With the success of such experiments, the realization that Islamic social funds can play a crucial role in meeting development finance needs of the economy will continue to grow. And simultaneously, we can look forward to a continuous expansion in the virtuous circle of benevolence.

In a blog based on my presentation at the International Conference of Hajj Fund Management (November 2019) I proposed that the Indonesian hajj fund with a size of USD8 billion should be placed in carefully selected awqaf development projects and generate fairly good returns. Hajj funds for awqaf development would inter alia,

  • bring together a sector (waqf) with whopping financing needs and one (hajj) 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 better 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 return-seeking private capital for waqf development

Little did I realize then that this proposition would fit so well with Indonesia’s Cash Waqf Linked Sukuk (CWLS) program that would not only address some on-going reservations about investment of hajj funds for government’s infrastructure plans, but also firmly put in place a model worth replication by all contemporary Muslim societies.

That the CWLS brought the waqf (Islamic social finance) and the sukuk (Islamic capital market) sectors together, was a remarkable development though there have been a couple of good examples elsewhere e.g. the Malaysian Initial Waqf Offer to finance development and expansion of Larkin Sentral Complex, a public transport terminal in the state of Johor Baru. The earlier generation musharakah bonds in Singapore or the sukuk al-intifa time-share bonds in Saudi Arabia were essentially instruments to bring in return-seeking private capital for development of awqaf assets. To see how the new framework compares with the earlier ones, we need to focus on the stakeholders and the nature of benefits flowing out of them and at what risk.

If we focus on the social benefits that are an outcome of these alternative sukuk structures, we find that  the musharakah sukuk or the sukuk intifa cited above essentially ensure enhanced benefits from developing waqf assets, which is shared between private-capital-providers and the waqf authorities who then pass on the benefits to the ultimate intended beneficiaries of waqf.  Private-capital-providers receive returns on the capital invested. Tensions in the structure relate to how fairly the enhanced benefits are shared between the two parties.

In case of the Malaysian corporate waqf, there are no material benefits to the investors in equity shares of the project sponsor Larkin Sentral, who make a waqf of the returns/benefits accruing to them to the waqf authorities. The issuer on the one hand, invests the proceeds in the project, providing better services to the commuters and public at large. And acting as agent of the waqf authorities, the WAN Corporation receives the returns on equity investment. It passes on ninety percent of returns on the shares back to the project sponsor as reinvestment and uses the remaining for charitable purposes – five percent for single mother tenants of the complex and five percent for sundry social projects of the waqf authorities. It was essentially a straight forward case primarily of financing infrastructure with corporate waqf with a small part meant for social assistance.

The framework thus, makes possible a direct integration of the institution of waqf with fiscal funding in the context of social programmes of the government.

In the present case as well, there are no material benefits for the waqif who makes a temporary waqf of cash, which is collected by the Indonesian Waqf Board (BWI) as trustee-manager (nazir or mutawalli) through various Islamic banks as its agents. The funds are managed and placed on the sukuk instruments (with special features including: a 3-year tenor, non-tradable nature, discounted payment of benefits and a fixed rate of periodic payments) issued by the Ministry of Finance. Since the cash waqf is “temporary” or with a finite maturity of a minimum of three years, the funds will be returned to the waqif in full upon maturity without the yield. Profit sharing from sukuk yield will be used by BWI for various programs in education, healthcare and other social sectors. The proceeds from the sukuk will be used to finance the state budget, including to finance the construction of public service projects such as the construction of educational infrastructure and religious services. The framework thus, makes possible a direct integration of the institution of waqf with fiscal funding in the context of social programmes of the government. The major stakeholders in the process are:

  1. Endowers or waqif include individuals or communities or institutions
  2. Bank Indonesia as an accelerator for the program in encouraging the implementation of CWLS
  3. Indonesian Waqf Board (BWI) as leader and the trustee-manager (nazir) with partners to mobilize waqf funds
  4. The Ministry of Finance as the issuer and fund manager
  5. Islamic banks as channels (LKS-PWU) to receive the funds

It was a prudent decision on the part of Indonesian Hajj Fund Management Agency (BPKH) announced in end-November 2019 to contribute to the success of the CWLS program by transforming itself into a waqif and place IDR15 billion, accounting for thirty percent of the program’s target value of IDR50 billion. It was a placement that would ensure that the corpus would not experience any possible decline in value. This was indeed the major reason behind the public opposition to any move to place hajj funds directly in any infrastructure project with unknown risk-return profile. And since the waqif has the right to stipulate how the benefits flowing from the waqf would be utilized, the Hajj Fund Management Agency (BPKH) entered into a strategic agreement with Indonesian Waqf Board (BWI) to ensure that the profit shares from its placement would go to a specific waqf-funded healthcare project, the Ahmad Wardi Eye Hospital in Serang, Banten. The profit shares compare well with market returns, since these do not invite any tax.

The Ahmad Wardi Eye Hospital in Serang, Banten is perhaps the maiden eye hospital to be entirely funded by cash waqf, set up and managed by the Indonesian Waqf Board (BWI) and Dompet Dhuafa Republika (DDR). The hospital stands on the waqf land of Achmad Wardi’s family which is entrusted to the Indonesian Waqf Board as Nazir, and is managed by the Dompet Dhuafa Republika Foundation. The hospital has a vision to provide eye health services that are affordable, professional and friendly.

The uniqueness of the project lies in bringing together multiple stakeholders – the central bank (BI), Ministry of Finance, Financial Services Authority (OJK), Ministry of Religion, Indonesian Waqf Board (BWI), Indonesian Hajj Fund Management Agency, Islamic banks and various nazirs – to work towards a common goal. Various Islamic banks and organizations that joined BPKH as waqif include Syariah Mandiri Bank, Permata Syariah Bank, BNI Syariah, Baitul Maal Muamalat, CIMB Niaga Syariah Bank, Dompet Dhuafa, Sinarmas Syariah Bank, Mega Syariah Bank, Maybank Syariah and individual waqf. This has a huge impact on the awareness levels of the general public that is critical for mainstreaming of the Islamic social finance sector. With the success of such experiments, the realization that Islamic social funds can play a crucial role in meeting development finance needs of the economy will continue to grow. And simultaneously, we can look forward to a continuous expansion in the virtuous circle of benevolence.

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