The economy underdevelopment becomes a mainstream problem faced by Muslim countries globally and remains obscure. Waqf is often suggested to be a panacea for that problem. However, the huge potential of utilising waqf for effective social development schemes remains untapped. This article promotes an efficient and productive investment model which will provide important sources of long-term finance for development, supporting financial inclusion and ensuring that poverty is alleviated. By then, it will help reach Sustainable Development Goals (SDGs) set by government leaders across the world.
Global Islamic Economy Report1 reveals that Islamic finance assets globally reached USD 2 Trillion in 2015 and will climb to USD 3.5 Trillion by 2021. These assets comprises of all sector of Islamic finance industry both commercial (e.g. Islamic banking, Islamic capital market, Islamic pension fund, etc.) and social finance (e.g. zakat, waqf, shadaqah, etc.). Although Stability Report of Islamic Financial Services Industry2 reveals that almost 79% of the Islamic Finance industry belongs to the commercial sector in particular Islamic Banking. However, currently there is a growing awareness as well as significant growth of the social sector in particular Islamic Endowment – so called waqf (plural: awqaf).
Waqf can be defined as holding maal (asset) and preventing its consumption for the purpose of repeatedly extracting its usufruct for the benefit of an objective representing righteousness and/or philanthropy.3 Taking an example from the most populous Muslim country, according to 2013 Report from IRTI & Thomson Reuters4, Indonesia has 1400 sq. km of waqf land spread in not less than 40,000 locations around the country which was valued at US$ 60 billion. However, those assets are in the state of under utilisation due to the lack of proper management to make them economically productive and supportive in many economic initiatives particularly to the low-income society.
Considering the huge potential of Islamic Economy mentioned above, it is hard to admit that most Muslim-majority countries in the world are highly underdeveloped.5 They further show that in terms of the global economy, Muslim nations contributed only 8.26% (of the global gdp) despite constituting 23.44% of world population. On the contrary, 28 countries in the European Union (EU), which constitute only 6.94% of world population, dominate the world economy by contributing 23.53%.6 In this case, Islamic finance has the potential to play a role in supporting development, particularly as found in the SDGs, as eradication of poverty, socio-economic justice and equitable distribution of income are among the primary goals of Islam and should be unyielding features of an Islamic economic system 7.
In line with that, the waqf sector grew significantly in Muslim societies and became one of the most important institutions for poverty alleviation.8 An effective way in which waqf can be used to enhance productive capacities of the poor is to integrate these institutions with the financial sector.9 According to ‘Ali Muhyi al-Din al-Ghurrah Daghi, waqf assets must be invested because investments are designed to generate returns on the capital, which are then used as a source of income, thus ensuring that the principal investment remains intact and produces returns that can be utilised to fulfil the needs of the community. The larger the investment returns, the more funds that can be allocated to poverty alleviation programme.
Concerning the importance of investment in the Islamic Endowment fund (waqf), we could take a lesson from the leading fund management which generated an impressive result over these 30 years – Yale Endowment model. The Yale Investment Office has fared better in its endowment performance, earning higher returns every year since fiscal year 2011. According to their Endowment Report10, in 2015 Yale generated return of 11.5 % which is almost double than that of Harvard – 5.8 %.
Continuously having that superior return among other education institution has impressed many scholars including the Economic Expert, Ben Polak, as quoted “Yale’s Endowment is the engine that drives the university. It supports 34% of our total operations: from the financial aid we give to our great students to our cutting edge scientific research, from our world-class professors to our unparalleled art collections. The Yale Investments Office is simply the best in the world. It not only makes our research and education possible. It is itself the home of great research and education. It trains the best investment experts on the planet. It has changed Yale and the world.”
The Yale endowment fund adopted a diversified approach to investing over twenty years ago. Yale endowments pursue asset allocation strategies dramatically different from those of other educational institutions. A comparison of the average asset allocation of a broad universe of educational institutions with Yale endowment shows striking patterns. Rather than relying on traditional asset classes, the Yale fund has significant allocations to alternative asset classes (as depicted in the figure below). Yale University also moves away its endowment fund from fixed income to equity instruments due to its vulnerability to inflation. This concept is in line with the principle of Islamic finance.
As private equity in the form of leverage buyout and venture capital is mostly driven by ribawi transaction since the superior private equity returns come at the price of higher risk levels, investors expose assets to greater financial leverage and more substantial operating uncertainty.11 We need to shift the heavy reliance of private equity toward the more Islamic instrument such as real estate investment trust (REIT). Private equities (leverage buyout and venture capital) are inevitably linked to ribawi instrument.
With the “new” optimal asset allocation which fit Sharia principle and diversification theory, Islamic investment particularly Islamic Endowment could generate an impressive return of 8.73% annually. Promoting an efficient and productive investment of Endowment fund will help reach SDGs by supporting financial inclusion and poverty alleviation. Taking an example from Indonesia, by this way, at least 8.73% of total value of waqf land – not less than USD 5 billion could be used for various socio-economic purposes to increase the income of bottom 40% of global population as a pathway to achieve 17 SDGs which are interconnected with each other.
About the Author
Yunice Karina Tumewang is a researcher at Islamic University of Indonesia. She just earned Master Degree in Islamic Finance from Durham University, United Kingdom. Her research interests are Islamic Pension Fund, Islamic Asset Management, Waqf and Islamic Accounting.
1. Thomson Reuters “Global Islamic Economy Report” (2016),
2. IFSB “Islamic Financial Services Industry – Stability Report” (2015),
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4. Thomson Reuters ‘Global Islamic Economy Report’ (2013),
5. Ebrahim, M. S., M. O. Salleh, and M. O. Sheikh. (2016). Institutional Status and The Underdevelopment of the Muslim World: A Juridicio-Philosophical Critique. Working Paper, Durham University Business School, England, UK.
6. Kuran, Timur. (1997). “Islam and Underdevelopment: An Old Puzzle Revisited.” Journal of Institutional and Theoretical Economics. March, 153:1, pp. 41–71.
7. Chapra, M. Umer (1985). Towards a Just Monetary System, The Islamic Foundation, Leicester.
8. Cizakca, Murat (2002). “Latest Developments in the Western Non-Profit Sector and the Implications for Islamic Awqaf”, in Munawar Iqbal (Editor), Islamic Economic Institutions and the Elimination of Poverty, The Islamic Foundation, Leicester.
9. Ahmed, Habib (2004). Role of Zakah and Waqf in Poverty Alleviation, Occasional Paper No. 8, Islamic Research and Training Institute, Islamic Development Bank, Jeddah.
10.Yale University “Yale Endowment Report” (2016)
11. Swensen, D.F. (2000). Pioneering Portfolio Management. New York: The Free Press; Simon & Schuster.