flows as well, so as to make the project a viable business case for the private sector. Awqaf usually generate stable cash flows targeted at specific social objectives and such endowments may be dedicated for each of the SDGs.
It is now well-documented that Islamic microfinance institutions have specifically relied on Islamic social funds including waqf to absorb certain costs related to the administration of microfinance and thereby succeeded in making microfinance affordable to clients. Awqaf can play a similar role in absorbing the incremental costs with clean technologies where subsidies are not forthcoming to absorb the same.
Tipping the balance in favor of commercial projects
It is well-known that in spite of its social and economic importance, the potential of waqf remains largely unrealized. Development of awqaf sector faces the critical challenge of liquidity and enterprise. The portfolio of awqaf assets is highly imbalanced in favor of physical assets. Awqaf are rich with one of the important factors of production – land, but are short on other factors such as capital, labor and organization. To date large parcels of awqaf land are undeveloped due to lack of sufficient funds and entrepreneurial initiatives. This calls for a strategic cooperation between awqaf and the private sector, which can bring in capital and enterprise.
Project funding is a constant quest for awqaf. Funds are needed if the physical assets are to be developed and transformed into high return-yielding assets. Therefore, the commingling of private investment capital with waqf is tolerated by fuqaha on condition that such private participation would be finite, for a limited period and not dilute the ownership of awqaf assets in any manner. Accordingly, a need is felt to establish a new breed of Islamic financial institutions that would essentially mobilize private investment capital that would (i) enhance returns to the Waqf, which in turn would be utilized for furtherance of waqif’s intentions or socially beneficial objectives in the absence of the former; and (ii) provide expected returns to the investors.
Companies in the private sector are attracted to awqaf projects because of the business opportunities they represent. Private sector also sees these projects as a way of discharging their corporate social responsibility. There have been some excellent cases of partnerships between the private sector and awqaf (e.g. the Awqaf Properties Investment Fund managed by IsDB).
Notwithstanding the possibilities, the idea of partnership between the two sectors faces many challenges. One reason why such partnerships are yet to catch the fancy of the private sector is perhaps the Shariah restrictions on pledging of awqaf assets. Another reason is that awqaf organisations as charitable institutions are perceived to lack the organisational discipline of the corporate world.
Partnerships between awqaf and the private sector are more like ‘marriages of convenience’ where each party expects the relationship to realize some benefits by leveraging on the other. Each party has its goals and metrics that drive it. Awqaf’s commercial strategies are more about development and social impact. Business activities are undertaken to support their mission. Awqaf’s ultimate goal is not financial, and making money is more of an outcome than a purpose. Companies, on the other hand, are concerned with maximising profits and increasing shareholders’ values. The potential risks associated with awqaf projects reduce their appeal to the private sector. Awqaf properties cannot be used as collateral, and in the event of a dispute, awqaf may have an edge over the private sector particularly in the area of “business versus charity”. These are areas of concern to companies who may feel that the playing field is tilted in awqaf’s favour.
Both awqaf and the private sector have a lot to learn from each other. Awqaf can adopt many of the corporate governance practices of the commercial world, especially in the areas of accountability and transparency. Reciprocally, the private sector can learn from awqaf that there are “values” in business other than just financial ones. The private sector can learn from awqaf commitment, dedication, social responsibility and long-termism and engage in ‘impact’ investments that combine social objectives with profitability.
(First published as a chapter in Global Islamic Finance Report, IRTI, IsDB, 2018)