When Waqf meets Banks

By Ebi Junaidi

Global economy has been leaning toward innovations focussed in achieving sustainability. Ebi Junaidi promotes the age-old Waqf “movement” established by the Muslims. The Waqf system, with its philanthropic nature, does not only motivate sustainability but more importantly promises to enable financial institutions that goes beyond corporate social responsibility.


Currently there is a new trend in Islamic Economics and Finance that is “revitalising the original institution/instruments” once practiced in early and medieval Islam. One of the very authentic institution/instrument is waqf. Waqf (plural: awqaf) is perpetual charitable trust established by Muslim. Waqf has been in the centre of attention in the latest World Bank-IRTI IDB’s Global Report in Islamic Finance 2016 by putting it in many aspects of Islamic Finance potential development in an effort to create a shared prosperity and reaching the Sustainable Development Goals (SDG).

In a national and local level, the trend has succeeded creating the new regulations, emerging some new institutions, empowering existing ones, as well as enabling cooperation among institutions once perceived to be “in different part of world”. This “movement” has been so massive, to the extent that Nagaoka of Kyoto University considered it as the New Horizon 2.0. in Islamic Economics and Finance.1

The support that has come from the Islamic Scholar, government, regulator, existing waqf institution, academics and common people (who act as the waqif, the giver of waqf and the beneficiaries of waqf) has not come without justifiable reasons. The existing dormant assets of waqf are enormous, its possible collection in the future is highly potential, as well. At the same time, religious-wise, contribution to waqf is highly recommended as it is believed that the perpetual nature of the instrument equals to continuous never-ending benefit received by the giver surpassing his life time. Modern historian, such as Hodgson affirmed that waqf is the key for the success of the Muslim world economy.2

Modern historian, Hodgson (1974) affirmed that waqf is the key for the success of the Muslim world economy.

The question now is, how to actually realise this potential? What model to be initiate to enable an efficient waqf management? Effort has been done in modelling waqf management. Some has come up with independent waqf-based charity organisations, microfinance institutions, a joint cooperation between waqf institution and (Islamic) banks creating a banking model of corporate waqf, joint cooperation between waqf institution and insurance companies,a stand-alone corporate waqf, etc.

Looking at current share of Islamic finance, which is still dominated by Islamic banks, it is easy to conclude that integrating waqf with Islamic banking institution will be one of the option that might create more impactful result. Estimate from the Islamic Financial Services Board (IFSB 2015) mentioned that almost 79% of the $1.87 trillion Islamic Finance industry belongs to Islamic Bank. This article, thus, focusses on what waqf could offer to the banking sector and how banking corporate governance will benefit from it. Other word, it aims to integrate the waqf into the mainstream of (Islamic) financial industry.

As waqf is a philanthropy in nature, the usage of the funding should have socio-economics dimension. Therefore the idea of financial inclusion looks appeal as it is now been mainstreamed in both developed and developing countries through financial institution and banking. For Islamic banking, these ideas are even more relevant as Islamic financial system stems from the main goals of Islam, those are: eradication of poverty, promotion of socio-economic justice and equitable distribution of income.

“The history of awqaf is very rich with prominent achievements in serving the poor in particular and in enhancing the welfare in general.”

In the past Waqf has played a tremendous role both as commercial and public institutions, even before the existence of bank and financial institution.3,4 During The Ottoman empire, for example, it is depicted that throughout the entire life of a citizen, waqf functions in “making his/her life possible” to the extent that it can be depicted as follow: “Thanks to the prodigious development of waqf institutions, a person could be born in a house belonging to a waqf, sleep in a cradle of that waqf and fill up on its food, receive instructions through waqf-owned books, become a teacher in a waqf schools, draw a waqf-financed salary, and at his death be placed in a waqf provided coffin for burial in waqf cemetery. In short, it was possible to meet all one’s need through goods and services immobilised as waqf.”5

Indeed, “The history of awqaf is very rich with prominent achievements in serving the poor in particular and in enhancing the welfare in general.”6

Integrating Waqf and Bank

Waqf can be created by both mobile (e.g. transportation devices, cash, etc) and immobile assets (such as land, building, etc). While integrating immobile waqf with bank is difficult in nature of banking business, cash waqf can be integrated with less problem. Historically, cash waqf has been practiced since the first century of Islamic calendar or sixteen centuries ago.7 The form of its practice can be divided into two.

Firstly, the waqf corpus is directly allocated for free lending to the beneficiaries of waqf. This requires a strong portfolio management by the bank as it is required to reserve the waqf corpus. Thus, making sure that diversification yields a “manageable risk” is essential.

Secondly, Cash is invested (in fixed assets such as properties, government’s Islamic investment instrument such as sukuk, etc.) and the net return are allocated to the waqf beneficiaries. The practice of cash waqf during the Ottoman empire can be a source of inspiration for this. Cizakca elaborated that, during that time, the investment return was distributed for three purposes that are administration costs, charity and additional funds for the endowment to keep up with inflation.8

It is important to note that financing given to the borrowers were fully protected during the Ottoman empire. This is achieved by putting the borrowers’ houses as collateral in a manner that the ownership of the housed are transferred into the bank. While the borrowers still stay in the house, they need to pay the rent that become the source of the bank’s income. This indeed overcome the adverse selection and moral hazard problems. Ahmed suggested using different reserves such as: Takaful/insurance reserves, Profit equating reserves and Reserves/Economic capital.9 Also, allocation of low risk asset should be done in a way that expected loss of risky funding activities can be covered.


Benefits for the Bank

Integrating waqf fund in the liabilities side of banks bring benefits to the bank in several ways. Firstly, As the waqf-funds are philanthropic in nature, their financing is not expected to gain any return. At the same time this will also enable Islamic banks to cover the untapped market of religiously-motivated self-exclusion individuals. These are individuals commonly found in many Organisation of Islamic Cooperation (OIC) countries. The term “waqf” is not only strong in conveying the charitable feature of its nature but more than that create a strong message of the shariah-compliant of the institution as well as allowing the usage of the fund to be return-free. It is widely known that for some, any form of additional fee charged over borrowing as well as additional return over lending are still perceived to be “un-Islamic” for this prospective market segment.

Secondly, the moral hazard problems can be solved by implementing Islamic financing mode which link the transaction to real transactions which both reduce the possibility of diversions of funds for other purposes and create collateral which can be redeem in case of defaults.

Thirdly, Islamic bank practice has been criticised by many as leaving its very profound objective of eradicating poverty, promoting equitable distribution of income or inclusive prosperity. Many of this critics were based on the fact that the nature of contracts used are not idealised contracts suggested in the early of Islamic Finance movement namely mudharabah and musyarakah. Islamic banks argue that the asymmetric information problems embedded in the contracts are not able to be mitigated within the nature of banking system. Our experimental research that we held in Durham and Jakarta found that borrowing from social-funding encourage not only higher compliance rate to contracts but also initiating giving behaviour of the borrower. Thus, integrating social-financing within the existing commercial model allows not only to embed the social expectation over the institution but also reduce the information problems of the bank.

Lastly, under current operation, providing funds for microfinance from existing channelling offices will not cause any extra fixed costs such as building rent, as well as additional banks officers in running it. Indeed, “the waqf component of the funds will significantly reduce the financial cost and improve financial viability of the institution”.10

Integrating commercial, profit-oriented business financial institutions with charitable projects beyond corporate social responsibility could be our next trend.

Sources of waqf funds can be generated from establishing waqf certificate, giving options to current customer for direct-debit the waqf on monthly basis, any late-payment penalties and non-halal operation income. This also can be achieved by introducing new products that allow current and future customer to structure its very own purpose of waqf. The example of Mudaraba cash waqf deposit by Exim Bank of Bangladesh can be a model to be adopted. This product was marketed by offering the professional attribute that the bank has in managing both the fund investment and the waqf-giver proposed charitable projects.

Integrating commercial, profit-oriented business financial institutions with charitable projects beyond corporate social responsibility could be our next trend. This is not only to achieve a more inclusive prosperity, but also enable financial institutions to realise a social role that has been heavily criticised before.

Featured Image: Courtesy of The Times of India

About the Author

Ebi Junaidi is School of Economics Lecturer at Universitas Indonesia. He is currently pursuing his PhD in Islamic Finance at Durham University Business School. His research area are Waqf, Trust, Venture Capital, Risk Attitude and Financial Decision. He is now the Chairman for Indonesia Islamic Economics Society-United Kingdom Representative. 


1. Nagaoka, S. (2014). Resuscitation of the Antique Economic System or Novel Sustainable System?: Revitalization of the Traditional Islamic Economic Institutions (Waqf and Zakat) in the Postmodern Era (Special Feature: Socio-Economic Role of Islamic Finance and its Potential in the Post-Capitalist Era). イスラーム世界研究, 7, 3-19.
2. Hodgson, M. G. (1974). The Venture of Islam: Conscience and History in a World Civilization (éd. 2). Chicago: University of Chicago Press.
3. Kuran, T. (2001). The Provision of Public Goods under Islamic Law:Origins, Impact, and Limitations of the Waqf Law and Society Review, 35(4), 841-898.
4. Yediyildiz, 1990:5, as cited in Kuran, 2001:815
5. Ahmed, Habib (2011). “Waqf-Based Microfinance: Realizing the Social Role of Islamic Finance” in Essential Readings in Contemporary Waqf Issues. Monzer Kahf & Siti Mashitoh Mahamood CERT, Kuala Lumpur.
6. Cizakca, M (2004). Incorporated cash waqfs and mudaraba, Islamic non-bank financial instrument from the past to the future,” MPRA Paper 25336, University Library of Munich, Germany.<
7. See Ahmed, 2014.
8. See Ahmed, 2007.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.