It is now over a decade-and-half since I wrote a piece on the subject of financing of hajj in the monthly magazine published by the Makkah-based Muslim World League. The piece was in response to an on-going controversy in India over the issue of provision of government subsidy to Hajj pilgrims from India. It appeared to us that the so-called subsidy – allegedly an instrument of appeasement of Indian Muslims – was indeed a windfall for the state carrier Air India. While the so-called subsidized airfare was a key cost factor for the Indian pilgrims, it was, arguably, a market-based rate that had to be lower, considering the bulk-purchase of air tickets. In any case, the controversy snowballed into a judicial decision in the year 2012 that required the Indian government to phase out the subsidies over a period of next ten years.
It was another decade later, a significant move by an Indian Member of Parliament, K Rahman Khan resulted in the Islamic Development Bank sending a delegation to a high-profile conference on Hajj Management in India. IsDB also facilitated the participation of a high-level team from Tabung Haji with a view to laying the foundations of a similar initiative in India that would also perhaps be the harbinger of Islamic financial instruments and institutions serving the Indian population. The conference at the sprawling premises of Hotel Ashoka witnessed the participation of over three hundred intellectuals including three Ministers from the Indian government. While I considered it a privilege to be part of the IsDB delegation, it was also painful to see all those efforts leading to nowhere. The idea of an Indian version of Tabung Haji simply fizzled out without a trace.
Therefore, recently when I received an invitation to participate in the first-ever international conference on Management of Hajj Funds, I was excited for good reasons. Here was an opportunity to revisit the issue and build on my previous research. Here is a summary of my presentation at the 1st International Hajj Fund Management Conference organized by the Indonesian Hajj Fund Management Agency, the Badan Pengelola Keuangan Haji (BPKH) held on November 14, 2019.
In this presentation I share some observations from an exercise to understand the dynamics of hajj funds management. The study covers four countries in South and South-East Asia – Indonesia, India, Malaysia and Maldives. Indonesia has world’s largest Muslim population followed closely by India. Malaysia has a much smaller population, but also boasts of world’s earliest and the most successful model of hajj funds management. Maldives is an interesting contrast operating on a tiny-tiny scale but seeking to follow the Malaysian model.
|No. of pilgrims||Share of Private|
|Indonesia||Badan Pengelola Keuangan Haji (2017)||225||230,000||–|
|Malaysia||Tabung Haji (1963)||19.5||30,000||–|
|Maldives||Maldives Hajj Corporation Limited (2013)||4||1000||50%|
|India||Hajj Committee (Ministry of External Affairs)||140||200,000||30%|
It is easy to see how the size of population impacts the scale of the challenge. The Saudi Arabian Hajj authorities permit a quota for pilgrims from a country, roughly at 0.1 percent of the respective Muslim population. Thus, the Indonesian and Indian situation is similar in terms of scale with the need to manage over 200,000 pilgrims. The difference is that India permits 30 percent of the pilgrims to be served by private operators. Malaysia operates at a much smaller scale with a pilgrim population of just 13 percent of its Indonesian counterpart.
Some very interesting facts for 2019 are presented in the table below.
|Country||Cost per Pilgrim
|Price per Pilgrim
|Subsidy per Pilgrim (USD)||No. of Pilgrims||Annual Outflow for subsidy (USD Million)|
* USD 75 million in 2016; USD 100 million in 2013
The first column provides estimated cost of performing hajj for all four countries. Estimates culled from different media sources seem to indicate similar numbers in the range USD4000-5400. However, while India and Maldives charge the full cost from the pilgrims based on actuals, both Indonesia and Malaysia seek to cap the price at USD 3200 and USD2400 respectively. This results in a subsidy obligation on the respective hajj authorities. Though the subsidy per pilgrim is higher in Malaysia, the total outflow is far higher for Indonesia, given the much larger number of Indonesian pilgrims. The challenge for Indonesia is far bigger than any of the sampled countries. With inflation resulting in a steady rise in the cost of services, the required outflow would pose an ever-increasing challenge for the Indonesian authorities. It may be noted that India has since discontinued its earlier practice of subsidizing air-travel due to a court decision by its apex court that required the government to phase out the same.
In the chart above, we may understand how a demand-supply mismatch leads to long-waiting periods for pilgrims. When the pilgrims are placed on a queue after making an initial deposit, this results in creation of a Fund. The exception seems to be India where the demand-supply mismatch is not so severe. For example, in 2019, the number of hajj-aspirants stood at 267000 against a quota of 140000 through Hajj Committee and 60000 through private operators. There is effectively no waiting period or one of 1-2 years at the maximum. The deposits by applicants amounting to about USD 600 million (200,000* USD3000 per pilgrim) is held for a few months only, with the Indian commercial banks. In contrast, the waiting period in Indonesia has steadily increased from 12 years to 20 years in 2019. With an initial deposit at USD1900 (25 million IDR), accumulated hajj funds have steadily increased and currently stand at about USD 7-8 billion. The same for Malaysia stand at USD17.6 billion in 2019.
Because of the large required annual subsidy outflow in Indonesia, its financial challenge is the gravest. Hajj funds in Indonesia have steadily increased from 95.2 Trillion IDR in 2016 to 106 Trillion IDR in 2017, 110 Trillion IDR in 2018 and to 121 Trillion IDR in 2019. The ex-post return on average has been 6.5 percent, while the minimum required rate of return is in the range of 3.45-5.75 percent (annual subsidy/investment).
How has Tabung Haji in Malaysia been able to address the fund management challenge?
Funds with Tabung Haji have steadily increased and now stand at a staggering MYR 70 billion or USD17.6 billion.
|Year||Total number of depositors||Total of deposits (RM)|
|1990||1.7 million||1 billion|
|2008||4.7 million||17 billion|
|2012||5 million||23 billion|
|2013||8.3 million||45 billion|
|2014||8.6 million||54 billion|
|2015||8.8 million||62 billion|
|2016||9.1 million||67 billion|
|2017||9.3 million||70 billion|
Its investment strategy is captured in the following chart, which is self-explanatory. It has been making direct investments in subsidiary companies as well as in equity shares of companies. From the earnings received from the investments, it covers the cost of administering the hajj services, pays zakat on behalf of its depositors, and taxes. Finally, it pays a bonus to the depositors (hajj aspirants).
Will a similar strategy make sense for Indonesia? The strategy of Indonesian authorities may be presented below.
|Asset Class||Government Sharia Securities (SBSN)||Sharia based Time deposit||Government Debt Paper (SUN)||Others|
|Amount in Trillion IDR||35.65||54.57||0.136||4.84|
|Based on 2016 Audit Report|
Present laws place a cap of 20 percent on direct investments. The following investment options make lot of sense in the Indonesian context:
- Direct investment in mature companies (with synergistic outcomes, such as, a stake in airline company or real estate in the holy cities)
- Long-term infrastructure sukuk/ projects (with utmost prudence in project selection based on risk-return assessment)
It may be noted that infrastructure projects offer a mixed bag in terms of realized outcomes. Risk-return assessment for greenfield projects can be extremely challenging. The enormity of the Indonesian investment challenge is further magnified by liquidity risk arising out of possible mismatch between liquidity needs and cash flows from investments. Currency risk is no less significant. While currency risk relating to the short-term operations may be managed through currency forwards, long-term hedging can be truly challenging.
We make a specific proposal here for investment of hajj funds. The market value of Indonesian awqaf assets has been estimated at a minimum of USD600 billion (ISFR, 2014), which is in urgently need of development. A fund with a size of USD8 billion can always be placed in carefully selected (in prime locations) awqaf development projects and generate fairly good returns. This has been borne out by similar experience elsewhere, e.g. on MUIS developed awqaf projects in Singapore and APIF (IsDB) portfolio of projects. Indeed, hajj funds for awqaf development would inter alia,
- bring together a sector with whopping financing needs and one with a massive investment needs
- where the primary objective of investment is not returns per se; returns are a means to a noble end
- which is a win-win for pilgrims as well as waqf beneficiaries
- which is an option with high public approval/ acceptance or with least resistance
- and which resolves the issue of discomforts (even if largely perceived) with (i) investing hajj funds in projects of less-understood quality and little historical track records, e.g. infrastructure and (ii) the use of private capital for waqf development