islamic social finance report 2014 - IRTI

ISLAMIC SOCIAL FINANCE REPORT 2014

An initiative by:

Member of

Strategic Partner:

Table of Contents 0.1

Message (from Director General, IRTI)

0.2 Acknowledgement

08 09

1.0

Executive Summary 13

2.0

Region under Focus 25

2.1 Economic Indicators

27

2.2

34

Potential of Islamic Social Finance

3.0 ZAKAH

39

3.1 Overview of Zakah Sector

42

3.2

Institutional Structure

55

3.3

Regulatory and Policy Framework

58

3.4 Supporting Infrastructure

62

3.5 Success Stories & Good Practices

64

3.6

70

Lessons and Policy Implications

4.0 AWQAF

73

4.1 Overview of Awqaf Sector

74

4.2


76

4.3


80


88


88

4.6


93

5.0

ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS

98

5.1 Overview of Islamic Financial Cooperative and NPO Sector

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99

5.2


104

5.3


105


108


109

5.6


121

6.0

GLOSSARY 124

Islamic Social Finance Report

Figures

TABLEs

2.0 Region under Focus

2.0 Region under Focus

Figure 2.1: GDP Per Capita , 2011 (current USD)

27

Table 2.1:

Total Population, Density of Population and Percentage of Muslim Population

26

Figure 2.2: GDP in billion USD

28

Table 2.2:

Income Distribution - GINI index

32

Figure 2.3: Average Annual GDP Growt h 2000-2012

28

Table 2.3:

Head Count Ratio 2000-2012

33

Figure 2.4: GDP Growth Rate 2000-2012 Br unei , Indonesia , Malaysia and Singapore

28

Table 2.4:

Resources gap for poverty alleviation

34

Figure 2.5: GDP Growth Rate 2000-2012 Bangladesh, India and Pakistan

29

Table 2.5: Estimate of Zakah Potential

Figure 2.6: Agriculture, Industry, and Services in the 7 countries for 2011

29

3.0 ZAKAH

Figure 2.7:

30

Table 3.1. Share of Private and Public Agencies in Zakah Collection in Indonesia

42

31

Table 3.2:

Time Series (2002-2012) of Zakah Collected in Indonesia

43

Table 3.3:

Pattern of Zakah Distribution by LAZ in Indonesia 2004-2008

44

Table 3.4:

Pattern of Zakah Distribution by BAZNAS in Indonesia 2011-2012

44

Table 3.5:

Time Series of Zakah Collected & Distributed in Malaysia 1991-2011 (Million RM)

45

Table 3.6:

Zakah collection and distri bution across states in Malaysia *

47

Table 3.7:

Distribution of zakah among asnaf in Malaysia *

47

Table 3.8:

Time Series of Zakah Collected in Singapore 2009-2012 (Million S$)

48

Table 3.9:

Time Series of Zakah Distributed in Singapore 2009-2012 (‘000 S$)

49

Inflation, Average Consumer Prices, 2000-2011, Bangladesh, India and Pakistan

Figure 2.8: Inflation, Average Consumer Prices, 2000-2011, Brunei , Indonesia, Malaysia and Singapore 3.0 ZAKAH

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Figure 3.1:

Time Series (2002-2012) of Total Zakah Collected in Indonesia

43

Figure 3.2:

Pattern of Zakah Distribution by BAZNAS in Indonesia (2012)

45

Figure 3.3:

Time Series of Zakah Collected in Malaysia 1991-2011

46

Figure 3.4:

Distribution of Zakah among asnaf in Malaysia (2010)

48

35

Figure 3.5: Time Series of Zakah Collected in Singapore 2009-2012

48

Figure 3.6: Distribution of Zakah among asnaf in Singapore (2012)

49

Table 3.10: Time Series of Zakah Collected in Brunei Darussalam 2001-2008 (Million BND$)

49

Figure 3.7:

50

Table 3.10: Time Series of Zakah Distributed in Brunei Darussalam 2000-2010 (‘000 BND$)

51

Figure 3.8: Distribution of Zakah among asnaf in Br unei Darussalam (2010)

50

Table 3.11:

52

Figure 3.9: Distribution of Zakah in Pakistan (2010)

51

Table 3.12: Composition of Zakah Distribution in India

53

Figure 3.10: Distribution of Zakah in India

54

Table 3.13. Multiple channels for zakah mobilization in Malaysia

61

Table 3.14. Services provided by SKMCH&RC as in 2012

64

Table 3.15. Revenue Growth of SKMCH&RC (1994- 2011)

65

Time Series of Zakah Collected in Brunei Dar

Charts

Time Series of Zakah Distributed in Pakistan

3.0 ZAKAH

Table 3.16. Collection & Utilization of Zakah and Charity Funds (2010-2011)

67

Chart 3.1:

Institutional Structure for Zakah in Indonesia

55

Table 3.17.

68

Chart 3.2:

Institutional Structure for Zakah in India

56

5.0 ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS

Chart 3.3:

Institutional Structure for Zakah in Pakistan & Bangladesh

56

Table 5.1.

Chart 3.4:

Institutional Structure for Zakah in Malaysia, Singapore and Brunei Darussalam

57

Table 5.2. Age of BMTs

100

Table 5.3. Area of Operation of BMTs

101

Table 5.4. Asset Structure of BMTs

101

Table 5.5.

102

4.0 AWQAF Chart 4.1:

Institutional Structure for Waqf in Indonesia

76

Chart 4.2:

Institutional Structure for Waqf in India

77

Chart 4.3:

Institutional Structure for Waqf in Pakistan

77

Chart 4.4:

Institutional Structure for Waqf in Bangladesh

78

Chart 4.5:

Institutional Structure for Waqf in Malaysia and Brunei Darussalam

78

Chart 4.6:

Institutional Structure for Waqf in Singapore

79

Chart 4.7:

Wakaf Syed Omar Ali Aljunied (Bencoolen)

91

5-year Details on Economic Empowerment Programs by DDR

Initial Capital of BMTs

Distribution of BMTs Based on Asset Size

99

Table 5.6. Asset Growth of BMTs

102

Table 5.7. Age and Asset Growth of BMTs

102

Table 5.8. Sources of Funds for BMTs

103

Table 5.9.

110

Modes/Products and Beneficiaries at Wasil

Table 5.10. Time-series of Major Performance Indicators

113

Table 5.11 Operational Expenses 2008-12

115

5.0 ISLAMIC FINANCIAL COOPERATIVES & NON-PROFIT-ORGANIZATIONS

Table 5.12. Flow of Charity Funds (2008-13)

116

Chart 5.1:

Table 5.13. Donations from Borrowers (2008-13)

116

Table 5.14. Growth of RDS

118

Institutional Structure for BMTs in Indonesia

104

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President of Islamic Development Bank (IDB) Group Ahmed Muhamed Ali speaks during the “Third IDB 1440H Vision Commission Meeting” in Kuala Lumpur March 23, 2006. REUTERS/Zainal Abd Halim

ABOUT THOMSON REUTERS

About the Islamic Research and Training Institute A Member of

The Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group (IDBG), was established in 1401H (1981). The principal aim of IRTI is to undertake research, training and advisory activities in Islamic Economics and Islamic Finance to facilitate the economic, financial and banking activities in IDB member countries to conform to Shari’ah. A knowledge-based organization, IRTI, is considered to be one of the pioneers and key centers of excellence around the world in promoting and supporting the development and sustenance of a dynamic and comprehensive Islamic Financial Services Industry (IFSI), which supports the socio-economic development of IDB member countries and Muslim communities across the globe.

Vision

To be the global knowledge center for Islamic Economics and Finance by 1440H (2020)

Mission

To inspire and deliver cutting edge research, capacity building, advisory and information services in the area of Islamic Economics and Finance

IRTI Services Advisory and Consultancy IRTI provides comprehensive advisory and consultancy services in the fields of Islamic Finance and Economics with global outreach to the public and private sectors. Backed by over three decades of industry experience, IRTI’s advisory and consultancy services add real value to the clients’ businesses. In addition to IRTI’s renowned experts, IRTI utilizes industry experts, affiliate partners and IDB Group members entities’ experts to provide advisory and consultancy services to clients. TRAINING AND CAPACITY BUILDING IRTI seeks to build capacities in the Islamic financial services industry through comprehensive training programs in various

fields, such as, Islamic banking, insurance, capital markets. It also seeks to strengthen the Islamic social finance sector by providing training courses targeted at zakah, awqaf and Islamic microfinance institutions. Research IRTI is a catalyst in the advancement of the Islamic Economics and Islamic Finance fields. Currently IRTI’s research agenda is focused on five clusters, namely: Islamic Financial Institutions and Financial Sector Development, Islamic Financial Products Development, Financial Stability and Risk Management, Economic Development in OIC member countries, and Human Development in light of Maqasid Al Shari’ah.

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MESSAGE The Islamic social finance sector comprising zakah, awqaf and non-profit microfinance institutions faces many challenges. At a micro level, institutions in this sector need to address the issue of sustainability in the supply of funds. A sustained flow of social funds demands high degrees of social acceptance and credibility, which in turn, are influenced by levels of integrity, transparency and professionalism in the management of these funds. Related to this is the institutional need for adequately trained professionals and managers well-versed in the Shariah aspects well as in scientific techniques of management of such charity-based and not-for-profit institutions. At a meso level, there appears to be a need for better supporting infrastructure including networks, associations, providers of education, training and consultancy services. Macro level challenges perhaps include absence of enabling regulatory and policy frameworks. Identifying these challenges constitutes the first step towards meeting them.

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A comprehensive understanding of the sector requires information. Unfortunately the available information pertaining to the sector is neither timely, nor adequate. New information need to be produced through research and documentation. The present initiative is a step in this direction. This is the first in a series of research-based reports towards a comprehensive documentation of trends in the Islamic social finance sector comprising zakah, awqaf and non-profit microfinance institutions. The report also undertakes a rigorous analysis of the legal and regulatory environment, supporting infrastructure and good practices by key players in the sector. Zakah, sadaqah and awqaf as instruments of philanthropy as well as various not-for-profit modes of Islamic finance occupy a central position in the Islamic scheme of poverty alleviation. Therefore, this initiative is of special significance to IRTI, since poverty alleviation and promotion of Islamic economics and finance are two strategic objectives in line with the vision and mission of the IsDB Group and IRTI. The report has been prepared by a team of researchers from IRTI who have painstakingly collected and analyzed data pertaining to the sector throughout the year using a variety of means including personal visits and focus group discussions involving key stakeholders in the sector. Let me take this opportunity to congratulate the team for producing an excellent piece of work. At the same time, let me also invite you to share your views and opinions for further enhancement of its value. I hope this report would play a very positive role in initiating and shaping a productive dialogue among policy makers and all major stakeholders for strengthening the global Islamic social finance sector.

AcknowledgEment After growing at a frenetic pace for over four decades, mainstream Islamic finance is now understood to comprise banking, insurance and financial market participation. These are for-profit segments of the Islamic economy. The impressive growth has also been matched by a large scale increase in research and documentation pertaining to these segments. At the same time there appears to be a gross imbalance in resources committed to research and documentation of the Islamic social, philanthropy-based and not-for-profit sector. The IRTI internal team entrusted with the formulation of its Strategy noted this imbalance with concern and rightly identified the present study as a flagship multi-year project of IRTI. The team merits appreciation of all stakeholders in the sector including that of the authors of the present study. This study on the Islamic social finance sector comprising institutions rooted in Islamic philanthropy, e.g. zakah, sadaqa and awqaf and in cooperation and solidarity has been undertaken by an internal cross-functional team of four researchers from IRTI. Major findings of a study undertaken for this purpose were presented at an intensive workshop on the theme “Strengthening Islamic Social Financial Sector” held in Bogor, Indonesia during April 29-30, 2013 in collaboration with the National Zakat Board (BAZNAS), Bogor Agricultural University and the Indonesian Association of Islamic Economics. The event was attended by a large number of participants from the academia, Ministries of Religious Affairs, apex regulatory bodies, central banks, networks and associations and organizations that are engaged either in direct mobilization and management of zakāh and waqf resources as a tool to alleviate poverty, or in development of good practices in the field of management of these sectors through research, training and consultancy. The revised document was later presented at the Global Islamic Finance Forum organized by IRTI and General Council of Islamic Banks and Financial Institutions (CIBAFI) in the sidelines of the Islamic Development Bank Group BoG Meetings at Dushanbe, Tajikistan on May 19, 2013. The study and the preparation of the Report have involved interaction with these experts at various stages of its

development. Some of the experts who deserve special mention are: • Dr Didin Hafidhuddin, BAZNAS and World Zakat Forum, Indonesia • Dr Irfan Syauki Beik, BAZNAS, Indonesia • Sr Nana Mintarti, Indonesia Magnificence Zakat (IMZ), Dompet Dhuafa Republica, Indonesia • Br Ali Sakti, Bank Indonesia, Indonesia • Dr Amin Aziz, Center for Microenterprise Incubation (PINBUK), Indonesia • Dr Rahmatullah, All India Council for Muslim Economic Upliftment, India • Br Arshad Ajmal, Al Khair Credit Cooperative, India • Dr Amjad Saqib, Akhuwat, Pakistan • Sr Farida Tariq, Wasil Foundation, Pakistan • Dr Raja Muhammad Hanif, Ministry of Religious Affairs, Government of Pakistan • Br Mirza Rizwan Baig, Shaukat Khanum Cancer Hospital, Pakistan • Dr Mahmoud Ahmad, IBTRA, Islami Bank Bangladesh • Dr. Shamsiah Bte Abdul Karim, Majlis Ugama Islam Singapura (MUIS), Singapore • Br Amran Hazali, PPZ-MAIWP, Malaysia • Dato Dr Syed Ghazali Wafa, Angkasa Syariah Financing Cooperative Limited (KOPSYA ANGKASA), Malaysia • Dr Norazlina Abd Wahab, Islamic Busines School, Universiti Utara Malaysia • Hjh Rose binti Abdullah, Universiti Islam Sultan Sharif Ali, Brunei Darussalam • Br. Ak Md Hasnol Alwee Pg Md Salleh, Universiti Brunei Darussalam, Brunei Darussalam A project of this nature would not have been possible without the cooperation and support of major stakeholders in the sector. We are much beholden to those who have contributed to the present study and look forward to their continued support as we move forward. Dr. Mohammed Obaidullah Project Leader Islamic Social Finance Report

Prof. Dato’ Dr. Mohd. Azmi Omar Director General Islamic Research and Training Institute


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The British Telecom tower is seen silhouetted at dusk in central London on April 28, 2008. REUTERS/Toby Melville (BRITAIN)

EXECUTIVE SUMMARY

The sun sets behind the Petronas Twin Towers in Kuala Lumpur June 26, 2006. REUTERS/Zainal Abd Halim (MALAYSIA)

The Islamic social finance sector broadly comprises the traditional Islamic institutions based on philanthropy zakah, sadaqah and awqaf; those based on mutual cooperation e.g. qard and kafala; and also the contemporary Islamic not-for-profit microfinance institutions that use for-profit modes primarily to cover costs and sustain their operations. This report presents the historical trends, future challenges and prospects for the various segments of the Islamic social finance sector in South and Southeast Asia, with the following countries under study: Indonesia, India, Pakistan, Bangladesh, Malaysia, Singapore and Brunei Darussalam. This report examines the broad regulatory and policy environment at the macro level as well as good and bad practices at the meso and micro levels to seek answers to the following questions as well as to encourage healthy deliberations around them:

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• How much regulation is right for the Islamic social finance sector? Do stringent laws and over-regulation stifle the sector? • How do we harmonize the different regulatory frameworks governing institutions based on religious and secular philanthropy, co-operation, not-for-profit and for-profit finance? How do we develop a unified and integrated framework for the Islamic social finance sector? • What role do supporting institutions, e.g. networks and associations, institutions of higher learning, trainers and consultants, developers of standards play in the sector?

A. Zakah 1. How do we ensure standardization in defining zakatable assets and estimating zakah liability in the presence of diversity in legal opinions?

The case for having standardized and globally acceptable definitions of zakatable assets and methods of estimating zakah liability does not appear to be a strong one. Since Islamic societies are typically characterized by multitude of madhabs and schools of thought, the zakah laws must retain enough flexibility to accommodate alternative views. The diversity in legal opinions should be respected. It is more practicable to ensure that zakah estimation is an outcome of consultative processes between the muzakki and the zakah collecting institutions.

Contrary to commonly held perceptions regarding lack of dependability in flow of donations, zakah is sustainable, dependable and could be a growing source of funds for institutions that acquire the necessary professionalism in fund-raising and seek continued betterment in their social credibility through integrity, transparency and good governance. 3. Does the state perform better than private institutions in the domain of zakah management?

The success or failure of an institution as zakah collector and distributor is not so much dependent on whether it is in government or private hands, but on the credibility and trust it enjoys among the muzakki population, which in turn are a function of the integrity, transparency and good governance reflected in its practices and as perceived by the stakeholders.

4. Should zakah payment be made compulsory? At a macro-level growth in zakah mobilization appears to be influenced more by incentives that make zakah payment an attractive proposition and less by penalties and punishments. Where zakah payment is made compulsory and non-compliance invites penalties and punishment, enforcement is invariably weak for a variety of reasons. Strict laws do not combine well with weak enforcement. At the same time, where zakah payment is voluntary, its mobilization has not been any less impressive. 5. Should a muzakki be allowed to choose between public and private zakah collector?

Executive Summary

6. Should zakah payment be allowed as a deduction to income tax payable or to taxable income?

2. Is zakah a dependable source of funds for institutions?

• How do we enhance transparency, accountability and governance in the sector? More specifically, the following questions relevant to specific sub-sectors have major policy implications. While we need to differentiate between Shariah-legal questions and efficiency-related questions for better comprehension, many apparently Shariah-legal issues are related to efficiency.

efficiency and gives more choice to the muzakki. However, competition also presupposes a level-playing field for the players. Where the public agency also assumes the role of the regulator of the zakah sector, it should restrict itself to regulation only, leaving zakah collection to private agencies.

There seems to be nothing inherently wrong with coexistence of public and private agencies as zakah collectors. Zakah mobilization is expected to be institutionelastic just as savings mobilization is. Competition brings

Where zakah collection and distribution is entrusted entirely to the state, zakah may be seen as a component of aggregate resources available to the state. In this sense, zakah payment may be seen as a perfect substitute of the direct taxes to the state and may be allowed as deductions to tax payable. However, there seems to be merit in allowing zakah payment as a deduction to taxable income only (at par with various kinds of charity flows) where private agencies are permitted to collect zakah. Treating zakah payment at par with taxes to state when the same is made to private agencies might seriously erode state revenues.

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7. Is corporatization good for zakah management? Corporatization that implies use of a large network of private institutional collectors for zakah mobilization is seen to be far more efficient as compared to a large number of unconnected private individual collectors. The issue of how to remunerate the corporate collector is however a trickier one and calls for putting in place adequate and transparent mechanisms to ensure that a minimal percentage of zakah collected is utilized in this manner. Corporatization should not be pushed too far, e.g. private agencies being allowed to offer zakah investment services as this may involve a misalignment of objectives of such private agencies with those of other stakeholders. 8. Should zakah be allocated for other types of beneficiaries “only” after the needs of the ultra-poor are addressed?

In the light of various legal opinions relating to distribution of zakah among eligible beneficiaries there is a case in favor of a scheme of prioritization among different types of beneficiaries with highest priority being given to the needs of the ultra-poor.

9. How do we ensure that zakah does not create dependence among beneficiaries and leads to their economic empowerment?

Basic consumption needs are, by definition, more urgent than needs that may be deferred to a future date. In this sense, zakah is traditionally viewed as a solution to the consumption needs of the poor. However, there is also merit in using zakah to enhance the wealth-creating


capacity of the poor so that they are able to get out of the vicious circle of poverty and find lasting solutions to their needs. A complete neglect of the empowerment dimension is likely to perpetuate the dependency syndrome among the poor.

Shariah. A zakah institution essentially acts as an agent of zakah payer or muzakki. As the principal, the zakah payer or muzakki would like its agent to ensure that the zakah funds flow to eligible beneficiaries according to Shariah. Therefore, fulfillment of the conditions relating to collection and distribution of zakah is the most fundamental requirement for a zakah institution to earn the trust of the zakah payers and enhance its credibility.

10. Does the requirement of tamleek imply unconditional cash transfer?

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The term tamleek implies a process of imparting ownership. In the context of zakah, tamleek is seen as a requirement that essentially implies making the mustahiq the owner of donated funds. This clearly rules out the possibility of giving zakah as a loan to be repaid later. The ownership question however, opens up two further issues. Should the poor beneficiary have absolute right to decide how he/she is going to use the funds? Where there is a genuine possibility that the poor may not use the donated cash in an optimal way, can the zakah distributing institution place a conditionality on the possible use of zakah, e.g. zakah payment in the form of scholarship to poor students for covering tuition fees. Given the recent evidence available in development literature in favor of unconditional cash transfers (UCT) over alternative ways of financial assistance to beneficiaries, the case in favor of interpreting tamleek as unconditional cash transfer appears to be a sound one. However, it is perhaps a good idea to treat the issue more as an efficiency-related than a Shariah-legal one.

11. Should zakah be used for giving loans (qard)? Will the answer be different if zakah funds are used to create a revolving fund (credit pool) to leverage the relatively scarce zakah funds for meeting the needs of a much larger number of the poor? Will the answer be different if the revolving fund is owned by the poor?

Traditionally scholars have frowned upon the prospect of giving zakah as loans, since zakah is supposed to make the mustahiq the owner of donated funds and not a borrower of funds. The objections seem to lose weight in the face of the leveraging possibility that loans offer. Arguably, a professionally managed zakah-financed microfinance program can potentially serve a much larger population of the poor as compared to the prospect of grant-making to a small number of beneficiaries. Further, a scenario where the poor are also made the sole owner of the revolving fund is on far stronger grounds. While the first scenario appears to involve efficiency-related gains while raising Shariah-legal concerns, the second one is clearly superior as it simultaneously takes care of the tamleek requirement.

12. How do zakah institutions enhance trust and credibility?

Executive Summary

Zakah payment is an act of worship (ibadah) for the zakah payer or muzakki. It is a matter of grave concern for the muzakki to ensure that his/her zakah is not only paid, but also distributed in conformity with the norms of the

13. How important is the need to separate zakah funds from other forms of donor funds? Separation of zakah funds from other forms of donations is a primary concern for a zakah institution acting as an agent of the zakah payer or muzakki for distribution of zakah. Since the conditions relating to eligibility apply only to zakah and not to other forms of donor funds, it becomes extremely important to ensure a wall of separation between zakah and other types of funds. The zakah institutions must put in place appropriate standard operating procedures, accounting and governance practices to ensure the same. 14. How important is the need to place a cap on percentage of zakah that may be used to absorb administrative costs? Shariah identifies zakah officials as one of the 8 eligible categories of beneficiaries. Therefore, a part of the zakah mobilized by the institution may be used to absorb the administrative and operational costs of the zakah institution. While some would like to place a legal cap of one-eighth on the percentage of zakah that may be utilized for this purpose, others would like to treat the matter as one of good governance. As a good practice, a zakah institution that typically collects other forms of donations should absorb its administrative and operational costs in such “free” funds as much as possible.

however, need for adequate caution while designing an institutional mechanism for this purpose. It is not easy to differentiate between genuine and willful defaulters for any microfinance institution operating with inadequate and imperfect information. The simultaneous functioning of a micro-credit initiative and a zakah-based initiative to cover credit defaults by poor borrowers under the same organizational umbrella may also involve serious conflict of culture and moral hazard issues.

B. Awqaf 1. What should be the coverage of an ideal legal framework for awqaf?

2. How should the regulator strike a balance between concerns of preservation and development?

15. How important is the need to ensure that the utilization of funds is in accordance with the wishes of the giver?

Within the overall eligibility framework stipulated by Shariah, a zakah payer or muzakki may have a unique preference or priority scheme in favor of specific regions, beneficiaries or projects. In the interest of good governance, a zakah institution should ensure compliance of such “revealed preferences”. While there may be practical hurdles that come in the way of such compliance for some zakah institutions, an increasing use of IT in zakah management may make a muzakki-to-mustahiq flow a reality as well as a good practice to replicate.

16. Should zakah be used for covering or guaranteeing against credit defaults?

There is a case in favor of using zakah for covering genuine credit defaults by the poor, since such borrowers qualify as eligible beneficiaries in the eyes of Shariah. There is,

Waqf law should provide a comprehensive definition of waqf that includes both permanent and temporary waqf. However, it must be recognized that once the waqf has been declared, it is irrevocable. It must explicitly cover various types of waqf: family and social waqf, direct and investment waqf, cash waqf, corporate waqf.

The legal framework must clearly articulate the permanent nature of waqf arising from the principle of “once a waqf, always a waqf”. At the same time, it must clearly recognize the importance of sustaining and enhancing the benefits flowing out of the waqf, this being the ultimate purpose of the act of waqf. This is possible only when the importance of development of waqf is clearly recognized. An undue emphasis on preservation (e.g. constraints on leasing) would lead to neglect of developmental possibility with private participation. Similarly, an undue emphasis on development, to the extent that it results in loss of full or partial ownership of asset to private developers) would dilute and vitiate the very concept of waqf. The regulatory framework must seek to strike a balance between concerns about preservation and development.

4. How does waqf compare with trusts and other forms of not-for-profit organizations in terms of financial and non-financial costs? Awqaf in general, have fallen behind common trusts and other forms organizing charitable and not-for-profit activities in terms of responding to evolving societal needs. Creation and management of waqf is a relatively more complex and demanding process and involves additional financial and non-financial costs. Incentivizing waqf in a manner similar to secular trusts and other forms of not-for-profit organizations, e.g. tax rebate on contributions for the donor/ endower would make the system both efficient and fair. 5. Must a waqif (endower) always be an individual Muslim?

6. Should waqf be restricted only to immovable properties like land and buildings?

The legal framework must not put undue restriction on creation of new waqf. There is no reason to disallow individuals from making waqf beyond one-third of their assets, since fiqhi rules permit the same unless made on the person’s deathbed. Legal requirements that make the process more difficult, e.g. approval of the head of the state, are both unnecessary and undesirable. A simple process of registration with the regulatory body is both desirable and adequate. While obstacles to waqf creation must not be there, the legal framework should actually encourage creation of new waqf by minimizing financial and non-financial costs of waqf creation and management.

The legal framework should not restrict the definition of the endowed asset to immovable tangible assets, such as real estate, but should also explicitly recognize movable, financial and intangible assets, e.g. cash, stocks, bonds and financial securities, transportation vehicles, rights on land and building, rights of leasing, and rights of intellectual property. Given the many benefits of cash and corporate waqf, law must explicitly provide a framework for them, including their investment dimension.

7. How should family waqf be dealt in the law?

3. How should the law ensure creation of new waqf?

The legal framework should not restrict making a waqf only to Muslim individuals and should permit both nonMuslims and institutional waqif as long as the purpose of waqf is religious or charitable.

The institution of family waqf must be revived. Since the distinction between family and public waqf is largely a matter of nature of beneficiaries, the law must provide for an explicit basis of distinction. For example, where more than 50 percent of the net available income of a waqf property is exclusively applied to religious and charitable purposes, such a waqf may be deemed to be a public waqf. Similarly, endowments where more than 50 percent of the net available income is meant for the waqif’s descendants, such a waqf may be treated as family waqf.

8. How efficient is the state agency as mutawalli?

Waqf is originally an institution and always meant to be in the voluntary sector with management of waqf entrusted to private parties. However, the state has often sought to play a role in the ownership and management of awqaf, at times governed by motives to expropriate and at other times, by need to curb corrupt practices of private trustee-managers. Whether ownership and management of awqaf should be in private hands or with the state, has no clear answer. There seems to be some Islamic Social Finance Report

17 |

positive evidence that the state can indeed play the role of an efficient manager of awqaf. Contrary to general belief, state control may not necessarily hamper creativity and innovation in awqaf development (e.g. corporate waqf as well as cash waqf in Malaysia and large-scale development of existing awqaf in public-private mode in Singapore). 9. Where waqf management is in private hands, what should be the role of the regulator in its appointment, and monitoring?

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Where waqf management is in private hands, the state agency as regulator should clearly stipulate and clear eligibility criteria for a mutawalli or nazir or trusteemanager not only covering aspects of integrity and trust-worthiness but also professional competence. Given that the individual or institution so nominated meets the criteria, the regulator must respect the expressed intention of the waqif or endower. Laws must clearly articulate the responsibility of waqf management that should not only emphasize preservation and protection of waqf assets, but also their development. The responsibility should also include transparent and honest reporting of financials. Laws must clearly stipulate the method of determination of remuneration of managers, sufficiently incentivizing sound and professional management of waqf assets.

as an exception to the above general rule, when this is deemed to be in the public interest. Such exchange would however, require prior permission from the regulator with additional conditions that the same is (i) necessary or beneficial to the waqf; (ii) consistent with the objects of the waqf; (iii) against another asset of equal or higher value; (iv) and with due respect to the inalienability of religious awqaf.

There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, and transparency. The measures must act as effective deterrent against further acts of apathy, neglect and misappropriation. At the same time, the state should not be allowed to wield absolute power to engage in irrational or whimsical action against the mutawalli. Instances of unfair and unlawful action by the state are numerous, as are cases of corrupt mutawallis. There needs to be effective checks and balances in the law against wrongful acts both by the state as well as the private mutawallis. Power has a tendency to corrupt and the possibility of such action can significantly increase the non-financial cost of creating new waqf. Endowers are likely to seek alternative forms of organizing their charitable activities if there is a possibility of undue state interference in the management of the endowed assets or outright usurpation of the endowed assets by the state.

11. How should existing awqaf be preserved and protected?

Executive Summary

The law must explicitly prohibit the waqf asset from being used as a mortgage, confiscated, given away, sold, inherited, exchanged or being alienated into any form of right. The waqf asset may however be exchanged

Waqf development must be a mandatory obligation of the waqf management. Innovating financing methods may be employed that bring in new waqf capital for development of existing awqaf. Innovative methods may also be employed that facilitate private-public partnerships (e.g. involving issue of sukuk) that involve transfer of rights to lease as distinct from ownership rights to private financing entities for finite, yet long enough period to provide a fair return on investment capital. Legal constraints motivated by preservation concerns, such as on long-term leasing of awqaf assets should be removed.

13. How effective are the penalties imposed by law against erring and dishonest private mutawallis?

10. Should the state have absolute power to terminate a mutawalli nominated by waqif and take waqf assets under its own management?

1. Is Islamic microf inance better placed than its conventional counterpart to address the needs of the ultra-poor?

12. How should existing awqaf be developed?

Financial penalties, especially when these are expressed in absolute numbers tend to lose their effectiveness as deterrents over time. These should either be subjected to continuous revision or be linked to the quantum of misappropriation. Physical punishments are potentially more effective.

14. How should the corpus of waqf be invested?

It is compulsory to invest waqf assets, be it real estate or moveable assets like cash. Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created. The assets purchased using the waqf investment returns do not form part of the waqf and therefore, may be resold unlike the original assets that have been given as waqf. Further, the conditions given by the waqif with regard to the investment of the waqf and/or that the returns from investment are to be spent on specific areas, is also binding. It would be rational to seek risk minimization through diversification or avoidance of high risk investment avenues. Risk minimization may however not be sought if the purpose of the waqf itself is to engage in specific risky ventures.

the expected return on the micro-enterprise is higher than the cost of debt. Such expectations may indeed materialize for the successful projects passing through “good times”. However, the same may not be true for all projects at all times. Debt-related liability can compound and accentuate the financial problems of a project experiencing bad times and hasten its failure. The pace, frequency and intensity of such failure is directly related to the levels of cost of debt. In contrast to debt, profit and risk-sharing mechanisms provide for a clear alignment between profitability of the project and cost of capital. The latter rises and falls in line with the realized profits of the venture. Islamic MFIs as compared to conventional MFIs are more inclined to use profit and risk sharing modes. Even when they use modes creating debt, e.g. murabahah, the quantum of debt once created cannot be increased through restructuring if the client fails to clear the debt in time. Further, given the Islamic emphasis on avoidance of debt, an Islamic MFI should refrain from seeking to entrap a client in ever-rising levels of debt.

C. Islamic Financial Cooperatives & Not-for-Profit Organizations

There are sound economic reasons why conventional microfinance and especially micro-credit may not be appropriate for the chronically poor and the destitute. Loans to the destitute may in fact make the poor poorer if they lack opportunities to earn the cash flow necessary to repay the loans. While a destitute may or may not be reluctant to incur debt and start a microenterprise because of risk and uncertainty with cash flows, profitmaximizing and risk-minimizing behavior on the part of the microfinance institution (MFI) would lead to exclusion of such clients. Usually such clients do not possess entrepreneurial and technical skills needed for wealth creation. Such an economically inactive individual would find it difficult to obtain financing from the for-profit MFIs. Indeed, more than financial services, these individuals must be provided for their basic needs, such as food, shelter, or guaranteed employment. Such safety nets may be funded through charity. In order to cross the skill-related barrier, such individuals would also need training for skills-development before they are able to make good use of microfinance. The safety nets may then be linked with microfinance programs, so that the same individuals may move through several stages – from abject penury to a stage where they are able to meet their consumption needs - then to a stage where they come to acquire necessary technical and entrepreneurial skills for setting up microenterprises - and then to a stage where they are able to obtain required funds from microfinancing institutions (MFIs) and have the microenterprises up and running. Fighting poverty thus, would require an integrated finance-plus approach or the provision of financial services along with business development services and that is linked to social safety nets. This is possible only by bringing philanthropy and cooperation into the model of microfinance. With institutionalization of philanthropy and its integration with for-profit microfinance, Islamic MFIs are perhaps better placed to address the needs of the ultra-poor.

2. Does high-cost microfinance push the beneficiaries into a debt spiral? How is Islamic microfinance different in this respect?

There are also sound economic reasons why high-cost microfinance may push the beneficiaries into a spiral of debt. Microfinance entails high administrative charges, monitoring costs and of course, high portfolio risk. As such, it is invariably costlier than the traditional sources of finance. At the same time, both the MFI and its clients may find this an attractive option if they believe that

3. How should charity be integrated with microfinance for IsMFIs? Charity and philanthropy occupy a central position in the Islamic scheme of poverty alleviation. Shariah clearly identifies 8 categories of beneficiaries who may benefit from zakah. Out of these, the potential beneficiaries relevant from the standpoint of poverty alleviation programs are the poor (fuqara), the destitute (masakeen), the indebted (gharimeen) and the zakah administrators (amileen). Scholars generally agree that zakah may be disbursed in the form of a grant or be used to form a revolving credit pool from which micro-loans may be provided. Zakah could thus form the basis of designing a range of programs for the poor, e.g. (i) safety net programs to meet basic consumption needs, health and education; (ii) economic empowerment programs involving skill enhancement and business development services; (iii) programs to provide emergency grants or credit; (iv) programs to provide micro-takaful; and (v) programs to provide guarantee against credit default. The administrative costs related to zakah management may partially be recovered from the zakah collected, thus paving the way for a self-sustained zakah management institutional infrastructure.

There is total flexibility with respect to beneficiaries of voluntary sadaqah. In case of sadaqah jariya or waqf, perpetuity of endowed assets is an essential condition that ensures that benefits from the assets flow to the beneficiaries on a sustainable basis. Waqf similar to zakah may form the basis of designing various poverty alleviation initiatives as stated above. While in case of zakah the major requirement is that benefits must flow into the hands of the poor, in case of waqf the same must flow to beneficiaries as intended by the donor. However, if the intention of the donor is not explicit, the proceeds may


19 |

be used for general-purpose community welfare projects including poverty alleviation initiatives. Waqf therefore, provides a definitive mechanism with added elements of sustainability and flexibility. The issue of high cost microfinance may now be addressed by creating awqaf whose benefits may now be dedicated for absorption of specific cost elements so as to make microfinance affordable to the ultra-poor.

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There seems to be merit in a uniform regulatory framework for all forms of organizations that are engaged in microfinance activities. The laws applicable to the banking sector are deemed to be too restrictive for microfinance activities. At the other extreme the laws applicable to cooperatives may accord the necessary flexibility of operations. On the flip side, a growing microfinance institution, if organized as a cooperative may face funding constraints due to the one-member-one-vote rule. Expansion of capital in a cooperative would require steady growth in membership. Compared to a cooperative, a corporate entity apparently makes it relatively easier to raise capital where voting rights are proportional to shares held. This realization has led to the search for dedicated laws for microfinance providers irrespective of whether these are organized as cooperatives or corporations or any other organization forms. A general consensus seems to exist on the need for simple regulations that are not over-restrictive, which do not stifle creativity but improve transparency, accountability, good governance, and allow the MFIs to meet the capital needs of growth. Islamic MFIs in general, should be permitted to raise deposits from their members. Raising deposits from the public is likely to bring other prudential norms into place.

5. How does the asset composition of a typical Islamic MFI look like? Is there an “ideal” mode of finance that needs to be promoted?

Executive Summary

In an Islamic system, far greater priority is given to the needs of the chronically poor than those of the poor or the moderately poor or the not so poor. Therefore, an Islamic MFI unlike its conventional counterpart is expected to aggressively integrate the various forms of Islamic philanthropy with for-profit microfinance to address the multiple issues related to poverty alleviation programs.

4. Should financial cooperatives and not-for-profits be grouped with for-profit microfinance institutions and be subjected to a unified regulatory framework?

less favored. (ii) Murabahah is familiar. For conventional MFIs venturing into Islamic MF and using murabahah, the transition is least demanding. Among all Islamic products, murabahah comes closest to interest-bearing micro loans.

Murabahah remains overwhelmingly popular among IsMFIs for the following reasons. (i) Murabahah is simple. The straightforward calculation of the installments for repayment is more easily comprehensible by the beneficiary. In contrast to this, the payments under a partnership-based mode are uncertain and therefore,

For Islamic modes of finance involving multiple contracts, e.g. murabahah, Shariah-compliance often requires careful sequencing of contracts to ensure that profits are associated with risk-bearing. However, in the context of microfinance involving large number of repetitive contracts involving small values, adherence to desired sequencing becomes practically impossible. Creative fiqhi solutions, e.g. istijrar may have significant advantages above murabahah as the former is tailor-made for repetitive transactions. Par tnership-based modes are demanding on the part of the beneficiary in terms of the need for proper bookkeeping and ascertainment of the financial results of the business. Financial illiteracy acts as a constraint. Further, the beneficiaries may be justifiably reluctant to share information relating to all aspects of their business with the MFI. Output-sharing modes or revenue-sharing modes may work better in such situations due to the “revealed” nature of the benefits to be shared between the parties and difficulties, uncertainties associated with cost calculation.

salam can involve exploitation when the advance price paid to the poor farmer is artificially pegged at low levels due to his/her weak bargaining power. An Islamic economy promotes free pricing and allows intervention by the regulator only when natural forces of demand and supply are manipulated to result in an artificial price. By implication, price ceilings or administered prices are to be frowned upon in a market where there is free and fair play of competitive forces in determination of prices. However, in case of modes where the regulator is in a position to determine a fair estimate of the costs for the MFI, it may seek to regulate the profit margin so that prices charged by MFIs ensure full cost recovery and a fair amount of returns in the interest of sustainability. At times, identifying appropriate organizational structure may offer a bulwark against possible exploitation. In case of salam, an example presented is one of a farmer’s cooperative replacing the vendor and thus preventing exploitation of individual farmers by the latter. 7. How do we ensure that the actual cost of operations in case of not-for-profit modes, e.g. qard and kafala forms the basis of pricing?

6. Should profit rates be administered in case of micromurabahah and other modes? What measures need to be taken to ensure that Shariah-compliant modes of microfinance, e.g. murabahah, ijarah, salam, mudharaa, musharakah, mudharabah etc. do not turn into modes of exploitation?

For-profit Shariah-compliant modes offer no in-built protection against exploitation and abuse through overpricing. For example:

a. Rates on micro-murabahah and micro-ijarah financing are deemed Shariah-compliant while interest rates are not. However, both can be and often are exploitatively high. b. In case of participator y modes e.g. mudharabah, musharakah and mudharaa the sharing ratio could be unfairly biased against the poor beneficiary because of their low bargaining power. Similarly, in case of fee-based modes, e.g. wakala and hawala, the agent-MFI may charge an exorbitant fee for the same reasons. c. The permissibility of salam (sale of non-existent produce) is linked to the economic benefits it confers on poor farmers in need of pre-cultivation financing. However,

There is no consensus on how to estimate the actual cost of operations chargeable to the beneficiary under not-for-profit modes, such as qard and kafala. There is a need to develop accounting standards for estimation of actual cost of operations and clear guidelines on what should ideally be passed on to the beneficiary. Vigilance by Shariah scholars to prevent disguised riba may also ensure that actual administrative costs recoverable from the beneficiary in qard or kafala are not overstated.

8. What specific issues confront a conventional MFI seeking to transform into Islamic MFI? A conventional MFI seeking to transform into an Islamic MFI is confronted with a range of issues at various levels. It requires an enabling environment, a regulatory and policy framework that permits the MFI to engage in trade, leasing and investment in real projects. This is usually not permitted for a conventional MFI, viewed as a financial intermediary. Law must recognize the special status of Islamic MFIs that are financial intermediaries as well as players in the real economy at the same time. Fiscal constraints in the form of taxes on real transactions must be removed. 9. Should Islamic MFIs engage in “ women-only ” microfinance?

Islam gives utmost importance to family as the nucleus social institution that plays a major role in shaping the

future of mankind. It also sees a balanced role for men and women in ensuring the economic and social well being of the family. Islam promotes the concept of “family empowerment” by exhorting men and women to play their respective roles in seeking economic and social well-being of all members of the family. Indeed, the “women only” approach to conventional microenterprise development and poverty alleviation is alien to Islamic principles and values. Further, there is the possibility that women may be doubly exploited instead of being empowered where they are made to take the loan related liability while the male member in the family manages to “pocket” the cash. Therefore, there is merit in the argument that Islamic MFIs should aim to empower families and not women alone. 10. Should voluntarism be an integral component of microfinance? Given the discomfort associated with high cost of microfinance making it unaffordable to the ultra-poor, the institutionalization of charity as well as voluntarism is a creative strategy that has the effect of drastically cutting down operational costs. Thus, microfinance may now be provided at low or zero costs, making it affordable to the poorest of the poor. 11. Should philanthropy and for-profit finance be offered under one umbrella, as in the case of BMTs?

Models offering philanthropy and for-profit finance under one umbrella, as in the case of baitul maal (BMTs) may involve serious problems due to conflicting organizational culture and conflicting policy and regulatory framework. As has been observed in the case of Indonesian BMTs, most of them have over time, preferred to do away with their philanthropic aspirations (as charity houses) and concentrated on for-profit financing (as financing houses). The twin-track nature of the model seems to have been abandoned for all practical purpose.

Fur ther, combining Islamic charity, especially zakah collection and application with for-profit financing involves serious transparency and governance issues associated with commingling of funds. A major condition with raising zakah funds requires such funds to be directly channeled into the hands of the eligible beneficiaries or the poor and cannot simply be credited to the organization capital. In the absence of relevant accounting standards and regulatory norms to ensure the above, the Shariah scholars have generally discouraged the use of zakah funds in economic empowerment initiatives preferring the direct channels of distribution for consumption purposes instead. Law relating to charities must clearly address such governance issues. Answers to the above questions require careful collection and analysis of data and information pertaining to legal


21 |

and regulator y frameworks as well as good and bad practices at macro, meso and micro levels. Attempts to collect, analyze, collate and interpret data involved personal visits to key stakeholder organizations, e.g. ministries of religious affairs, central banks, apex regulatory bodies, networks and associations, major private not-for-profit organizations. Methods of data collection involved interviews, focus group discussions and workshops. An initial finding that such research yielded is that the availability of data on the sector in a given country is very much a function of maturity, efficiency, and professionalism in the sector in that country. The less developed a sector is in a given country, the more difficult it is to obtain any relevant data.

Notwithstanding this major constraint, the data that could finally be collected were invaluable and provided the researchers with excellent insights into the inter-country differences in practices. The following first-cut observations have serious policy implications and therefore, may form the basis of further research and policy dialogue. These are presented as responses to the above mentioned questions and presented in the same order. It should be noted that the responses should not be viewed as definitive answers to the critical questions, but as first-cut answers based on existing regulations and practices in countries and regions that have witnessed impressive growth and may be considered healthy and reasonably well-developed.

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Executive Summary

Office workers cast their shadows as they walk on a busy street in central Sydney June 9, 2011. Australian employment rose by a disappointingly meagre 7,800 in May, a second month of weakness that led investors to slug the local dollar while greatly scaling back expectations of a rate rise at all this year. REUTERS/Daniel Munoz


24


REGION UNDER FOCUS

A Kashmiri fisherman rows his boat through autumn leaves in Kashmir’s Dal Lake in Srinagar, November 7, 2004. Kashmiri separatists gave a cautious welcome on Sunday to India’s offer to allow them to visit Pakistan and said it could help to restart a stalled dialogue process. REUTERS/Fayaz Kabli FK/TW

25

This is a study of the Islamic social finance sector in South and Southeast Asia. It focuses on the countries in this region with sizable Muslim populations - Indonesia, India, Pakistan, Bangladesh, Malaysia, Singapore and Brunei Darussalam. It is estimated that this region alone accounts for about 720 million (45 percent) of world Muslim population of about 1.6 billion.

2.1 Trends in Economic Aggregates This section focuses on broad socio-economic indicators for the region, such as economic growth, structure of the economies, employment, savings and investment, inflation, business environment and governance issues, which directly and indirectly affect the earnings and poverty levels of the households.

The seven countries under focus are diverse in their natural resources, population, geographic area and levels of economic development. Brunei Darussalam and Singapore are very small compared to India and Indonesia. According to the World Bank classification of countries, Bangladesh is a low-income country; India, Indonesia and Pakistan are lower middle-income countries; Malaysia is upper middle income; while Brunei Darussalam and Singapore are high-income countries.

| Figure 2.1: GDP Per Capita, 2011 (current USD) SINGAPORE PAKISTAN

India and Indonesia are the largest countries in terms of both size and population. The estimated population of India was 1,223.2 million in 2012 with average annual growth rate of 1.51 percent during 2000-2011. The Muslim population constituted 14.4 percent of the total population, or 176.1 million, the second largest Muslim population in the world behind Indonesia. The estimated population of Indonesia was 244.5 million in 2012, with Muslim population at 88.1 percent or 215.4 million, the highest in the world. Indonesia’s average annual growth rate was 1.17 percent during 20002011. Pakistan is the third largest country in terms of Muslim population at 172.5 million (96.4 percent), followed by

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Bangladesh at 135.6 million (90.4 percent). The population growth of Pakistan and Bangladesh has remained 1.87 percent and 1.40 percent per annum respectively during 2000-2011. The Muslim population of Malaysia was found to be 18.4 million or 61.4 percent of the total population in 2010. The estimated Muslim population of other selected countries like Singapore and Brunei Darussalam were 0.8 million (14.9 percent) and 0.2 million (51.9 percent) respectively. The average annual population growth rate of Singapore has remained 2.25 percent during 200-2011, which was the highest among the selected countries.

MALAYSIA INDONESIA INDIA

27 |

BRUNEI BANGLADESH

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Bangladesh

Brunei

India

Indonesia

Malaysia

Pakistan

Singapore

767.135

41,662.15

1,523.03

3,510.59

9,941.29

1,202.32

50,000.34

Source: World Development Indicators (2013), World Bank

2.1.1 Economic Growth | Table 2.1: Total Population, Density of Population and Percentage of Muslim Population Total Population (million-2012)

Percentage of Muslim population (2010)*

Estimated Muslim Population in millions

Bangladesh

150

90.4

135.6

Brunei Darussalam

0.4

51.9

0.2

India

1223.2

14.4

176.1

Indonesia

244.5

88.1

215.4

Malaysia

29.9

61.4

18.4

Pakistan

178.9

96.4

172.5

5.4

14.9

0.8

Singapore

Source: World Development Indicators (2013), World Bank * Accessed from http://www.guardian.co.uk/news/datablog/2011/jan/28/muslim-population-country-projection-2030#data

Region under Focus

Almost all the economies under study made economic progress over the last decade. The real GDP of Bangladesh, Indonesia and Singapore almost doubled over the past decade, while the real GDP of India more than doubled during the same time period (see Figure 2.3). During 2000-2012, the economy of India grew at an average annual rate of 7.03 percent, which is the highest growth rate among the selected countries, followed by Bangladesh (5.93 percent) and Singapore (5.61 percent). Indonesia experienced an average annual growth rate of 5.33 percent, while Malaysia and Pakistan registered a growth rate of 5.01 percent and 4.46 percent respectively during the same period. However, Brunei Darussalam recorded a low average annual growth rate of 1.56 percent during 2000-2012. During the financial crisis that hit the global economy, Brunei Darussalam was adversely affected, and its growth rate was

just 0.15 percent in 2007. It further declined and became negative at (-)1.94 percent and (-)1.77 percent during the subsequent two years. Bangladesh was successful in keeping its growth momentum and was not affected by the crisis. Similarly, Indonesia was not affected by the crisis. Malaysia and Singapore recorded negative growth of (-)1.51 percent and (-)3.63 percent respectively during the crisis. The economy of Pakistan slowed down during the crisis. India, which was growing at about 9 to 10 percent annually during 2005-2007, slowed down and recorded a growth rate of 6.19 percent and 5.04 percent respectively in 2008 and 2009. However, the Indian economy picked up subsequently and experienced a growth rate of 11.23 percent in 2010 (see Figures 2.4 and 2.5). Bangladesh, India and Indonesia are expected to grow at average annual rates of more than 6 percent over the next 6 years, while Malaysia and Brunei Darussalam are expected to grow at average annual rates of 5.24 percent and 4.60 percent per annum respectively. The economy of Singapore and Pakistan are expected to grow at average annual rates of 3.51 percent and 3.21 percent over the next 6 years.


| Figure 2.2: GDP in billion USD

| Figure 2.5: GDP Growth Rate 2000-2012 Bangladesh, India and Pakistan

SINGAPORE PAKISTAN MALAYSIA INDONESIA INDIA BRUNEI BANGLADESH

12.00 10.00 8.00

0.00

200.00

Bangladesh

400.00

Brunei Darussalam

India

600.00

800.00

1000.00

1200.00

Indonesia

Malaysia

Pakistan

Singapore

2011

88.55

7.02

1046.66

292.48

154.26

118.80

173.81

2005

61.39

6.65

658.55

207.89

118.22

94.36

121.10

2000

47.12

6.00

474.69

165.02

93.79

73.95

95.92

6.00 4.00 2.00 0.00 2000

2001

2002

2003


2004

2005

2006

2007

India

Bangladesh

2008

2009

2010

2011

2012

Pakistan


| Figure 2.3: Average Annual GDP Growth 2000-2012

2.1.2. Structure of Economies

7.028

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5.932

5.328

5.014

5.62

The composition of GDP varies with the average income level of the countries. The contribution of the agriculture sector is low in the countries with higher per capita income compared to the countries with low per capita income. Similarly, the relative contribution of services and industrial sectors is high in high-income countries compared to the low-income countries. The relative contribution of the agriculture sector to Pakistan’s GDP was the highest (22 percent) in 2011, followed by Bangladesh (18 percent) and India (17 percent). The relative share of the agriculture sector of the GDP of Indonesia and

4.459

1.555

Bangladesh

Brunei Darussalam

India

Indonesia

Malaysia

Pakistan

29 |

Singapore

Source: World Economic Outlook (Oct 2013), International Monetary Fund

Malaysia was 15 percent and 12 percent respectively in 2011. The value addition of the industrial sector to the GDP of Brunei Darussalam was found to be the highest (72 percent), followed by Indonesia (47 percent), Malaysia (40 percent), Bangladesh (28 percent) and India (27 percent) in 2011. However, the relative contribution of the services sector to the GDP of Singapore was the highest (73 percent) among the countries under study in 2011. (see Figure 2.6)

| Figure 2.6: Agriculture, Industry, and Services in the 7 countries for 2011 | Figure 2.4: GDP Growth Rate 2000-2012 Brunei, Indonesia, Malaysia and Singapore

100% 80%

16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00 -4.00

60% 40% 20% 0%

2000

2001

2002

2003

Brunei Darussalam

2004

2005

2006

Indonesia

2007

2008

Malaysia

2009

2010

2011

2012

Bangladesh

Brunei

India Service

Indonesia Industry

Singapore

Malaysia

Pakistan

Agriculture

Singapore

Source: World Economic Outlook (Oct 2013), International Monetary Fund

Region under Focus


2.1.3. Unemployment In Singapore, the unemployment rate as a percentage of total labor force has been low (on average 2.72 percent per annum) during 2000-2012 compared to the other countries under study. It is expected that the unemployment rate will remain at 2.08 percent during the coming 6 years. Brunei Darussalam and Malaysia experienced an unemployment rate of 3.85 and 3.37 percent per annum respectively during the same period, and is expected to be even lower at 2.7 percent and 3.16 percent respectively during 2012-2018. Indonesia and Pakistan recorded high unemployment rates during the last decade, which was on average 8.41 percent and 6.76 percent per annum respectively. Pakistan is expected to experience high unemployment in the future, at around 12 percent during 2012-2018. However, Indonesia is expected to reduce its unemployment rate to around 5.45 percent per annum over the subsequent 6 years. India experienced an unemployment rate of 3.5 percent in 2010, while Bangladesh registered an unemployment rate of 5 percent in 2009.

2.1.4. Inflation | 30

In the South Asian countries, consumer prices were stable and low in the early years of the last decade, but started increasing after 2004. The economy of Pakistan was badly

hit by increasing consumer prices over the last decade. On average, inflation has been about 8 percent per annum during 2000-2011 and is expected to be in double digits in the following 6 years (2012-2018). During the same time period of 2000-2011, Bangladesh and India experienced an average inflation rate of about 6.3 percent per annum. (see figure 2.7 for annual trend) However, the rate is expected to be about 9 percent per annum for India and 6 percent per annum for Bangladesh during 2012-2018. Except for the year 2008, consumer prices remained low in Brunei Darussalam, Malaysia and Singapore during the last decade. Brunei Darussalam experienced an inflation rate of less than one percent on average per annum, while Malaysia and Singapore witnessed, on average, an inflation rate of about two percent per annum during 2000-2011. In Brunei Darussalam, consumer prices are expected to increase by 1.6 percent per annum over the period 2012-2018. Singapore will register an inflation rate of about 3 percent per annum, while prices in Malaysia are expected to remain stable over the same period of 2012-2018. Contrary to the general trend in Southeast Asia, Indonesia faced high and fluctuating inflation during the last decade, at an average rate of 7.65 percent per annum. Since 2009, however, Indonesia has stabilized consumer prices compared to the previous years and its rate of inflation is expected to be about 5 percent per annum during 2012-2018. (see figure 2.8 for annual trend)

| Figure 2.8: Inflation, average consumer prices, 2000-2011, Brunei, Indonesia, Malaysia and Singapore

15 10 5 0 -5 2000

2001

2002

2003

Brunei Darussalam

2004

2005

20

15

10

2000

2001

2002

2003

2004 Bangladesh

2005

2006 India

2007

2008

2009

2010

2011

2008

Malaysia

2009

2010

2011

2012

Singapore

Source: World Economic Outlook (2013), International Monetary Fund

31 | 2.1.5. Savings and Investments

5

0

2007

Indonesia

According to the criterion laid down in the World Bank Growth Report, countries need an investment of 25 percent or more of GDP for a sustained development.1 Not all the countries under study meet this requirement. In Bangladesh however, gross investment stood at about 24.27 percent of GDP over the last decade and has met the required criterion in recent years. Its gross savings as a percentage of GDP has been on average about 27 percent per annum, which exceeded total investment. India has been successful in investing about 32 percent of its GDP per annum on average over the last decade with slight domestic resource deficit, which has been 30.55 percent of its GDP on average during the same period. Domestic resources (gross savings) have been declining over the last few years (see Table Appendix 1). Pakistan registered low rates of investment and savings over the last decade, which affected the growth momentum of the country. The average investment and savings as a percentage of GDP has been about 18 percent and 16 percent per annum respectively over the last decade.

| Figure 2.7: Inflation, average consumer prices, 2000-2011, Bangladesh, India and Pakistan

2006

Indonesia has been successful in investing about 27 percent of its GDP per annum on average, with savings of about 29 percent per annum. Its investment and savings have been

increasing in recent years resulting in sustained economic growth. Despite sufficient domestic resource availability, Malaysia has not fared well in investing these resources over the past decade. Malaysia has invested on average about 23 percent of its GDP annually, while its savings were about 35 percent of its GDP. Similarly, Singapore has been saving on average more than 40 percent of its GDP annually, but its investment remained an average of about 24 percent per annum with unstable economic growth (see Appendix Table 1).

2.1.6. Income Distribution Table 2.2 depicts income distribution in the region estimated by using the GINI index. Income distribution in Bangladesh marginally improved over the last decade. The decline in Bangladesh’s GINI index from 33.46 percent in 2000 to 32.12 percent in 2010 is quite insignificant. The same is true for Pakistan and India. However, Indonesia and Malaysia experienced increasing income inequality during the last decade. In Indonesia income inequality increased from about 30 percent in 2002 to about 36 percent in 2010. As compared to other countries in the region, the income inequality in Malaysia is much higher, and it is increasing. The GINI Index for Malaysia increased from about 38 percent in 2004 to about 46 percent in 2009.

Pakistan

Source: World Economic Outlook (2013), International Monetary Fund

1

Region under Focus

See World Bank 2008, The Growth Report


| Table 2.2: Income Distribution - GINI index 2000 Bangladesh

2001

2002

| Table 2.3: Head Count Ratio 2000-2012 2003

2004

3.46

India Indonesia

29.74

Malaysia Pakistan

2005

2006

2008

2009

32.74

2003

2004

2005

2006

2007

2008

2009

2010

50.47

43.25

33.90

2

84.40

80.32

76.54

35.57

3

48.90

40.00

31.51

4

52.30

43.80

35.16

5

35.20

28.40

21.28

1

41.64

32.68

2

75.62

68.76

3

37.20

29.80

4

41.80

33.80

5

25.70

20.90

34.01

31.18

2002

58.59

33.38

Bangladesh

2001

1

32.12

46.00

2000

2010

33.22

37.91 30.39

2007

46.21 30.02

2011

2012


India

2.1.7. Incidence of Poverty All the countries experienced reduction in the incidence of poverty over the last decade. Bangladesh reduced the number of extremely poor, those earning under US$ 1.25 a day, from 58.59 percent in 2000 to 43.25 percent in 2010, while the percentage for the poor, those earning under US$ 2 a day, declined from 84.4 percent to 76.54 percent over 2000-2010. Using the national poverty line, the incidence of poverty, which was about 49 percent in 2000 declined to about 32 percent in 2010. The incidence of rural poverty was much higher at 52.30 percent in Bangladesh compared to urban poverty at 32.20 percent in 2000. Ten years later, in 2010, rural poverty declined significantly to 35.16 percent and urban poverty to about 21 percent.

| 32

About 42 percent of the Indian population were found to be extremely poor (under US$ 1.25 a day) in 2005, but that declined to 33 percent in 2010. The percentage of poor (under US$ 2 a day) declined by about 7 percentage points from about 76 percent to about 69. Poverty estimates for India under US$ 1.25 and US$ 2 a day seem to be high compared to those under national poverty lines. Under the national poverty line criteria, about 37 percent of Indian population were registered as poor in 2005, which declined to about 30 percent in 2010. Higher incidence of poverty (about 42 percent) was found in rural India (2005) compared to the urban poor (about 26 percent) in the same year. However, over 2005-2010, rural poverty declined by 8 percentage points compared to a 5-percentage point decline in urban poverty. Indonesia recorded about 29 percent of its population as very poor and about 67 percent as relatively poor under US$ 1.25 a day and US$ 2 a day criteria respectively in 2002. In the same year, using the national poverty line, 18 percent of the Indonesian population were recorded as poor; 21 percent in the rural areas (using rural poverty line) and about 15 percent in the urban areas (using urban poverty line). Indonesia was

Region under Focus

successful in reducing its poverty level to 12 percent overall; this translated to poverty levels of 15 percent in rural areas and to about 9 percent in urban areas in 2012. Malaysia has been quite successful in fighting poverty. The incidence of poverty has been low. In 2004 only about 8 percent of the population were estimated as poor under US$ 2 a day, which has further declined to about 2 percent in 2009. However, using the national poverty line criteria, about 6 percent of the population were registered as poor; about 12 percent were estimated as poor in the rural areas under the rural poverty line, and about 3 percent were found to be poor in the urban areas under the urban poverty line in 2004. The country successfully reduced the incidence of poverty over 2004-2009. In 2009 about 4 percent of the overall population - about 8 percent in the rural areas and about 2 percent in the urban areas - were found to be poor. Poverty has declined even while the income gap has widened. Pakistan has been experiencing high incidence of poverty. About 36 percent of its population were very poor (under US$1.25 a day) and 74 percent were relatively poor (under US$ 2 a day) in 2002. However, in the same year the percentage of poor was estimated to be about 35 percent under the national poverty line. The proportion of poor was 39 percent for the rural population and about 23 percent for the urban population. During 2002-2008, the incidence of poverty estimated under international poverty line, declined by 15 percentage points from 36 percent to about 21 percent. The poverty estimates under national poverty lines are available until 2006. During 2002-2006, the incidence of poverty witnessed an overall decline by 12 percentage points from 34.5 percent in 2002 to 22.3 percent in 2006. During the same time, rural poverty declined from about 39 percent to 27 percent and the incidence of poverty in the urban areas declined from about 23 percent to about 13 percent (see Table 2.3).

Indonesia

Malaysia

Pakistan

1

29.31

21.44

28.63

24.20

22.64

20.42

18.06

2

66.97

53.80

63.35

56.13

54.40

52.68

46.12

3

18.20

17.40

16.70

16.00

17.80

16.60

15.40

14.20

13.30

12.50

12

4

21.10

20.20

20.10

20.00

21.80

20.40

18.90

17.40

16.60

15.70

15

5

14.50

13.60

12.10

11.70

13.50

12.50

11.60

10.70

9.90

9.20

8.8

1

0.54

0.00

0.00

2

7.81

2.93

2.27

3

5.70

3.60

3.80

4

11.90

7.10

8.40

5

2.50

2.00

1.70

1

35.87

22.59

22.58

21.04

2

73.91

60.31

60.98

60.19

3

34.50

23.90

22.30

4

39.30

28.10

27.00

5

22.70

14.90

13.10

33 |

Source: World Development Indicators (2013), World Bank 1: Poverty headcount ratio at $1.25 a day (PPP) (% of population) 2: Poverty headcount ratio at $2 a day (PPP) (% of population) 3: Poverty headcount ratio at national poverty line (% of population) 4: Poverty headcount ratio at rural poverty line (% of rural population) 5: Poverty headcount ratio at urban poverty line (% of urban population)


2.2 Potential of Islamic Social Finance

2.2.2. Estimation of potential resources from zakah

In the face of large-scale poverty among Muslims of South and Southeast Asia, the role of Islamic social finance assumes great significance. Given that the primary objective of Islamic social finance - zakah, awqaf, cooperative and not-for-profit microfinance - is to meet the needs of the poor and to make a dent on their ever-rising levels of poverty, it is important to scientifically estimate to what extent Islamic social funds may meet the resource requirements for poverty alleviation. We proceed first by estimating the resource gap for poverty alleviation and then measure the potential Islamic social funds that could be tapped to meet the resource gap.

2.2.1. Estimating the Resource Gap for Poverty Alleviation The resource gap has been estimated by using the poverty gap index, which is defined as the mean shortfall below the poverty line, expressed as a percentage of the poverty line. The World Bank has used the recently updated poverty lines of US $1.25 a day in 2005 PPP terms for hard core poor and US $2 a day for the relatively poor respectively, which represents the mean of poverty lines found in the poorest 10 to 20 countries ranked by per capita consumption . This reflects the depth of poverty as well as its incidence. The poverty gap index does not provide the total income (consumption) shortfall explicitly. For this purpose, the estimated poverty gap indices based on international poverty lines of $ 1.25 a day and $ 2 a day respectively, have been converted into percentage of GDP for each country under study.

| 34

P1

, Where, N is total population,

Z is poverty line and Yi is the income (consumption) of the ith household. The poverty gap index has been re-arranged to get the absolute resource shortfall of the countries concerned. P1 NZ The resultant absolute values have been converted into percentage of GDP. The poverty gap indices under US$ 1.25 a day and US$ 2 a day were not available for Brunei Darussalam and Singapore. Table 2.4 shows that Bangladesh needed 7.57 percent of GDP to push its ultra-poor above US$ 1.25 a day and about 33 percent of GDP to push the relatively poor above US$ 2 a day. India required 2.39 percent of GDP for its ultra-poor and about 13 percent of its GDP for its poor. The resource shortfall to push the poor Muslims above US$ 1.25 a day and US$ 2 a day is estimated at 0.344 percent and 1.813 percent of GDP respectively. Pakistan required 1.62 percent of its GDP for ultra-poor and about 13 percent for its relatively poor. The resource shortfall for the Indonesian ultra-poor were estimated to be 0.35 percent of GDP, while for the relatively poor the same was about 3 percent of its GDP. Malaysia required only 0.02 percent of its GDP for the relatively poor.

Year

Resource Gap % of GDP at $ 1.25 per day

Resource Gap % of GDP at $ 2.0 per day

Bangladesh

2010

7.57

33.36

India*

2010

2.39 (0.344)

12.59(1.813)

Indonesia

2011

0.35

2.74

Malaysia

2009

0.00

0.02

Pakistan

2008

1.62

13.35

*Figures in brackets refer to estimates for Muslim population only

It may be noted that zakah is collected from rich Muslims only and non-Muslim citizens are exempt from its payment. Consequently, the GDP of each country under study has been adjusted by taking into account per capita income and the proportion of the Muslim population in each country. The average score of Zs has been applied as a proxy for the estimation of potential zakah collection for the countries in the region.

||Table 2.5: Estimate of Zakah Potential Country

Year

Z1 % of GDP

Z2 % of GDP

Z3 % of GDP

Bangladesh

2010

1.63

3.48

3.92

Brunei Darussalam

2010

0.93

2.00

2.25

India

2010

0.26

0.55

0.63

Indonesia

2011

1.59

3.39

3.82

Malaysia

2009

1.11

2.36

2.66

Pakistan

2008

1.74

3.71

4.18

-

0.27

0.57

0.65

Singapore

| Table 2.4: Resources gap for poverty alleviation Country

The estimates for zakah potential of the countries under study are based on Kahf (1989) with some changes. Kahf (1989) estimated zakah potential using National Income Accounts and his estimates of potential zakah were based on three different opinions of jurists regarding zakatable assets, which the author denoted as Z1, Z2 and Z3. Z1 was estimated in accordance with the majority traditional view according to which zakah is levied on agriculture, livestock, stock in trade, gold, silver and money. Z2 was based on the views of some contemporary Muslim scholars according to which zakah is payable on net returns of manufacturing concerns, rentals

of building and net savings out of salaries. Z3 was based on Malikite views, where the zakah base includes buildings and other fixed assets except those assigned for personal and family use.

Table 2.5 depicts that zakah potential under Z1 varies from about 1 percent of GDP to 1.74 percent of GDP in the five predominantly Muslim countries. Under Z2, potential zakah ranges from 2 percent of GDP to 3.71 percent of GDP, while under Z3 it ranges from 2.25 to 4.18 percent of GDP of these countries. The Muslim minorities in India and Singapore can collect zakah in the range of about 0.26 percent to 0.65 percent of their GDP.

collection. It reveals that resource shortfall in the case of Bangladesh is much higher than its potential zakah collection, while in the case of other Muslim countries resources needed for poverty alleviation can easily be provided by the potential zakah collection. Indian Muslims can generate enough resources (0.63 percent of GDP) for providing the resource shortfall (0.344 percent of GDP) to lift their ultra-poor out of poverty.

A juxtaposition of tables 2.4 and 2.5 provides a comprehensive picture of whether and to what extent the resource shortfall required for poverty alleviation may be met by potential zakah

For more precise estimates, national poverty lines and micro data of each country are required, which are not available Therefore, international poverty lines and the poverty gap indices measured in terms of the same are used for estimation.

2

Region under Focus

3 For review of literature see Nasim Shah Shirazi (2006). Providing for the Resource Shortfall for Poverty Elimination Through the Institution of Zakat In Low Income Muslim Countries, IIUM Journal of Economics and Management, Volume 14, Number 1


35 |

2.2.3. Estimation of potential resources from waqf 4 The process of estimation of resources from waqf is more challenging due to gross absence of data in most countries. However, based on limited data available for two countries - India and Indonesia - the potential resources that may flow from awqaf assets can be estimated for these two countries. According to a report on economic potential of awqaf assets in India5 , there are about 490,000 registered awqaf in India with a total area of about 600,000 acres and with a book value of about INR 60 billion. A good number of the awqaf properties are located in city centers and their current market value is many times more than their book value. The authors of the report argue: “…as the book values of the properties are about half a century old, the current value can safely be estimated to be several times more and the market value of the properties can be put at INR 1,200 billion (about US$ 24 billion). If these properties are put to efficient and marketable

use they can generate at least a minimum return of 10 per cent which is about INR 120 billion (about US$ 2.4 billion) per annum. Wherever the waqf land have been put to efficient use they have generated an average return of about 20 per cent”. The above figure is about 0.3 percent of the GDP of India in 2005. The resource shortfall of the Muslim poor are 0.344 percent as indicated in table 2.4. Combining zakah and waqf, a surplus can be generated, which is enough to push the poor Muslims out of poverty. For Indonesia, data obtained from the Ministry of Religious Affairs are indicative of a similar possibility. It is estimated that the market value of registered land waqf is about Rp 590 trillion (US$ 60 billion). At a similar minimum rate of return of 10 percent, these assets may generate an annual cash flow of US$ 6 billion, which is 0.849 percent of Indonesia’s GDP. This compares favorably against a resource shortfall of 0.35 percent to lift all the Indonesian poor above the US$1.25 a day poverty level.

| 36

This is section is based on Nasim Shah Shirazi (2013), Integrating Zakat and Waqaf into the Poverty Reduction Strategies of the IDB Member Countries, Islamic Economic Studies, IRTI, IDB ((forthcoming)

4

5 Social, Economic and Educational Status of the Muslim Community of India (2006) accessed from http://www.scribd.com/doc/53403975/52/Economic-Potential-of-Wakf-Assets-in-India

Region under Focus

A farmer carries newly harvested wheat at a field in Attcak village, in Punjab province, Pakistan May 6, 2011. REUTERS/Erik de Castro (PAKISTAN - Tags: AGRICULTURE ENVIRONMENT SOCIETY FOOD)


38


ZAKAH

People work at a brick kiln near Hlawga village, 22 miles (35 km) north of Yangon January 15, 2011. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY)

39

Charity occupies a central position in the Islamic scheme of poverty alleviation. The broad term for charity in Islam is sadaqah. When mandated on an eligible Muslim, sadaqah is called zakah. Zakah is the third of the five pillars of Islam and payment of zakah is an obligation on the wealth of every Muslim based on clear-cut criteria. Rules of Shariah are fairly clear and define who are liable to pay zakah, at what rate it must be paid and who can benefit from it. Zakah literally means ‘to purify, to develop, and, to cause to grow’. Zakah is the prescribed share of one’s wealth to be distributed among the categories of those entitled to receive it. An individual entitled to pay zakah is called muzakki and the individual entitled to receive zakah is called mustahiq. Islamic microfinance programs aim at transformation of mustahiq into muzakki within a definite time frame.

| 40

Islam imposes restrictions on the use of zakah funds and requires that funds must clearly flow only to specified categories of beneficiaries. Zakah funds must be clearly distinguished from funds with Islamic treasury pooled through taxes and state revenues and cannot be used to finance infrastructural projects, public utilities and services beneficial to all Muslims - the poor and the rich - or for meeting the administrative expenditure of the state.

Zakah is, therefore, primarily a safety net to take care of the basic necessities of life of those who cannot afford them. The first two categories - fuqara (the poorest of the poor) and masakeen (the needy and destitute) - include individuals with no means of livelihood or inadequate income to meet their basic necessities of life; these would include orphans, the sick and the disabled, and the homeless. Zakah funds may also be used to defray the operational costs of managing a zakah organization. This is to maintain the integrity and the independence of collection and disbursement of zakah funds. The third category of eligible recipients of zakah – ameleen a alaiha - refers to the personnel employed for this purpose and their salaries may be paid out of zakah funds. Muallafat ul quloob, the fourth category, literally means people whose hearts are to be won over and implies such non-Muslims who are close to understanding and perhaps accepting the truth and message of Islam. Under the fifth category – fir riqaab - zakah may be used to pay ransom or compensation to buy freedom for slaves and prisoners of war.

The sixth category, al gharimun, refers to individuals trapped in debt. It is important that such debt does not relate to frivolous and conspicuous consumption. It is also important that the default or delinquency in repayment of debt is not wilful and deliberate. Scholars also add qualifiers to debt eligible for zakah support, such as that arising out of settling disputes among Muslims. Further, the amount of zakah that is paid cannot exceed the amount of debt. The seventh category fi sabeelillah is a fairly broad one and includes expenditure for the propagation and defence of Islam. It also includes expenditure on charitable projects in the field of education, medical care, and social welfare. Finally the eighth category - ibn as sabil (son of the road / the way farer) - denotes any person who is far from his/her home who, because of circumstances beyond his/her control, does not have sufficient means of a livelihood at his/her disposal. In its wider sense it describes a person who, for any reason at all, is unable to return home either temporarily or permanently, such as a political exile or refugee. This allows for use of zakah funds for rehabilitation work in post-conflict regions6.

41 |

“The offerings (zakah) given for the sake of Allah are (meant) only for fuqara (poor) and the masakeen (needy), and ameleen-a-alaiha (those who are in charge thereof), and muallafat-ul-quloob (those whose hearts are to be won over), and for fir-riqaab (the freeing of human beings from bondage), and for al-gharimun (those who are overburdened with debts), and fi-sabeelillah (for every struggle) in Allah’s cause, and ibn as-sabil (for the wayfarer): (this is) an ordinance from Allah and Allah is all knowing, wise.” (9:60)

The following verse of the holy Quran defines the eligible beneficiaries (mustahiqeen) of zakah.

6

ZAKAH

For further discussion on these issues, see Obaidullah (2012) Zakah Management for Poverty Alleviation, IRTI, IDB


3.1 Overview of Zakah Sector

| Table 3.2: Time Series (2002-2012) of Zakah Collected in Indonesia

The previous sections clearly demonstrate how zakah can potentially meet the resource gap for poverty alleviation in all the countries under focus. However, the potential remains unrealized as actual zakah mobilized falls far short of its potential in most countries. For instance, the actual zakah collected according to latest figures is just 0.025 percent of GDP, while estimated resource shortfall is 0.41 percent of GDP in Indonesia, and 0.06 percent of GDP, while estimated resource shortfall is 0.709 percent of GDP in Pakistan. In Malaysia the opposite is true. The actual zakah collected is 0.24 percent of GDP against an estimated resource shortfall of 0.012 percent of GDP. Mobilization of zakah has generally shown an increasing trend in all the countries under consideration. Distribution of zakah has also kept pace and shows a growing trend in almost all countries.

For Indonesia, the following tables present a snapshot of mobilization and distribution of zakah. Zakah collections show a steadily rising trend over the years, multiplying by 32 times over the last decade. According to data obtained from the National Board of Zakat (BAZNAS) the ratio of muzakki to mustahiq currently stands at 1:12. Another important dimension of the Indonesian zakah collection exercise is that private organizations, such as Dompet Dhuafa Republika, and Rumah Zakat Indonesia have traditionally led the collection effort, although their role is increasingly diluted by the National Board of Zakat (BAZNAS), which assumed the role of apex regulating body for zakah management in 2011. BAZNAS is also engaged in direct collection of zakah. For the year 2011, for example, national collection data shows that the BAZNAS-led network accounted for 62 percent while the private institutions (LAZ) together accounted for 38 percent of total zakah collected.

Year

(Billion Rupiah)

(Million USD)

2002

68.39

7.2

2003

85.28

8.9

2004

150.09

15.8

2005

295.52

31.1

2006

373.17

39.3

2007

740

77.9

2008

920

96.8

2009

1,200

126.3

2010

1,500

157.9

2011

1,729

182

2012

2,200

231.6

• Indonesia: Increased by over 32 times over 10 years (US$ 231.6 mln in 2012)

| 42

• Pakistan: Increased by 40 percent7 over 3 years (US$ 105 mln in 2011)

43 |

| Figure 3.1: Time Series (2002-2012) of Total Zakah Collected in Indonesia

• Singapore: Increased by 20.2 percent over 3 years (US$ 20.4 mln in 2012)

2500

• Brunei Darussalam: Increased by 55 percent over 10 years (US$ 13.8 mln in 2010)

2000

• Malaysia: Increased by 26.9 times over 20 years (US$ 547 mln in 2011)

1500 1000 500

| Table 3.1. Share of Private and Public Agencies in Zakah Collection in Indonesia Name of zakah collecting institution Rumah Zakat Indonesia (RZI)

Amount (Billion Rupiah)

77.35

Dompet Dhuafa Republika

75.05

BAZNAS Total BAZNAS network Total national collection

% of Total

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total Zakat Collection

144.03

Pos Keadilan Peduli Ummat (PKPU)

Total for all LAZ

0

659.96

38

40.40 1,068.90

62

1,728.9

100

Can the steady growth in zakah collections in Indonesia be attributed to a sound and enabling regulatory framework? A major change in the regulatory framework relates to the replacement of the Zakat Act 1999 with the Zakat Act 2011. Among other things, the new 2011 Act brought all major private collectors, such as Dompet Dhuafa Republika, under the supervision of National Zakat Board, or BAZNAS. It is interesting to see how the regulatory change has impacted the mobilization efforts of Dompet Dhuafa Republika.8

A 2010 survey 9 on the distribution pattern of zakah as well as other Islamic charity funds (together known as ZISWAF) in Indonesia has some interesting findings. Based on data from 9 leading amil zakah institutions (known as LAZ), this survey reveals that disbursements by LAZ during the period 2004-2008 are primarily focused on consumption-oriented assistance, such as humanitarian assistance programs (23.1 percent), direct grants to asnaf (15 percent), education (10.7 percent), health (5.8 percent), and assistance to da’wah activities (3.9 percent). Productive economic activity on average received an allocation of 10.7 percent.

Details are available in a subsequent section providing a case study of Dompet Dhuafa Republica. Mintarti N. (2013) Models of Zakat Distribution, Presentation at International Workshop on “Strengthening Islamic Social Finance Sector” held at Bogor, Indonesia

8 9 7

ZAKAH

Based on figures available for zakah collected by the government of Pakistan; excludes zakah collected by private institutions and individuals.


| Figure 3.2: Pattern of Zakah Distribution by BAZNAS in Indonesia (2012)

| Table 3.3: Pattern of Zakah Distribution by LAZ in Indonesia 2004-2008 Year

Productive and Economic

Education

Health

Humanity

Da’wah Assistance

Direct Grants to the Asnaf

Other Programs

2004

20.34

12.95

8.54

11.54

4.43

17.58

24.61

2005

9.06

13.27

5.33

49.82

2.69

5.97

13.86

2006

9.18

9.29

6.69

29.06

2.21

13.55

30.02

2007

7.58

12.05

6.16

16.78

5.94

17.82

33.66

2008

7.38

5.87

2.44

8.44

4.32

20.35

51.20

Economic Programme 12% Education Programme 16%

Health Programme 31% Humanitarian Aid 41%

The National Board of Zakat, Indonesia, compiles data for distribution of zakah in four categories as follows: 1. Education Program: a program that is designed to provide educational assistance. It comprises two major programs: Smart House for Children of the Nation, and Cadre of 1,000 Ulama.

| 44

2. Humanitarian Aid: a program that is created to provide humanitarian assistance, and it consists of two major programs: Mustahik Services Counter, and Disaster Emergency Aid.

3. Health Program: a program that is intended to provide medical assistance, and it is called Healthy House of Indonesia (cost-free hospital and mobile clinic serving mustahik in remote and backward areas). 4. Economic Program: a program that is developed to empower mustahik economically by using comprehensive and integrated approach, and it comprises two main programs: Zakah-based Community Development, and Bayt al-Ma’mur. Official data of the National Board of Zakat (BAZNAS) 2013 reported the following distribution pattern for 2011-12.

From the above, it appears that economic empowerment programs still account for a small percentage of the zakah collected, notwithstanding the visible success of some initiatives, such as the community development program of Dompet Dhuafa Republika.

| Table 3.5: Time Series of Zakah Collected & Distributed in Malaysia 1991-2011 (Million RM) Total Zakah Collection (Million RM)

Total Zakah Distribution (Million RM)

61

-

2003

408.4

349.5

85.6

2004

473.3

353.1

74.6

2005

573.1

424.2

74.0

2006

670.7

498

74.3

2007

806.3

626

77.6

2008

1,038.1

749.4

72.2

2009

1,196.9

1,020.8

85.3

2010

1,363.8

1,176.5

86.3

2011

1,641.1

-

78.7

Year 1991 | Table 3.4: Pattern of Zakah Distribution by BAZNAS in Indonesia 2011-2012 No

Types of Program

2012

1

Education Program

18.12

15.50

2

Humanitarian Aid

41.21

41.07

3

Health Program

26.70

31.10

4

Economic Program

13.96

12.33

100

100

TOTAL

ZAKAH

2011

For Malaysia, the following tables present a snapshot of mobilization and distribution of zakah. Somewhat less spectacular compared to Indonesia, zakah collections in Malaysia also show a steadily rising trend over the years, multiplying by about 27 times over the last two decades.

Distribution as % of Collection


45 |

| Figure 3.3: Time Series of Zakah Collected in Malaysia 1991-2011

| Table 3.6: Zakah collection and distribution across states in Malaysia* Collection State

1800

Distribution

Distribution as % Coll.

Distribution to Amil as % of Zakah-Al Maal


Zakah Al Fitr

Zakah Al Mal

7,041

275,635

282,676

200,541

70.94

11.77

17,333

319,601

336,934

330,365

98.05

13.18

1600 1400

Kuala Lumpur

1200

Selangor

1000 800

Perlis

913

37,179

38,092

30,730

80.67

8.42

600

Kedah

5,505

71,442

76,947

66,062

85.85

8.77

400

Penang

3,999

49,241

53,239

54,353

102.09

11.03

200

Perak

7,664

61,976

69,640

66,793

95.91

14.55

Kelantan

7,592

62,781

70,373

63,909

90.81

16.60

Terengganu

5,567

70,881

76,448

61,745

80.77

10.36

Pahang

0

1991

2003

2004

2005

2006

The following observations follow from the data presented.

| 46

1. Maintaining surplus: Distribution of zakah as a percentage of collection over time is 79 percent on average. Across states in 2010, it averages 86 percent, ranging between 61 percent and 103 percent with only half of the states achieving more than 90 percent. Although there has been considerable “holding” of zakah funds in the past, zakah management has steadily improved over time.

2007

2008

2009

2010

2011

2. Defining and prioritizing asnaf: Distribution of zakah among asnafs varies across states. Two among them do not distinguish between hardcore poor and poor. As many as ten do not distribute zakah to riqab. This is perhaps due to adherence to the literal definition of riqab as slaves. Others prefer a broader definition of riqab as “freeing a Muslim from physical and mental oppression and humiliation by certain individuals”. Further, priority of asnaf also varies across states. While four states allocated more than half of the zakah funds to the hardcore poor and poor, two states distributed more funds to the fi sabilillah category.

6,300

74,575

80,875

58,604

72.46

13.45

N Sembilan

3,771

46,430

50,201

51,740

103.07

14.87

Johor

13,141

109,195

122,336

110,308

90.17

12.29

Melaka

3,145

30,867

34,012

31,393

92.3

16.63

Sabah

7,189

25,668

32,857

26,022

79.2

11.05

Sarawak Total

3,272

35,871

39,143

23,923

61.12

11.00

92,432

127,1341

1,363,772

1,176,487

86

9.15

*as at the end of 2010

| Table 3.7: Distribution of zakah among asnaf in Malaysia* Hardcore Poor

Poor

Amil

Mu’allaf

Riqab

Gharmin

Fi Sabilillah

Ibnus Sabil

TOTAL

Kuala Lumpur

36,908

30,889

32,438

3,459

0

2,540

93,732

575

200,541

Selangor

50,340

76,863

42.117

19,957

2,455

29,106

108,304

1,224

288,291

860

7,062

3,131

228

0

0

19,449

0

30,730

State/ Asnaf

Perlis Kedah

2,578

25,474

6,267

1,184

0

47

30,291

221

66,062

Penang

2,949

23,383

5,432

866

0

1,054

20,407

261

54,352

Perak

35,570

9,018

2,016

0

312

19,195

682

66,793

Kelantan

43,182

10,423

896

0

8

9,397

4

63,910

Terengganu

12,858

21,947

7,342

1,803

20

371

17,260

143

61,744

Pahang

6,065

6,504

10,034

2,919

27

117

32,357

580

58,603

1,339

13,206

6,905

4,002

10,806

2,060

13,062

360

51,740

Johor

13,201

29,638

13,420

6,943

0

2,623

44,353

130

110,308

N Sembilan

Melaka

13,105

1,121

5,132

1,719

0

3,449

6,859

7

31,392

Sabah

9,586

6,644

2,836

1,791

0

7

5,154

3

26,021

Sarawak

4,920

2,729

3,946

402

0

0.58

11,922

3

23,923

478,921

116,366

48,185

13,308

41,695

431,742

4,193

1,134,410

42.22

10.26

4.25

1.17

3.68

38.06

0.37

1

TOTAL Percent of TOTAL *as at the end of 2010 ZAKAH


47 |

| Table 3.9: Time Series of Zakah Distributed in Singapore 2009-2012 (‘000 S$)

| Figure 3.4: Distribution of zakah among asnaf in Malaysia (2010)

Year/ Asnaf

Ibnus Sabil 1% Poor 42%

Fi Sabilillah 38%

2009

2010

2011

Gharimun 4% Riqab 1%

2012 Mu’allaf 4%

Amil 10%

Fuqara & Masakin

Amil

Mu’allaf

Riqab

GHARIMUN

Fi Sabilillah

Ibnus Sabil

TOTAL

6,809.2

2,351.7

748.8

3,797.3

568.8

5,874.9

1.9

20,152.7

33.79

11.67

3.72

18.84

2.82

29.15

0.01

6,569.4

2,374.6

371.4

4,799.2

78.9

7,272.4

1.8

30.60

11.06

1.73

22.36

0.37

33.88

0.01

8,517.7

2,370.4

257.8

2,494.9

53.5

9,519.6

4.2

36.69

10.21

1.11

10.75

0.23

41.00

0.02

9,373.8

1,861.8

276.8

3,691.8

350.3

10,138

1.1

36.48

7.25

1.08

14.37

1.36

39.46

0.00

21,467.7

23,218.1

25,693.6

| Figure 3.6: Distribution of zakah among asnaf in Singapore (2012) Ibnus Sabil 0%

| Table 3.8: Time Series of Zakah Collected in Singapore 2009-2012 (Million S$)

| 48

Year

Zakah Al Fitr

Zakah Al Mal

Total Zakah Collected

2009

2.9

18.4

21.3

2010

3.0

19.8

22.8

2011

3.1

20.2

23.4

2012

3.2

22.4

25.6 Amil 7%

Gharimun 1% Riqab 14%

| Figure 3.5: Time Series of Zakah Collected in Singapore 2009-2012

Mu’allaf 1%

| Table 3.10: Time Series of Zakah Collected in Brunei Darussalam 2001-2008 (Million BND$) Year

Zakah Al Fitr

Zakah Al Maal

Total Zakah Collected

30

2001

0.692

9.489

10.18

25

2002

0.789

13.805

14.59

20

2003

1.408

10.869

12.28

15

2004

0.765

11.173

11.94

10

2005

0.781

14.752

15.53

2006

0.806

11.097

11.90

2007

0.813

11.292

12.11

2008

0.832

11.821

12.65

2009

0.843

19.918

20.76

2010

0.848

16.529

17.38

5 0 2009

ZAKAH

49 |

Poor 37%

Fi Sabilillah 40%

2010

2011

2012


| Table 3.10: Time Series of Zakah Distributed in Brunei Darussalam 2000-2010 (‘000 BND$)

| Figure 3.7: Time Series of Zakah Collected in Brunei Darussalam 2001-2010

Year

Poor

Amil

Mu’allaf

GHARIMUN

Musafir

Total Zakat Distributed

2000

4,158

340

1,283

211

1.3

5,993

69.38

5.67

21.41

3.52

0.02

100.00

4,603

352

1,705

122

0.35

6,782

67.87

5.19

25.14

1.80

0.01

100.00

4,569

347

1,577

1,212

1.4

7,706

59.29

4.50

20.46

15.73

0.02

100.00

5,530

406

1,686

2,820

0.863

10,443

52.95

3.89

16.14

27.00

0.01

100.00

10,669

473

2,069

1,600

0

14,811

72.03

3.19

13.97

10.80

0.00

100.00

4,876

518

1,797

1,489

0.8

8,681

56.17

5.97

20.70

17.15

0.01

100.00

13,545

142

1,400

1,414

0

16,501

82.09

0.86

8.48

8.57

0.00

100.00

13,000

69

1,553

789

1.1

15,412

84.35

0.45

10.08

5.12

0.01

100.00

13,014

185

1,178

1,471

0

15,848

82.12

1.17

7.43

9.28

0.00

100.00

101,264

147

3,070

3,858

0.3

108,339

93.47

0.14

2.83

3.56

0.00

100.00

44,886

243

2,610

6,234

0.45

53,973

83.16

0.45

4.84

11.55

0.00

100.00

25 20

2001

15 10

2002

5

2003 0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2004

2005

2006

| 50

2007

| Figure 3.8: Distribution of Zakah among asnaf in Brunei Darussalam (2010) Gharimun 12%

2008

Musafir 0%

2009

Mu’allaf 5% Amil 0%

2010

Total Zakat Collected


10,181

66.61

14,594

52.80

12,277

85.06

11,938

124.07

15,533

55.89

11,903

138.63

12,105

127.32

12,653

125.25

20,761

521.84

17,377

310.60

| Figure 3.9: Distribution of Zakah in Pakistan (2010) Admin 9%

Poor 83% Healthcare 17%

Social Safety Net 43% Education 31%

ZAKAH


51 |

| Table 3.11: Time Series of Zakah Distributed in Pakistan Amount Allocated 2008-09*

No. of Beneficiaries 2008-09

Amount Allocated 2009-10*

No. of Beneficiaries 2009-10

Amount Allocated 2010-11*

2,225.43

24,8342

2225.43

237,939

225.429

Social Welfare/Rehabilitation

148.363

19,777

0

0

0

Marriage Assistance

148.363

6,306

296.726

10,983

296.726

1,000

0

0

0

0

200

19,990

554.017

0

4170

Eid Grant

185.455

16,1714

185.455

148,230

185.455

Sub-total (social safety net)

3,907.61

456,129

3,261.63

397,152

4,877.61

Percentage of social safety net to total

52.97

40.28

42.52

35.96

46.87

Educational Stipends

667.629

197,932

667.629

203,963

667.629

Stipends to students of Deeni Madaris

296.723

69,389

296.723

59,826

296.723

Educational Stipends (Technical)

1,228.92

75,237

1,228.92

14,863

1,228.92

Model Deeni Madaris

12

716

12

716

18

Vocational Training of IDPs

0

0

164.84

1120

0

2,205.27

343,274

2,370.11

280,488

2,211.272

29.90

30.32

30.90

25.39

21.25

222.542

69,917

222.542

54,003

222.542

Leprosy Patients

0.57

103

1.5

103

1.5

National Level Health Institutions

600

262,920

932.142

366,235

552.3

0

0

100

6525

100

823.112

332,940

1,256.18

426,866

876.342

11.16

29.40

16.38

38.65

8.42

440.649

-

710.875

-

440.649

0

-

72

-

0

5.97

-

9.27

-

4.23

Total in PKR million

7,376.64

1,132,343

7,670.8

1,104,506

10,405.87

Total in USD million

75.04

Head Guzara Allowance

Permanent Rehabilitation Scheme Natural Calamities

| 52

Sub-total (eduction & training) Percentage of education to total Health Care

Hepatitis-C sub-total (health) Percentage of healthcare to total Administrative Media Campaign Percent of Admin to Total Allocation

78.03

Data from the Ministry of Religious Affairs also indicate that there is no standard categorization for zakah beneficiaries. The above table presents the distribution of zakah as several headers, such as rehabilitation and safety net, social welfare, education and skill enhancement, health care and finally administrative expenses. Items which can be clearly identified with the poor and the needy account for about half of all

disbursements. Education-related expenditure accounts for 20-30 percent; health care expenditure accounts for 10-20 percent while administrative expenditure is kept below 10 percent. For India, there is no authentic data available from official sources regarding zakah collection or distribution, because the process is largely controlled by the ulama. Much of the zakah is collected by religious seminaries and informal organizations that often operate in a regulatory vacuum and lack transparency in financial reporting. A small percentage of zakah is also paid by individuals directly to their friends, neighbors and relatives in need without any formal method of reporting. However, some estimates are available based on some surveys conducted in the past. For instance, a survey of 18 religious seminaries conducted by an NGO found that a little over 50 percent of their total expenditure was met through zakah collected, which stood at INR 17 million. Extrapolating the numbers for over 30-40,000 seminaries, the study arrives at an estimate of INR 70 billion collected through zakah every year. Adding zakah collected from other sources, the total estimate for annual zakah collected stands at INR 140 billion (US$ 1.5 billion). Regarding distribution of zakah in India, there is little data available. According to a study conducted by the magazine Islamic Voice in 2007 the following are areas of focus for the Zakah / donation funds allocation:

| Table 3.12: Composition of Zakah Distribution in India Secular Education

23

Religious education

19

Health care

17

Direct help to poor and needy

11

Orphanage

10

Poor relatives

8

Economic need

5

Others

7

Education and health care receive more than 50 per cent of financial aid in the form of zakah and donations. Unfortunately economic needs receive just 5 percent of the share of funds.

105.86

*Amount in Pakistani rupees in millions ** No. of beneficiaries and amount in 2011-12 has not been reported as the subject has been devolved to the Provinces/Federal Areas. Hence no utilization report received.

ZAKAH

For Pakistan, data on actual mobilization of zakah are not easily available and can only be estimated. Data from the Ministry of Religious Affairs indicate a net collection of zakah of about PKR 7.9 billion in 2010 against a disbursement of PKR 7.67 billion. An amount of PKR 10.4 billion was distributed in the year 2011. Assuming this figure may be used as a proxy for zakah collected by the government, the zakah collected by private agencies needs to be estimated and added to it. It is interesting to note that one private foundation alone, the Shaukat Khanum Hospital collected PKR 1.343 billion of zakah in 2011. Other than this, there are other charities, such as Edhi Foundation, The Citizens Foundation, SOS Village, and Fatimid Foundation which collect sizable amounts of zakah. According to one estimate, the Edhi Foundation alone collects about 16 percent of all zakah mobilized in Pakistan10. While other estimates such as that by the media house Dawn11 put it at PKR 200 billion (approx. US$ 1.95 billion) in 2012 seem to be somewhat inflated, the fact remains that the performance of private collectors in Pakistan as well as in Indonesia remains impressive as compared to the government agency.

10 11

http://www.paklinks.com/gs/religion-and-scripture/263864-zakat-and-edhi.html http://beta.dawn.com/news/744760/troubled-times-for-charities/?commentPage=1&storyPage=3


53 |

3.2 Institutional Structure

| Figure 3.10: Distribution of Zakah in IndiA Economic need 5%

Others 7% Social Education 23%

Poor relatives 8%

Orphanage 10%

Direct help to poor and needy 10%

Religious Education 19%

Healthcare 17%

| 54

The Survey also revealed four major gaps in the distribution of zakah in India:

To sum up, the trends in zakah distribution in South and Southeast Asia reveal the following in terms of beneficiaries:

1. Lack of involvement of the zakah payer in the effective disbursement of the fund

The poor as beneficiaries account for: • Above 90 percent in Indonesia, India, Pakistan, Bangladesh

3. The network of organizations which collect zakah on behalf of the poor are not accountable and the leak is enormous.

• Above 80 percent in Brunei Darussalam

For Bangladesh, according to the Bureau of Islamic Economics, zakah collection in 2010 was about Tk 110 billion or US$ 1.4 billion, which was equivalent to 1.4 percent of GDP12. Out of two key agencies that are working in the zakah sector – Zakah Board of the Islamic Foundation Bangladesh (a government agency) and the Islami Bank Bangladesh (a private agency) the former collected Tk 14.2 million during 1432H and expects to collect Tk 20 million during the year 1433H. In Bangladesh, the majority of people pay zakah individually, mostly as token charity. Distribution of clothing (sarees and lungis) is a traditional method of zakah distribution. Institutional distribution of zakah is more diversified and takes the form of scholarship programs for poor students, rehabilitation and training for poor women, rehabilitation of widows, housing for the poor, and distribution of rickshaws for the unemployed young people in villages.

Indonesia offers the most recent example of regulatory reforms in the field of zakah management with the Zakat Act 2011 replacing the Zakat Act 1999. The Zakat Act 2011 aims to create a national institutional infrastructure for zakah management that aims to “improve the effectiveness and efficiency of the management of zakah services, and optimize the benefits of zakah for public welfare and poverty alleviation.” (Art.3) The apex body in this infrastructure is the Badan Amis Zakat Nasional (BAZNAS) created by the government for the sole objective of zakah management. (Art 6) It is an independent body responsible to the President through the Minister of Religious Affairs. (Art 5.3) Its functions

| Chart 3.1: Institutional Structure for Zakah in Indonesia

2. Lack of professional approach in identifying the real needs and issues at both micro level and macro level

4. Lack of authentic data about the deprived section of the community at the micro level

In this section we undertake a comparative analysis of the institutional and regulatory environment for mobilization and utilization of zakah across countries in the region under focus.

include planning, implementation, controlling the process of collection, distribution and utilization of zakah and reporting the operational performance of zakah management. (Art 7) Its executive committee includes members who are non-political, responsible and competent members from the community. (Art.11) It is supported by a Secretariat (Art.14) and has a network of offices in provinces, districts and cities where it forms zakah collecting units (UPZ) to assist the process of zakah collection. (Art.15-16) The second tier in the zakah management infrastructure involves private community initiative and comprises Amil Zakat Institutions (LAZ). Such community organizations must be registered not-for-profit legal entities with adequate competencies and programs of social welfare. These institutions additionally must have Shariah supervisory boards and must undergo periodical Shariah and financial audit. These must be duly authorized by the government based on BAZNAS recommendation. (Art.17-18) Further, these are required to report their audited performance to BAZNAS (Art.19).

55 | President

• 35-40 percent in Malaysia and Singapore

Fi-sabilillah as beneficiaries accounts for:

Minister of Religious Affairs

• Less than 5 percent in Indonesia • About 40 percent in Singapore and Malaysia Within the poor category, education, health, social safety nets receive priority; around 10 percent for economic empowerment programs in Indonesia. The proportion of zakah distributed to zakah collected shows reversion to unity over intervals for Malaysia and Singapore; in Brunei Darussalam it varies widely between 50 and 500 percent showing symptoms of zakah “holding” or accumulation of surplus. The proportion of administrative costs to zakah collected varies between zero and 10 percent for most countries; except in India where anecdotal evidence shows the percentage to be as high as over 30 percent.

BAZNAS

LAZ UPZ

LAZ

UPZ

Muzakki and Mustahiq

The country with the second largest Muslim population, India does not have a formal institutional or regulatory framework for zakah management. Zakah is largely seen as an act of worship and the government does not seek to intervene in the process of zakah collection and disbursement in any manner. Payment of zakah is entirely voluntary and largely flows

through the hands of innumerable private zakah collecting individuals who represent religious schools and institutions. Of late, a handful of institutions have come up with the express objective of mobilizing zakah and channeling the same into the hands of the poor through a range of relief, education and health related initiatives.

Asif Ibrahim, at Seminar on “Utilization of Zakat for Sustainable Poverty Alleviation”, jointly organized by DCCI Foundation and Center for Zakat Management (CZM) on August 2, 2012

12

ZAKAH


| Chart 3.2: Institutional Structure for Zakah in India

Private Collectors (Individual & Institutions)

created Majlis Ugama Islam Brunei (MUIB) is the sole entity empowered to collect and distribute zakah. Zakah collection is undertaken by MUIB representatives in the four districts of the country, through Amils in mosques and banks.

| Chart 3.4: Institutional Structure for Zakah in Malaysia, Singapore and Brunei Darussalam


Pakistan has a dual system of zakah management. For certain types of zakatable wealth and income, the muzakki is mandatorily required to pay zakah to the state. For others, zakah may be paid to the state (Department of Zakat under Ministry of Religious Affairs) as well as to the multitude of private zakah bodies at the discretion of the muzakki. The latter include individual and institutional zakah collectors and social organizations that are partially funded through zakah. Matters pertaining to zakah are governed by the Zakat Ordinance 1980.

Brunei Darussalam follows a regulatory framework similar to Malaysia’s and Singapore’s. The Laws of Brunei 1/1984, Religious Council and Kadi Courts, Chapter 77, Section 114 governs religious matters pertaining to Muslims, including zakah. Similar to Malaysia and Singapore, the state-

Bangladesh, like Pakistan, also has a dual system of zakah management. However, unlike Pakistan, there is no element of compulsion. Payment of zakah is voluntary and may be made to the Zakat Board of Islamic Foundation, a government agency under the Ministry of Religious Affairs or to several other private institutional collectors or even to private individuals. Matters pertaining to zakah are governed by the Zakat Fund Ordinance 1982.

Sultan / President


Islamic Religious Council / Majlis

| 56

57 | | Chart 3.3: Institutional Structure for Zakah in Pakistan & Bangladesh

Zakat Office

Amil

Agent - Bank

Minister of Religious Affairs Muzakki and Mustahiq Department / Board of Zakat NGOs

Individuals


Malaysia places the state at the heart of zakah management with the state-created Majlis being the sole entity empowered to collect and distribute zakah. The Majlis authorizes individuals and institutions to act as its agents and collect zakah. Collection from or payment to an unauthorized zakah collector is an offence that invites financial penalty or imprisonment or both. The Syariah Criminal Offences (Federal Territories) Act 1997 is a key piece of legislation that governs matters pertaining to zakah. Singapore’s regulatory framework is similar to Malaysia’s. The Administration of Muslim Law Act governs religious

ZAKAH

matters pertaining to Muslims, including zakah. Similar to Malaysia, the state-created Majlis Ugama Islam Singapura (MUIS) is the sole entity empowered to collect and distribute zakah. (Art.68) MUIS, with the approval of the Minister-incharge of Muslim affairs, makes rules for and regulates all matters in connection with the collection, administration and distribution of zakah and fitrah. It also provides for the method by which zakah and fitrah shall be collected; appoints agents and officers for the collection of zakah and fitrah; and provides penalties for the collection or payment of zakah and fitrah by or to unauthorized persons. (Art.69)


3.3 Regulatory and Policy Framework 3.3.1 Zakah Collection Article 4.2 of the law in Indonesia identifies various zakatable assets as: gold, silver, and other precious metals; cash and other securities; trade inventories, produce from agriculture, horticulture, and forestry; livestock and fisheries; mining; industry; revenues and services, and rikaz. The law recognizes both individuals and business entity as muzakki (Art.4.3). It refrains from providing the applicable rates and method of calculating zakah liability and merely asserts that the terms and method of zakah calculation should be in accordance with Islamic law. (Art.4.4). A muzakki may make a self-calculation of their zakah obligation or seek the help of BAZNAS to calculate zakah obligation. (Art.21) In Malaysia, however, it is compulsory to pay zakah. Law provides for stringent punishment for non-payment of zakah when it is due. For example, the Syariah Criminal Offences (Federal Territories) Act 1997 provides for stringent penalty for non-payment of zakah. As Sec.16 of the Act states: “any person who, being liable to pay zakat or fitrah— (a) refuses or wilfully fails to pay the zakat or fitrah; or (b) refuses or wilfully fails to pay the zakat or fitrah through an amil appointed, or any other person authorized, by the Majlis to collect zakat or fitrah, shall be guilty of an offence and shall on conviction be liable to a fine not exceeding one thousand ringgit or to imprisonment for a term not exceeding six months or to both.” The law also prescribes stringent penalty for any person who in any manner prevents another person from paying zakah in the form of a fine not exceeding RM 2,000 or imprisonment for a term not exceeding one year or both. (Sec.17-2)

| 58

Singapore’s regulatory framework is similar to Malaysia’s. Art.68-3 makes it obligatory on all Muslims in Singapore to pay zakah and fitrah in accordance with the provisions of this Act. Again, similar to Malaysia, refusal or willful failure to pay zakah is an offence according to Art 137 and a person guilty of this is liable to a fine not exceeding S$ 500 or to imprisonment for a term not exceeding 6 months or to both. Further the conviction under this section will not extinguish the liability. Any zakah due by any person or the value of the same may be recovered as if the value thereof were recoverable as a fine imposed under the provisions of this Act. Though Brunei Darussalam has a framework similar to that of Malaysia and Singapore, zakah payment is not compulsory. The only other country that has made zakah payment compulsory is Pakistan, where zakah on specific forms of assets is deducted at source. Section 3 (1) of the Zakat and Ushr Ordinance, 1980 asserts that “zakat in respect of assets mentioned in the First Schedule shall be charged

ZAKAH

and collected, on compulsory basis, for each zakat year, at the rates and in the manner specified therein, and as may be prescribed, from every person who is on the valuation date, and for whole of the proceeding zakat year been, sahib-e-nisab, and who owns or possesses such assets on the valuation date.” The list of assets includes: savings deposits with banks and similar deposits, mutual fund units, government securities etc. Zakah is to be paid voluntarily on a self-assessment basis for most other forms of assets, such as cash, gold, silver, loans receivable, shares and bonds, stock-intrade, precious metals, agriculture produce, livestock, rental income and the like. Zakah payment is entirely voluntary in India as well as in Bangladesh. Going by the experience of countries that have made zakah payment compulsory, it appears that there are serious flaws in the implementation of the law. The reasons for weak enforcement, as cited by some observers in Malaysia are: absence of muzakki database, unwillingness of zakah officer to list those who fail to pay zakah, shortage of staff and inadequate authority designated to the zakah officer to investigate any failure. It is interesting to note that while the law in Pakistan seeks to provide definitive methods for calculation of zakah liability, the rigidity itself may have resulted in large-scale zakah evasion or avoidance. The law also provides for exclusion of a Muslim from zakah liability if he follows a school of fiqh that stipulates differently regarding estimation of zakah liability. It merely requires the person to submit a declaration with the deducting agency that “that says his faith and the said fiqh do not oblige him to pay the whole or any part of zakah or ushr in the manner laid down in this ordinance.”

3.3.2. Zakah Utilization Indonesian Zakat Act prescribes zakah to be distributed to mustahik in accordance with Islamic law (Art.25) and based on priority after considering the principles of equity, justice, and territorial proximity. (Art.26) It remains short of providing objective and quantitative criteria for distribution of zakah among the various categories mandated by Shariah, but clearly stipulates that zakah can be used for productive activities in order to handle poverty and to improve the quality of life, but only after fulfilling the basic needs of the mustahik. (Art.27.1-2) In no other country do laws deal with the issue of prioritization in zakah distribution. For example, the Singaporean law leaves the matter to MUIS. It merely states that “any zakat or fitrah collected shall be disposed of by the Majlis (i.e. MUIS) in accordance with the Muslim law.” (Art 68-4) An interesting provision in the law in Pakistan deals with the issue of imparting ownership to zakah beneficiaries

(tamleek). Secton 8 of the law in Pakistan identifies several categories of beneficiaries, such as the poor, needy, orphans, widows, handicapped and the disabled as eligible to receive zakah under Shariah for their subsistence or rehabilitation, either directly or indirectly through religious seminaries or educational, vocational or social institutions, public hospitals, charitable institutions and other institution providing health care, provided that the lists of the individuals to be assisted directly and of the institutions through which assistance is to be given from a Zakah Fund shall be prepared and maintained in such form and manner as may be prescribed. Zakah may take the form of assistance to needy persons affected or rendered homeless due to natural calamities like floods and earthquakes, and for their rehabilitation. Laws in many countries explicitly deal with the issue of meeting operational and administrative expenditure related to zakah collection and distribution. The Indonesian law does not stipulate any maximum limit (such as one-eighth) for the use of zakah proceeds to cover administrative expenses of zakah collectors (amilin alaihi). While BAZNAS is required to cover its expenditure both by State budgetary allocation and part of zakah collection (Art.30), LAZ is also entitled to take parts of zakah collection to finance its operations. (Art.32) In Pakistan, Section 8 stipulates that zakah proceeds may only partially cover expenditure on the collection, disbursement and administration of zakah. All expenditures related to administration will be met by the government while all banking services related to zakah will be provided free of charge. It may be noted that in Pakistan zakah flows through a network of central zakah council, provincial zakah councils, district committees and eventually distributed through local committees. In Brunei Darussalam, operational expenses are met through budgetary allocation by the government and covers the salaries of MUIB staff, while expenses for Amils are allocated from zakah collection based upon a standard formula. Amils play a major role in collection of zakah and as at the end of 2007, there were 280 amils in addition to 2 Islamic financial institutions engaged in zakah collection.

3.3.3. Accountability, Transparency and Governance in ZIs The law in Indonesia permits the zakah institutions - LAZ and BAZNAS - to collect other forms of charity funds, such as, infaq and sadaqah (Art.28-1). However, these must also ensure that the use of such funds is in conformity with Shariah and also with the intention of the donor(s) (Art.28-2). Further, given the Shariah constraint regarding the nature of zakah beneficiaries, there is a need to ensure that zakah funds are not commingled with other forms of charity funds. The Act (Art.28-3) rightly stipulates that all non-zakah charity funds must be recorded in a separate book. No other law takes care of this important Shariah as well as governance related issue.

The law also meticulously provides for mandatory reporting requirements for all zakah institutions at all levels in addition to their wide dissemination through all forms of media. While BAZNAS itself is required to produce and file detailed reports regularly to the government – provincial and central, the LAZ in the voluntary sector is required to produce and file detailed reports to both BAZNAS and the government. The Act also requires flow of information at all levels within BAZNAS and the government. (Art.29) The law also seeks to ensure wider public participation in the functioning of BAZNAS and LAZ (Act.35). It is rightly based on the assumption that such participation will result in greater public awareness about the need to strengthen these institutions through acts of giving and acts of vigilance against mismanagement. This is also sought by laws in most other countries stipulating nomination of respectable members from the community to state agencies entrusted with zakah management.

3.3.3.1. Penalties and Sanctions The Indonesian law provides for administrative sanctions in the form of warning, temporary suspension of activities and even revocation of license for zakah institutions (Art.36), should they violate specific provisions (e.g. Art.19, 23-1, 28-2, 28-3, 29) relating to timely reporting to BAZNAS and noncompliance with Shariah and/or donors’ wishes. The Act prohibits individuals from owning, pledging, granting, selling, and / or diverting zakah, infaq and other religious social funds that exist in its management. (Art. 37) Any person who willfully and unlawfully violates this shall be punished with imprisonment of 5 (five) years and / or a maximum fine of Rp 500 million. (Art.40) The Act also prohibits one from deliberately acting as amil zakah to undertake the collection, distribution, or utilization of zakah without the consent of the authorities. (Art.38) Any person who willfully and unlawfully violates this provision shall be punished with imprisonment for a maximum of 1 (one) year and / or a maximum fine of Rp 50 million. (Art 41) Further, Article 39 stipulates that any person who intentionally unlawfully distributed zakah according to provisions of Article 25 shall be punished with imprisonment of 5 (five) years and / or a maximum fine of Rp 500 million. Malaysian law has similar provisions under which zakah can be collected only by amil appointed and authorized by the Majlis. Section 33 prescribes a financial penalty not exceeding RM 3,000 or imprisonment for a term not exceeding 2 years or both to unauthorized zakah collectors. The law also requires confiscation of any such collection that would be paid into the Baitul Maal established under section 60 of the Act. Further, it is not only the unauthorized collection, but payment of zakah to an unauthorized collector is also punishable. Such a zakah


59 |

payer faces the prospect of a financial penalty not exceeding RM 1,000 or imprisonment for a term not exceeding 6 months or both. (Sec.34) Law in Brunei also provide for deterrents against frauds in the form of financial and physical punishment. In contrast, Singapore law leaves the power to provide penalties for the collection or payment of zakah by or to unauthorized persons with MUIS itself. (Art.69). They are less stringent elsewhere, e.g. in Pakistan where zakah law is very elaborate in terms of organization and management of central, provincial, district, sub-division and local committees, but provide very little in terms of penalties and punishments, except the possibility of removal of an erring member.

3.3.4. Tax Treatment of Zakah Most countries treat zakah at par with charity contributions made to voluntary organizations and provide tax relief in the form of allowing the same as a deduction to taxable income.

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In Indonesia, Article 22 of the Act provides for tax relief to the muzakki by treating zakah paid to BAZNAS as deductable to taxable income. Further, BAZNAS or LAZ provide receipt of zakah payments to each muzakki that is then used to deduct income tax. (Art.23) Pakistan also provides for similar tax relief to the muzakki. Section 25 of its Act says: Notwithstanding anything contained in any other law for the time being in force in determining the tax liability of an assessee for an assessment year, o Under the Income Tax Ordinance, 1979 (XXXI of 1979), his total income shall be reduced by the amount paid by him to a Zakah Fund, during the income year relevant to that assessment year; and o Under the Wealth Tax Act, 1963 (XV of 1963), his assets in respect of which zakah or contribution in lieu thereof, has been deducted at source during the year relevant to that assessment year shall be excluded from his taxable wealth; and o Land revenue and development cess shall not be levied on land on the produce of which ushr or contribution in lieu thereof, has been charged on compulsory basis. Malaysia provides very strong incentives to muzakkis to pay zakah. It is the sole country that provides for reduction in the income tax liability of an individual by the full amount of zakah paid. Other countries treat zakah as a tax-deductible

expense, which means the amount of zakah paid is adjusted against the taxable income and not against the tax payable. The difference between the two is explained below with a simple example. If ‘I’ is the taxable income of an individual, ‘t’ is the relevant income tax rate, and an individual pays zakah, the quantum of zakah being ‘Z’, then:

| Table 3.13. Multiple channels for zakah mobilization in Malaysia14 NO.

(1) in a zakah-less neutral tax regime, e.g. India, tax payable by an individual is I*t; and the after-tax income is I*(1-t) (2) in Malaysia, tax payable is reduced by the amount Z, is now equal to (I*t – Z); and the after-tax income is equal to {I – (I*t – Z)} or {I*(1-t) + Z} (3) elsewhere, e.g. Indonesia, taxable income is reduced by Z; taxable income is equal to (I – Z); tax payable is equal to (I – Z)*t; after-tax income is equal to {I – (I – Z)*t} or {I*(1-t) + Z*t} Thus, the income tax payable by the muzakki gets reduced by ‘Z’ in Malaysia, while in other countries it gets reduced by ‘Z’ multiplied by the tax rate. The tax factor thus, constitutes a powerful incentive for zakah collection.

3.3.5. Corporatization & Use of Technology Zakah collection system in Malaysia was corporatized in some states by the establishment of a separate body that administers all matters pertaining to the administration of zakah collection. This step was intended to improve the collection of zakah funds and to develop the ways zakah payers can easily transfer their financial obligations. Studies report that this move brought in a general increasing trend in collection in the majority of states. While the increase of collection may be attributable to other factors, corporatization is the major factor that has affected collection significantly.

STATES

OFFICE / COUNTER BRANCH

AMIL CORP

KIOSK CREDIT CARD

MOSQUE

AGENT

SMS

POST BANK OFFICE COUNTER INTERNET ATM

1

Johor

12

√

√

2

Kedah

1

√

√

3

Kelantan

6

√

4

Melaka

7

√

5

NS

9

6

Pahang

10

7

Perak

8

MATA PHONE

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

16

√

√

√

√

√

Perlis

1

√

√

√

√

√

9

P Pinang

7

√

√

√

√

√

10

Sabah

3

√

√

√

√

√

11

Sarawak

11

√

√

√

√

√

12

Selangor

22

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

61 |

√

√

√

√

13 Terengganu

8

14

WP

6

√

√

√

√

√

√

√

√

√

√

√

√

TOTAL

119

6

14

14

2

10

14

14

13

4

6

2

4

OFFICE / COUNTER BRANCH

Additionally, zakah institutions have developed other instruments for handling zakah funds. Apart from the corporatization and collection by workers or “amils” assigned by the zakah offices, there are several other supporting bodies which are given the authority to collect funds from the payers and transfer to the accounts of zakah institutions. Such collection bodies include the Income Tax department (through deductions from salaries), Baitul-mal subsidiaries, higher learning institutions (such as universities), collection counters in banks, post offices, and shopping centers, where all play an important role to facilitate collection procedures. Additionally, the collection process has been simplified, made safer and less time-consuming for the payers through computerized collection systems, proactive marketing approaches, and payments via commercial banks and e-banking systems.

SALARY DEDUCT

14

AMIL CORP

6

SALARY DEDUCT

KIOSK CREDIT CARD

MOSQUE

14

AGENT POST BANK OFFICE COUNTER INTERNET ATM

14

2

10

14

14

13

4

MATA PHONE

6

2

Based on data collected from Jabatan Wakaf Zakat dan Haji (JAWHAR) by Dr Syed Ghazali Wafa and presented at Preparatory Workshop for this Report at Bogor, Indonesia on April 29-30, 2013.

14 13

ZAKAH

Obaidullah M (2012) Zakah Management for Poverty Alleviation, Islamic Rvesearch and Training Institute, Jeddah, p78


3.4 Supporting Infrastructure Associations and Networks

Education & Training Providers

World Zakat Forum (WZF): The WZF was founded in 2010 in Yogyakarta, Indonesia. The Forum essentially aims to meet at least once in three years, to discuss and share all zakah -related matters at a global level involving various stakeholders from state/government, government zakah organizations, non-government zakah organizations, academicians, ulama, and others. It also aims to support and cooperate with the International Zakat Organization (IZO). In its maiden meeting, the WZF called all Muslim countries to accommodate and implement the policy of “zakah as tax credit”.

Indonesia provides the example of a pioneering initiative devoted to the creation of a cadre of amil zakah or zakah professionals through continuous training and capacity building programs. The Indonesia Magnificence Zakat (IMZ) undertakes a comprehensive range of training programs in zakah management that includes various aspects of zakah, e.g. fiqh of zakah, modern fund-raising techniques of zakah, transparency and governance issues in zakah management and the like. Programs are short-term in nature. (see box)

International Zakat Organization: The IZO is a body of the Organization of Islamic Cooperation (OIC), established on April 4, 2007 by the Government of Malaysia . The objectives of the establishment of the International Zakat Organization (IZO) are as follows: • To elevate and dignify zakah, the third pillar of Islam, as the “pencetus” or pivot of economic development and increasing awareness among the zakah administration systems globally.

| 62

• To encourage international cooperation in eradicating poverty through programs relating to human resources development, economy, religious awareness, health and others pertaining to social and community programs. • To gather and maximize Muslim expertise from various disciplines towards the socio-economic progress of Muslims. • To explore investment opportunities for superfluous zakah and other financial resources to elevate and strengthen the financial resources of Muslims.

Indonesia Magnificence of Zakat (IMZ)

Option 2: Fundraising

The Indonesia Magnificence of Zakat (IMZ) was established in 2009 by merging two institutions the Intitut Managemen Zakat (IMZ) and the Circle of Information and Development (CID). The merger brought together two institutions that have been institutional leaders in the field of socialization, communication and training for zakah development in Indonesia.

1. Strategies for promotion, donor/muzakki services that create value for fundraising program

Vision: Become a reference institution at the forefront of national and international level through study, research activities, capacity building and information publication

3. B u i l d i n g te a m s a n d co m m u n i t y r e l at i o n s management 4. Strategic model for fundraising from muzakki/ donors from Indonesian companies and multinational corporations

In Malaysia, the International Islamic University offers a course on zakah accounting as part of its undergraduate and graduate programs in accountancy.

Mission

5. Building trust among staffs and society for social legitimization

- Conduct studies related to the policy framework and its implementation for zakah regulations

6. Strategy for fundraising for zakah using IT, media and networking

In Singapore, MUIS Academy, established by the Majlis Ugama Islam Singapura, the Islamic Religious Council of Singapore, offers training programs for zakah professionals.

- Undertake research and develop a discourse about zakah to develop models of empowerment and appropriate measurable objectives that contribute to poverty reduction

Option 3: Accounting

-

2. Financial organization and accountability

In India, the International Institute of Islamic Business and Finance offers a certification course on zakah management, which has similar objectives and structure as the IMZ program.

Develop the organization and management of zakah in Indonesia through training and consultation

- Provide data and maintain a center of zakah information and development Programs and activities: These include undertaking research and policy studies, organizing seminars, training events and workshops, publishing journals, books and web portal, running a Zakah Information Center. In-house training program: Training events are held in-house using interactive models appropriate for adult learning. Role-playing and games form an integral part of training methodology. Training effectiveness is carefully measured using the mechanism of pre-test and post-test as well as through observation of participants. The various study modules as options are:

Option 1: Fiqh of zakah

1. Financial management and analysis for organization and management of zakah

Option 4: Optimal Utilization of Zakah 1. Reinterpretation of rules for optimal utilization of zakah 2. Organization and management of health programs using zakah, sadaqah and infaq funds 3. Community empowerment by microfinance program 4. Organization and management of education programs using zakah, sadaqah and infaq funds 5. Collective action for development of sustainable agriculture 6. Social entrepreneurship by empowerment of farmers

Option 6: Zakat (General Aspects)

1. Contemporary fiqh of zakah

1. Legal aspects for organization and management of zakah

2. Technique of calculation of Amilin salary according Islamic law

2. Discussion and sharing about regulation of zakah at district/city level

3. Zakah calculation – zakah for professional workers and companies

3. Formulation of vision, mission and goal for organization and management of zakah, preparation of strategic plan for organization and management of zakah program, human resource planning

4. Regulation of zakah for district/city according Islamic law

ZAKAH

2. Training for excellent communication skills


63 |

3.5 Success Stories and Good Practices 3.5.1. Shaukat Khanum Memorial Cancer Hospital & Research Centre, Pakistan Key ideas: Zakah as sustainable source of funding; credibility through efficiency, transparency and good governance; use of zakah for projects with mixed beneficiaries Shaukat Khanum Memorial Cancer Hospital and Research Centre (SKMCH&RC) was established in 1994 in Lahore, Pakistan, to treat patients with cancer and conduct research on the causes of and treatments for cancer. SKMCH&RC is the first and only cancer hospital of international standard in Pakistan, dedicated to providing first-class treatment of cancer to all its patients, irrespective of their ability to pay.

Mission: To act as a model institution to alleviate the suffering of patients with cancer through the application of modern methods of curative and palliative therapy irrespective of their ability to pay, the education of health care professionals and the public and perform research into the causes and treatment of cancer. Achievements: Since its inception in 1994, the Shaukat Khanum Memorial Cancer Hospital and Research Centre (SKMCH&RC), has come to be recognized as one of the most credible and resilient charities in Pakistan. It has an annual budget of PKR 5.8 billion. Since 1994, 75 percent of its patients have received financial support with the cumulative philanthropic spending reaching PKR 9.94 billion (US$ 148 million). The following data for the year 2012 are indicative of the scale of operations at SKMCH&RC.

in PKR millions

Hospital Services

Zakah

Donations

Other Income

Total Revenue

2011

1,976

1,343

908

63

4,290

2010

1,546

813

614

37

3,010

2009

1,281

865

620

47

2,813

2008

1,125

646

460

37

2,268

2007

954

535

486

33

2,008

2006

750

438

273

34

1,495

2005

573

265

320

29

1,186

2004

424

397

368

33

1,222

Year

2003-04*

374

287

238

14

913

2002-03

261

244

178

15

698

2001-02

234

152

174

17

577

2000-01

211

131

190

15

547

1999-2000

139

117

152

17

425

1998-99

113

100

129

11

353

1997-98

90

99

103

11

303

156,766

1996-97

62

117

105

7

291

Chemotherapy

31,198

1995-96

35

109

87

18

249

Radiation treatments

51,865

1994-95

5

46

85

5

141

| Table 3.14. Services provided by SKMCH&RC as in 2012

| 64

| Table 3.15. Revenue Growth of SKMCH&RC (1994- 2011)

New registrations Outpatient visits

Admissions Surgical procedures Pathology tests Imaging studies Pharmacy Dispensing Consultants, Physicians & Surgeons Total Staff Total national collection

9,542

8,613

*Financial year changed from June 30 to Dec 31 in December 2004

6,990 3,740,838 160,574 1,092,480 59 1,524 1,728.9

The figures in Table 3.15 demonstrate clearly that zakah and charitable contributions can certainly be considered as sustainable sources of financing for the provision of expensive health care to the poor who would otherwise have found them unaffordable. The growth in zakah and other donations have kept pace with the growth of income from hospital services. It is interesting to note that that while the amount distributed by the Ministry for the whole of Pakistan stood at US$ 105 million in 2011, one private foundation alone, SKMCH&RC collected US$ 13.7 million in zakah and another US$ 9.24 million in donations. One is inclined to conclude that the above is due to a high degree of trust and credibility enjoyed by the hospital in the face of the lack of the same for the government, notwithstanding the fact that the law in Pakistan has made it mandatory on the part of the muzakki to pay zakah to the government on certain specific forms of wealth. Segregation of Zakah from Other Donations

Strategies and Processes: The SKMCH&RC has been constructed with the donations of the people from the country and across the world. About 50 percent of the revenue is generated by hospital services provided to paying patients and the rest comes from donations and zakah money. Donations and zakah money have shown a significant growth over the years. (see Table on the next page)

ZAKAH

The commingling of zakah with other donations poses major Shariah issues, given that the clientele served by the hospital comprises both the rich and the poor. How are these issues tackled from an accounting point of view? How are these

issues tackled from the governance point of view? What procedures are in place to identify the poor (eligible for zakah) from among patients and how is differential pricing practised? The credibility enjoyed by the organization among donors is quite apparent from the sustained growth in zakah contributions. What are the major contributing factors behind this? What major lessons lie in the governance structure of this organization for other zakah -funded institutions? The management of SKMCH&RC asserts that issues of transparency, governance and above all, Shariah-compliance are given due consideration in the way a mustahiq is provided benefits of zakah. It follows a systematic procedure to address the above concerns that may be narrated as follows: 1. Patients are registered for financially supported treatment after a thorough evaluation of the nature and stage at which each patient is presented to the Hospital. This step ensures that all patients being accepted for financially supported health care are cancer patients. 2. Once this is done, the patient will be routed to the Financial Support Services Unit for a financial evaluation interview to ascertain the extent of support required. The


65 |

concerned staff shares the expected cost of treatment and the patient shares the details of their assets, dependents, income sources etc. and they mutually agree upon a percentage for financial support. 3. Nearly 65 percent of the patients receive complete, i.e. 100 percent support because they cannot cover their basic needs, let alone the expensive treatment for cancer (many people do not have enough money to take away their dead). Another 10 percent of the patients receive partial support and that too in which they pay nominal amounts (e.g. 5 percent of their treatment cost) because they would like to pay whatever they possibly can.

| 66

11. Keeping in view the transparency of the entire system, the Ministry of Religious Affairs, Zakat and Ushr of the Government of Pakistan also disburses PKR 12 million from its Zakat Fund for the treatment of poor cancer patients each year, and has permanently deputised a representative to monitor the disbursement at the Hospital.

4. Apart from this interview, the Hospital has field investigators to help in the verification of the information through alternate means to ensure that the patients who qualify for financially supported treatment truly deserve it.

It is also pertinent to mention here that of a total hospital budget of PKR 5.2 billion for the year 2012, the amount that was required to provide direct patient care for the poor cancer patients was about PKR 2.1 billion, while the zakah collections were about PKR 1.6 billion. These figures are reassuring in the sense that zakah itself is not enough to cover the direct patient costs and therefore, there is little possibility of zakah being used for any other purpose. The entire amount collected in the form of zakah is completely exhausted in providing direct patient care within the same year

5. Next, the patient is asked if they are eligible for zakah.

3.5.2. Dompet Dhuafa Republika, Indonesia

6. Those who claim to be eligible are further asked to obtain a signed and stamped referral letter from their local zakah authorities who also authenticate the patient’s eligibility for zakah based on local information.

Key ideas: Zakah as sustainable source of funding; projectapproach to zakah-based microfinance and community empowerment

7. The treatment of such patients is subsidized from the Zakah Fund that is separately maintained at the Hospital. 8. Note that the revenue from the Hospital’s diagnostic services (i.e. PKR 2.2 billion) has always been and continues to be used for expansion projects/equipment and other hospital expenses (including salaries). Zakah is exclusively used to provide direct patient care to the poor patients. 9. Patients who do not qualify for zakah (e.g. non-muslims, syeds etc.), however deserving they may be, are subsidized from a separate Donation Account of the Hospital. 10. The implementation of this entire system is to ensure with precision that every penny is used in line with the eligibility of each patient. Every time a service is provided to a patient during the course of treatment, it is made possible through a very sophisticated custom-built Hospital Information System.

Dompet Dhuafa Republika (DDR) is a philanthropic institution that serves to help the poor using donated assets including zakah, sadaqah and waqf from individuals, groups, companies or institutions. It redistributes the funds received to support the many socio-community activities, including activities aimed at alleviating poverty, and activities that promote education, health and research. As a legal entity, DDR was recognized as a waqf foundation by the Indonesia’s Social Ministry in 1994 and as a national level Zakat Amil Institution by its Religious Ministry in 2001. DDR is driven by a mission to (i) build human values and selfreliance (ii) increase community participation and support charitable resources for empowerment (iii) encourage synergy program and a global network of community development organizations (iv) develop and preserve community assets through equitable economic strategies and (v) develop charity as an alternative tool of poverty alleviation.

Collection & Utilization of Zakah and Charity Funds by DDR The following table provides details on the collection and distribution of zakah and other charity funds by DDR in 2010 and 2011. | Table 3.16. Collection & Utilization of Zakah and Charity Funds (2010-2011) Inflows

%

2010 (Rp Million)

%

2011 (Rp Million)

Zakah

31.6

60,541

39.2

74,972

Waqf

23.8

45,642

23.8

45,525

Infaq / charity

4.8

9,211

7.7

14,760

Human solidarity funds

4.8

9,198

0.9

1651

Animal Sacrifice

10.3

19,750

10.3

19,628

Infaq restricted

24.0

45,944

16.9

32,388

Revenue shares

0.6

1205

0.7

1339

Other receipts

0.2

322

0.6

1093

100.2

191,816

100.0

191,355

%

2010 (Rp Million)

%

2011 (Rp Million)

Distribution of sacrificial animals

6.8

13,022

6.7

12,824

Channeling restricted infak

17.0

32,621

14.6

27,981

Socialization Madina Zone

0.1

267

0.2

381

Madina Zone Program

0.4

841

1.1

2103

Grant to Asnaf: (% of zakat)

71.4

43,249

66.7

49,983

Fuqara & Masakin

52.1

31,531

51.2

38,383

Gharimin

0.0

5.7

0.0

13.3

Ibn sabil

0.5

275.6

0.0

4.5

18.8

11,400

15.4

11,575

0.1

36.7

0.0

8

22.8

43,611

1.7

3180

Social activities

1.0

1885

0.7

1356

Education activities

0.0

28.6

0.2

429

Economic activity

0.0

0

0.0

18,339

Correctional ZISWAF

4.6

8,849.5

6.4

12,253

Routine operational

5.2

10,010

6.2

11,789

Humanitarian aid

4.8

9,188

3.3

6364

Construction of public facilities

0.0

13

0.0

10.7

Prepaid expenses

0.2

460

0.6

1135

Other routine operational

2.2

4151

3.2

6176

Miscellaneous expenditures

0.2

390

1.0

1839

88.0

168,585

72.0

137,822.7

11.2

21,370.7

28.2

54,038.5

Total Outflows

Fisabilillah Muallaf Use of waqf

Total Outflow Net cash flows provided by operating activities ZAKAH


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In addition to the above, information collected from DDR indicate that zakah collection have generally seen an upward trend except in the year 2012 when it experienced a steep fall. During January-July 2013, total zakah collected touched Rp 52.9 billion. While it was Rp 74.9 billion in 2011, it experienced a sharp fall to Rp 31.4 billion in 2012. Thus the fall proved to be a temporary setback perhaps attributable to the regulatory change which curbed the freedom of all private zakah collecting bodies and required them to operate under the regulatory supervision of BAZNAS. Indeed during 2012, in 6 out of 12 months zakah collected by DDR was actually zero! While zakah collection has not been a problem for DDR, its tendency to carry zakah surpluses may raise some Shariah issues. Measured as the difference between zakah collected and zakah distributed among asnaf, the surplus stood at 28.6 percent and 33.3 percent of zakah collected during 2010 and 2011 respectively.

Operating costs as a percentage of total resources stood at 7.4 percent and 9.4 percent during 2010 and 2011 respectively, indicating high levels of operational efficiency and conformity to the spirit of Shariah. Economic Empowerment through Zakah The funds dedicated to economic empowerment programs average about Rp 6.3 billion per year; this hovers around 10 percent of total zakah resources available. The low dedication is attributable to apparent Shariah objections by some scholars who emphasize on use of zakah for consumption alone in the short-term. In the face of a growing realization however that an emphasis on the short-term may lead to a dependency syndrome among the poor, and that the long term need of the poor is economic and social self-reliance, DDR seeks to enhance the use of zakah for community empowerment programs.

| Table 3.17. 5-year Details on Economic Empowerment Programs by DDR

| 68 No.

Field Program

1.

Organic Farming

Program

Funds (Rp Billion)

Beneficiaries

15

4.6

2,611

2.

Livestock

9

6

997

3.

Fisheries

52

11.1

6,175

4.

For-profit Microfinance

6

4.3

2,186

5.

Research, In House & Public Training

150

5.6

5,164*

TOTAL

232

31.7

17,133

* Participants

Among the major economic programs of DDR are: the masyarakat mandiri (self-reliant communities), pertanian sehat (health/ organic farming), kampoeng ternak nusantara (livestock development), Islamic microfinance (for-profit) in addition to capacity building initiatives under Indonesia Magnificence Zakat (IMZ). The first three programs follow a similar model of economic empowerment that involves interest-free loan financing to groups from a pool created out of zakah funds. The key distinguishing factor of this model is the phased building of self-reliant communities and the creation of a community organization that would continue to provide financing to the members. Below we focus on the masyarakat mandiri (MM) program. The MM program of Dompet Dhuafa Republika is focused on income generating and community-based organization development. The objectives of the MM program are: • To achieve material independence of target community by realizing its productive ability to meet basic needs and to establish survival mechanism during crises;

ZAKAH

• To achieve intellectual independence of target community by fostering independent way of thinking and behavior and ability to make critical judgment. • To achieve managerial independence of community-based organization by ensuring the community’s capability to take collective action in creating a sustainable local institution that is able to establish equal partnership between multistakeholders. Selection of Beneficiaries Shariah clearly defines the nature of beneficiaries of zakah. In order to ensure full Shariah-compliance and also to ensure efficiency and effectiveness of the intervention, the MM program employs the clearly defined criteria for identifying its target region and beneficiaries. An urban region targeted for the program (i) is usually a densely populated slum area (ii) with potential to be developed into a center of production and (iii) with ease of access to transport and marketing facilities and networks.

A rural region targeted for the program (i) should have comparative advantages in specific commodities or produce (ii) should have natural resources with access to the same by the poor (iii) should have available human resources both in terms of quality and quantity and (iv) should not witness conflicts or have a high potential for conflict. MM identifies its target group of individuals based on criteria not just related to their income and ownership, but based on their potential for forming partnerships, and their quality as human resource. In terms of income and ownership, those with income of less than US$ 2 a day for rural areas and less than US$ 3 a day for suburban and urban areas are eligible beneficiaries. Additional criteria used are conditions of residence and ownership of assets. A key requirement is the agreement from the local community based on their evaluation of the individual or family. The evaluation of potential beneficiaries is also undertaken in terms of their potential to form meaningful economic partnerships. This is assessed in terms of the potential for expansion of their micro-businesses. Several criteria used for the process are: past track record in enhancing the scope and scale of business; the availability of raw materials, production capacity and market potential; the capacity to absorb labor, potential to create further economic opportunities and to use local resources. In terms of human resource potential, the potential beneficiaries of the program are restricted to those individuals who are between 18 and 60 years of age, and who are able to work with a vision for further expansion of their efforts. Further, they must not be currently receiving assistance from other similar programs. Program Components The program has the following key components: • Building Awareness: The program helps the community identify its problems and its potential under the assumption that the community itself has the ability to solve the problems. Community organizers from the program are immersed in the target region and share the life of the communities. The program also facilitates a learning process to bring about changes in attitudes.

• Partnership: The local Community figures out what can be implemented and what support will be needed from external party (the program). The community establishes cooperation based on specific roles for each stakeholder based on mutual trust and transparency. The program provides the following ser vices to its beneficiaries: • Developing human resources through various training program, workshops, meetings among members and others; • Developing institutions with proper documentation of standard operating procedures for each organization or group in order to be commonly monitored; • Provision of capital to local businesses through groupbased credit, self-help savings; • Providing business development services for improving production methods; and • Developing markets through sharing of information on business opportunities, building networks and synergies. The program emphasizes building and strengthening of individual and institutional capacity. At an individual level, the focus is on improving perceptions and attitudes, enhancing knowledge and skills and building the ability to generate income and manage funding of micro enterprises. At an institutional level, the focus is on strengthening organization management, improving access to financial ser vices, information, marketing services and networks. Termination and Exit Strategy The program has a clear termination and exit strategy. It withdraws from the region and the program comes to an end as soon as the community cadres are ready to take part in maintaining program sustainability - financial and institutional. It ensures that a community-based organization is a legal entity with adequate capacity to sustain cooperation with all stakeholders. From a Shariah perspective, this ensures that the “tamleek” condition of zakah is complied with, since the poor beneficiaries ultimately become the owners of the local organization in a collective sense with transfer of assets from the program to the local organization. Thus, the fact that they are borrowers in the first instance does not appear to vitiate the “tamleek” requirement.

• Organization: It generates self-help groups as the medium to build bargaining position; helps form a local organization through community initiative. • Building Cadre: It prepares a local cadre who will develop local self-help and who will take over the “hand-holding” role once the program ends. • Technical Support: It provides technical training based on locally available and appropriate technology.


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3.6 Lessons & Policy Implications 1. The case for standardized and globally acceptable definitions of zakatable assets and methods of estimating zakah liability does not appear to be a strong one. Since Islamic societies are typically characterized by multitude of madhabs and schools of thought, zakah laws must retain enough flexibility to accommodate plurality of views. The diversity in legal opinions should be respected. It is more practicable to ensure that zakah estimation is an outcome of consultative processes between the muzakki and the zakah collecting institutions. 2. Contrary to commonly held perceptions regarding lack of dependability in flow of donations, zakah is sustainable, dependable and could be a growing source of funds for institutions that acquire the necessary professionalism in fund-raising and seek continued betterment in their social credibility through integrity, transparency and good governance.

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7. Corporatization that implies use of a large network of private institutional collectors for zakah mobilization is seen to be far more efficient as compared to a large number of unconnected private individual collectors. The issue of how to remunerate the corporate collector is however a trickier one and calls for putting in place adequate and transparent mechanisms to ensure that a minimal percentage of zakah collected is used in this manner. Corporatization should not be pushed too far, e.g. private agencies being allowed to offer zakah investment services as this may involve a misalignment of objectives of such private agencies with those of other stakeholders.

3. The success or failure of an institution as zakah collector and distributor is not so much dependent on whether it is in government or private hands, but on the credibility and trust it enjoys among the muzakki population, which in turn are a function of the integrity, transparency and good governance reflected in its practices and as perceived by the stakeholders.

8. In the light of various legal opinions relating to distribution of zakah among eligible beneficiaries there is a case in favor of a scheme of prioritization among different types of beneficiaries with highest priority being given to the needs of the ultra-poor.

4. At a macro-level, growth in zakah mobilization appears to be influenced more by incentives that make zakah payment an attractive proposition and less by penalties and punishments. Where zakah payment is made compulsory and non-compliance invites penalties and punishment, enforcement is invariably weak for a variety of reasons. Strict laws do not combine well with weak enforcement. At the same time, where zakah payment is voluntary, its mobilization has not been any less impressive.

9. Basic consumption needs are, by definition, more urgent than needs that may be deferred to a future date. In this sense, zakah is traditionally viewed as a solution to the consumption needs of the poor. However, there is also merit in using zakah to enhance the wealth-creating capacity of the poor so that they are able to get out of the vicious circle of poverty and find lasting solutions to their needs. A complete neglect of the empowerment dimension is likely to perpetuate the dependency syndrome among the poor.

5. There seems to be nothing inherently wrong with the coexistence of public and private agencies as zakah collectors. Zakah mobilization is expected to be institution-elastic just as savings mobilization is. Competition brings efficiency and gives more choice to the muzakki. However, competition also presupposes a level-playing field for the players. Where the public agency also assumes the role of the regulator of the zakah sector, it should restrict itself to regulation only, leaving zakah collection to private agencies.

10. The term tamleek implies a process of imparting ownership. In the context of zakah, tamleek is seen as a requirement that essentially implies making the mustahiq the owner of donated funds. This clearly rules out the possibility of giving zakah as a loan to be repaid later. The ownership question however, opens up two further issues. Should the poor beneficiary have absolute right to decide how he/she is going to use the funds? Where there is a genuine possibility that the poor may not use the donated cash in an optimal way, can the zakah distributing institution place a conditionality on the possible use of zakah, e.g. zakah payment in the form of scholarship to poor students for covering tuition fees? Given the recent evidence available in development literature in favor of unconditional cash transfers

6. Where zakah collection and distribution is entrusted entirely to the state, zakah may be seen as a component of aggregate resources available to the

ZAKAH

state. In this sense, zakah payment may be seen as a perfect substitute of the direct taxes to the state and may be allowed as deductions to tax payable. However, there seems to be merit in allowing zakah payment as a deduction to taxable income only (at par with various kinds of charity flows) where private agencies are permitted to collect zakah. Treating zakah payment at par with taxes to state when the same is made to private agencies might seriously erode state revenues.

(UCT) over alternative ways of financial assistance to beneficiaries, the case in favor of interpreting tamleek as unconditional cash transfer appears to be a sound one. However, it is perhaps a good idea to treat the issue more as efficiency-related than Shariah-legal. 11. Traditionally scholars have frowned upon the prospect of giving zakah as loans, since zakah is supposed to make the mustahiq the owner of donated funds and not a borrower of funds. The objections seem to lose weight in the face of the leveraging possibility that loans offer. Arguably, a professionally managed zakah -financed microfinance program can potentially serve a much larger population of the poor as compared to the prospect of grant-making to a small number of beneficiaries. Further, a scenario where the poor are also made the sole owner of the revolving fund is on far stronger grounds. While the first scenario appears to involve efficiency-related gains while raising Shariahlegal concerns, the second one is clearly superior as it simultaneously takes care of the tamleek requirement. 12. Zakah payment is an act of worship (ibada) for the zakah payer or muzakki. It is a matter of grave concern for the muzakki to ensure that his/her zakah is not only paid, but also distributed in conformity with the norms of the Shariah. A zakah institution essentially acts as an agent of zakah payer or muzakki. As the principal, the zakah payer or muzakki would like its agent to ensure that the zakah funds flow to eligible beneficiaries according to Shariah. Therefore, fulfillment of the conditions relating to collection and distribution of zakah is the most fundamental requirement for a zakah institution to earn the trust of the zakah payers and enhance its credibility. 13. Separation of zakah funds from other forms of donations is a primary concern for a zakah institution acting as an agent of the zakah payer or muzakki for distribution of zakah. Since the conditions relating to eligibility apply only to zakah and not to other forms of donor funds, it becomes extremely important to

ensure a wall of separation between zakah and other types of funds. The zakah institutions must put in place appropriate standard operating procedures, accounting and governance practices to ensure the same. 14. Shariah identifies the zakah officials as one of the eight eligible categories of beneficiaries. Therefore, a part of the zakah mobilized by the institution may be used to absorb the administrative and operational costs of the zakah institution. While some would like to place a legal cap of one-eighth on the percentage of zakah that may be used for this purpose, others would like to treat the matter as one of good governance. As a good practice, a zakah institution that typically collects other forms of donations should absorb its administrative and operational costs in such “free” funds as much as possible. 15. Within the overall eligibility framework stipulated by Shariah, a zakah payer or muzakki may have a unique preference or priority scheme in favor of specific regions, beneficiaries or projects. In the interest of good governance, a zakah institution should ensure compliance of such “revealed preferences”. While there may be practical hurdles that come in the way of such compliance for some zakah institutions, an increasing use of IT in zakah management may make a muzakki-to-mustahiq flow a reality as well as a good practice to replicate. 16. There is a case in favor of using zakah for covering genuine credit defaults by the poor, since such borrowers qualify as eligible beneficiaries in the eyes of Shariah. There is, however, need for adequate caution while designing an institutional mechanism for this purpose. It is not easy to differentiate between genuine and willful defaulters for any microfinance institution operating with inadequate and imperfect information. The simultaneous functioning of a micro-credit initiative and a zakah-based initiative to cover credit defaults by poor borrowers under the same organizational umbrella may also involve serious conflict of culture and moral hazard issues.


71 |


72


awqaf

REUTERS/Stephane Mahe

73

Waqf is an important institution in the Islamic economy. Waqf (plural: awqaf) may be defined as a perpetual endowment. The literal translation of the word waqf is “to hold”. The institution of waqf or awqaf, therefore, implies holding or setting aside certain physical assets by the donor (waqif) and preserving it so that benefits continuously flow to a specified group of beneficiaries or community. The nature of the expected benefit or purpose of the waqf is clearly stated in the waqf deed or document created for this purpose by the donor (waqif). A traditional example of waqf is that of donating or setting aside a land for construction of a masjid or a school or a hospital. The donor also specifies the trustee-manager(s) who would ensure that the intended benefits materialize and flow to the community. The trusteemanager is variously described as mutawalli or nazir. The waqf deed provides for the method of compensation of the trustee-manager, usually a part of the earnings or benefits from the assets under waqf. The trustee-manager can also be paid a salary (this was the more popular custom in history). But paying him a share of the earnings or benefits is a better method as it would give him/her an incentive to generate/ maximize profits. Moreover, this would also bring the waqf closer to a mudharabah partnership with the founder as the rab al mal and the trustee as the mudarib.

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How does waqf compare with other forms of Islamic charity, such as, sadaqah and zakah? Executing a waqf, like ordinary sadaqah, but unlike zakah, is a voluntary act. Like ordinary sadaqah and unlike zakah, waqf is flexible in the sense that its beneficiaries need not be restricted to Muslims. Waqf is distinct from ordinary sadaqah in the sense that the benefits flowing from waqf are sustainable by definition. And unlike ordinary sadaqah, zakah and infaq (forms of charitable spending) that are usually in the nature of specific financial flows, a waqf provides for flow of benefits on a sustained basis. Waqf is, thus, a mechanism for institutionalization of charity. The mechanism of waqf should result in a corpus that is either intact or growing. It has a legal identity separate from its manager and therefore, it is most suitable for creation of an institution in the voluntary or not-for-profit sector. As a legal entity, waqf is also described as an “Islamic Trust”. Waqf is also believed to be the precursor to secular trusts, endowments and foundations. Some scholars even see waqf as leading to the idea of modern corporations.

AWQAF

Waqf, by definition, creates a sustainable entity, governed by the fundamental principles of perpetuity, inalienability, and irrevocability. By creating community assets, waqf has the potential to create robust not-for-profit entities that may address the education, healthcare and other social needs in Muslim societies. At the same time, the potential of waqf remains largely untapped. One does not need to venture far for the reasons. There is an urgent need to revisit the existing inefficient laws and create enabling legal and regulatory frameworks at a macro level. The welcome developments in the frontiers of knowledge pertaining to waqf (including reinterpretations of fiqhi rules based on contemporary conditions) can yield ver y positive results in terms of development of the waqf sector if national laws change to convert the possibilities into realities. Contemporary developments in the Islamic finance sector have also opened up many possibilities in terms of new structures for financing development of waqf assets.

4.1 Overview of Awqaf Sector Historically, waqf thrived in all Muslim communities. In many societies waqf-based institutions were the sole providers (with no state intervention) of education, health care, water resources, and support for the poor. The list of social services even included welfare of animals. A specific variant of waqf known as irsad became extremely popular in Muslim-ruled societies. Irsad may be understood as a variant form of waqf where the asset has been set aside by the state or the government in order to cater to identified social needs. As Muslim rule came to an end in many parts of the world with secular states replacing them, the properties under Irsad have either been lost or become a bone of contention with large-scale encroachment by the state and private parties. India is a good example where there has been large-scale

encroachment of awqaf assets. Recovery of such lost awqaf assets remains at the top of the agenda for the Indian Muslim community. As a result, creation of new awqaf has suffered and development of existing awqaf through private financing is always frowned upon. As per latest available reports15, there are more than 490,000 registered awqaf spread over different states and union territories of India. A large concentration of waqf properties is found in West Bengal (148,200) followed by Uttar Pradesh (122,839). Other states with a sizeable number of awqaf are Kerala, Karnataka and Andhra Pradesh. The total area under waqf properties all over India is estimated at about 600,000 acres with a book value of about INR 60 billion. However, the market value of these properties could be many times higher. For instance, a recent estimate of the current value of waqf properties in Delhi alone is in excess of INR 60 billion. A good number of the waqf properties in urban areas are found to be located in city centers where the current value is many times more than the book value. However, the current annual income from these properties is only about INR 1.63 billion, which amounts to a meager rate of return of 2.7 percent. Of this amount the waqf boards are entitled to receive a share at the rate of 7 percent which is used for the working expenses of the boards. The remaining amount is expected to be spent on the stated objectives of the respective awqaf. As the book values of the awqaf properties are about half a century old, the current value can safely be estimated to be several times more and the market value of the waqf properties can be put at INR 1.2 trillion (about US$ 20 billion). If these properties are put to efficient and marketable use they can generate at least a minimum return of 10 pe rcent which is about INR 120 billion (about US$ 2 billion) per annum. The optimum utilization of waqf properties would however, require proper administrative back-up by the central and state governments as well as legislative support by way of crucial amendments to the Waqf Act and some other pieces of existing legislation. Interestingly, as many as 584 waqf properties have been in unauthorized occupation of the governments and their agencies! In Bangladesh according to a survey conducted by the Bureau of Statistics of the Government of Bangladesh, the total number of waqf properties in the country is 150,593 including 1,400 properties around different ‘mazars’. According to the 1983 Mosque census, out of about 200,000 mosques 123,006 are waqf properties. It is also claimed that almost one third of the land of Dhaka city is waqf. Out of the 150,593 waqf properties, however, only 15,300 are registered with the Waqf Administration of the Government. No valuation

15 16

estimates of awqaf in Bangladesh are currently available. In Malaysia, as at 2012, the waqf portfolio comprises the following: The state of Johor has 1,843 pieces; Perak has 1,749 pieces; Kedah has 1,472 pieces; Melaka has 601 pieces; Selangor has 285 pieces; Terengganu has 236 pieces; Pulau Pinang has 138 pieces; Kelantan has 52 pieces, and the Federal Territory Kuala Lumpur has 30 pieces of properties. Data for waqf buildings indicate that the state of Penang has the highest number of waqf buildings - 160 units - followed by Perak (50 units), Melaka (43 units), Johor (14 units), Federal Territory Kuala Lumpur (4 units), and Kelantan and Terengganu (each with 3 units). Data for waqf by type of properties indicate that of the 6,406 pieces of waqf properties, 1,760 pieces are for masjids, 900 pieces for suraus and 219 pieces for religious schools. A total of 2,446 pieces are for cemeteries, 15 pieces for house dwellings, 125 pieces for buildings, 314 pieces for paddy fields, 46 pieces for coconut planting, 42 pieces of rubber trees, and 8 pieces for gardening. Further, there are 38 pieces of orchards; 87 pieces of village lands, 37 pieces of empty lots, 367 pieces undefined and 2 pieces of strata title ownership. Currently, there are no comprehensive figures available for valuation of these waqf assets. According to the Department of Awqaf, Zakat and Hajj (JAWHAR) of the government of Malaysia, the 11,091 hectares of land under awqaf are valued at RM 1.2 billion (US$ 384 million).16 In Indonesia data obtained from the Ministry of Religious Affairs for the year 2012 indicate that: • The size of registered land waqf in Indonesia is equal to 1,400 km² and most of them are still idle • Market value of registered land waqf is estimated to be equal to Rp 590 trillion (US$ 60 billion) • Collected ca sh waqf by Badan Wakaf is equal to Rp 3.60 billion (US$ 370,000) In Singapore as at 2012, the waqf portfolio of MUIS includes 157 properties that comprise 114 shop-houses, 30 residential units, 10 commercial units, 2 commercial buildings and 1 institution. Size of land area under waqf is 406,910 sq ft. The size of the net area that may be rented out is 447,233 sq ft. The portfolio is valued at S$ 471 million.

Source: Report on Social, Economic and Educational Status of the Muslim Community of India, 2006 Malaysia reviews operations of Islamic endowments, The Star, March 27, 2013


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4.2 Institutional Structure This section undertakes a comparison of institutional structure with a brief description of key players at macro, meso and micro levels and their interrelationships and functions.

Indonesia offers the most recent example of comprehensive regulatory reforms in the field of awqaf with the promulgation of the Act of Republic of Indonesia No.41 on Waqf, 2004. Article 47 of the Act established Badan Wakaf Indonesia as an independent institution “in order to improve and develop the national waqf”. In performing its task, it heeds the suggestion and consideration of the Minister and Indonesian Ulama Council.

| Chart 4.2: Institutional Structure for Waqf in India

Ministry of Minorities Affairs

Central Waqf Council

| Chart 4.1: Institutional Structure for Waqf in Indonesia

State Waqf Board(s)

President Ministry of Religious Affairs

Waqf Administration

Ulema Council

Waqf (Endower)

Mutawalli (Manager) (Endower)

Mawquf Alaihi (Beneficiary)

BADAN WAKAF

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Waqf (Endower)

Nazir (Manager) (Endower)

The countries in the Indian subcontinent – India, Pakistan and Bangladesh - have a shared history with respect to waqf, as Pakistan and Bangladesh were part of the undivided India under British rule. Despite the similarities, the institutional infrastructure shows some differences, which is perhaps attributable to the size and dispersion of awqaf portfolio in these countries. India has a huge waqf infrastructure under its Ministry of Minority Affairs but with significant autonomy to waqf boards constituted at the provincial or state levels. The State Waqf Boards are established by the respective provincial or state

77 |


governments in view of the provisions of section 13 & 14 of the Wakf Act, 1995. These work towards management, regulation and protection of the waqf properties by constituting local committees. Presently there are 30 waqf boards across the country. The Central Waqf Council is a statutory body established in 1964 by the Government of India under Wakf Act, 1954 (now a sub section the Wakf Act, 1995) for the purpose of advising it on matters pertaining to working of the State Waqf Boards and proper administration of the awqaf in the country. This body is now being provided with more teeth to deal with the state boards under the proposed reforms in the Act.

In Pakistan the four provinces – Punjab, Sindh, Baluchistan and Khyber-Pakhtunkhwa – have independent waqf administrations headed by a chief waqf administrator. As will

| Chart 4.3: Institutional Structure for Waqf in PakistAN


Chief Waqf Administrator (Province)

Waqf Administration (Province)

Waqf (Endower)


Bangladesh has a waqf infrastructure similar to and with elements from those in India and Pakistan. Under the Ministry of Religious Affairs, the Waqf Administrator functions as the

AWQAF

be discussed later, the head of the waqf administration i.e. the Chief Waqf Administrator exercises unfettered powers in matters relating to waqf in the given province.


apex authority (under section 7) but with a waqf committee in an advisory role (established under section 19 of the Waqf Ordinance 1962).


| Chart 4.4: Institutional Structure for Waqf in Bangladesh

Singapore retains ownership of all awqaf with the state agency, Majlis Ugama Islam Singapura (MUIS), but permits a dual management; direct management of most awqaf by

MUIS and private management by mutawallis under MUIS supervision in other cases.

Ministry of Religious Affairs Waqf Administrator

Waqf Committee

| Chart 4.6: Institutional Structure for Waqf in Singapore

President Waqf Administration Islamic Religious Council/ Majlis

Waqf (Endower)



Mutawalli (Manager) Waqf (Endower)

It may be noted that all the countries in the Indian subcontinent with shared history, and Indonesia with its rather unique past, allow for continued management of awqaf assets by the mutawalli/ nazir with the state agency playing the role of a regulator and supervisor. This is not so in the cases of Malaysia, Singapore and Brunei Darussalam – countries with shared history – that rule out any major role for private mutawalli. Malaysia and Brunei have state Islamic religious council(s) or

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Majlis as the sole owner-manager of waqf assets ruling out any mutawalli or privately managed awqaf. The Malaysian Wakaf Foundation is an entity under the Department of Awqaf, Zakat and Hajj of the government of Malaysia, and it monitors awqaf, but currently lacks any administrative power in the matter. Plans are afoot to transform this organization into a corporate entity for professional management of awqaf with participation of Islamic financial institutions.

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| Chart 4.5: Institutional Structure for Waqf in Malaysia and

Brunei DarussalaM Sultan

Ministry of Religious Affairs

Islamic Religious Council(s)/ Majlis

Waqf (Endower)

AWQAF



4.3 Regulatory and Policy Framework The present section undertakes a comparative analysis of awqaf regulations in the region under focus.17 The sample of jurisdictions presents wide divergence in terms of coverage, coherence and relevance to contemporary needs. As we shall see, the laws currently in operation in these countries demonstrate a high degree of influence of their colonial past. In these countries, Islamic law was superseded by secular law18, and awqaf remained dormant for long periods. It is also interesting to see the varying degrees to which reform in the laws have been attempted across countries. For example, though Malaysia is far ahead of others in putting into practice Islamic law in the field of banking, insurance and financial markets, it lags way behind others in operationalizing a progressive law for its awqaf sector. Indonesia stands far ahead of others in enacting a law that reflects state-of-the-art thinking among scholars in the field and that may perhaps serve as a model for other countries. India, Pakistan and Bangladesh, on the other hand, share the same origin in the form of laws enacted during the undivided British India, but have brought in reforms in varying degrees since achieving their independence. A high degree of commonality therefore, exists in their laws.

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Malaysia comprises of 13 states and federal territories. In Selangor and Malacca, the provisions of law on waqf are provided under the Enactment of Wakaf (State of Selangor) 1999 and the Enactment of Wakaf (state of Malacca) 2005 and the other states that do not have such enactment are governed by the states’ administration of Islamic law. This study considers the key provisions relating to awqaf that are common to the waqf-related laws of Malaysia. It focuses specifically on the specific provisions of the Administration of the Religion of Islam (Federal Territories) Act 1993 relating to waqf as contained in Part VI of the Act. Interestingly, the provisions have striking similarities with those in Chapter 3 of the Administration of Muslim Law Act, Singapore 1999 that deals with waqf. There are a few points of difference as well as will be discussed in the following sections. India, Pakistan and Bangladesh share a common history of being part of the undivided India ruled by the British until 1947 and therefore, show striking similarities in their waqf laws as well. There have been major changes since however. India, similar to its neighbors, has a long history of waqf laws in various versions. The most recent piece of comprehensive regulation is the Waqf Act, 1995. This however, is going through a process of reform and the Waqf Reform Bill, 2010 may soon become a law. In Pakistan the Provisional Waqf Ordinances 1979 in its four provinces provide the regulatory framework for awqaf. In this section, we will focus on the Provisional Waqf

Ordinances 1979, Punjab for comparison and discussion. In Bangladesh the Waqf’s Ordinance 1962 primarily governs the process of waqf creation and administration. In Indonesia, waqf is regulated by the Act of Republic of Indonesia No.41 on Waqf, 2004. It is perhaps the most recent and exhaustive piece of legislation. Therefore, this section focuses on the Indonesian Act as the benchmark against which other national laws are compared.

4.3.1. Permanence of Waqf Indonesian law provides a comprehensive definition of waqf that includes both permanent and temporary waqf. However, once the waqf has been declared, it is irrevocable. (Art 3) Singapore law defines waqf as “a perpetual endowment of movable and immovable property” and thus excludes waqf with a finite life. Malaysian laws recognize both types of waqf. The law defines “Wakaf Am” as a dedication in perpetuity of the capital and income of property for religious or charitable purposes recognized by Islamic Law, and the property so dedicated; while “Wakaf Khas” means a dedication in perpetuity or for a limited period of the capital of property for religious or charitable purposes recognized by Islamic Law, and the property so dedicated, the income of the property being paid to persons or for purposes prescribed in the waqf.19 Indian law defines waqf as “the permanent dedication by a person professing Islam, of any movable or immovable property for any purpose recognized by the Muslim law as pious, religious or charitable” and as such, excludes temporary waqf.” (Section 3 –r) Pakistan and Bangladesh laws, similar to their Indian counterpart define waqf as a permanent dedication.

4.3.2. Creation of New Waqf Both Malaysian and Singaporean laws put severe restrictions on the creation of waqf. Even while fiqhi rules permit an individual to make waqf beyond one-third of his assets unless he is on his deathbed, the same is not permitted by national laws of both countries. As the Malaysian law20 states, whether or not made by way of will or deathbed gift, no waqf involving more than one-third of the property of the person making the same shall be valid in respect of the excess beyond such one-third. Section 60-1 of Singaporean law uses precisely the

same language to restrict creation of new waqf. Further, according to Malaysian law, waqf khas, which means a dedication for a finite period and/or for restricted purpose, cannot be created without explicit permission of the Sultan. (Sec.63-2) Laws in all other countries permit creation of new waqf but require registration of the same with the state supervision agency. An unregistered waqf, however, is not considered null and void. Nor are the mutawallis subjected to penalty and punishment for failure to register. In Pakistan for instance, law requires that every person in charge of or exercising control over, the management of any waqf property and every person creating a waqf after the commencement of this Ordinance shall get such waqf property registered. (Sec. 6) In India Sec.36 of the Act provides detailed procedure for registration of waqf asset either by the wāqif or the mutawalli. In Indonesia Art.32-39 of the Act cover the procedure of registration. Singaporean law makes failure to seek registration of waqf on the part of the mutawalli punishable by fine and imprisonment. (Sec.11) Malaysian law of course, rules out any private individual or organization as mutawalli in the first place.

4.3.3. Elements of Waqf 4.3.3.1. Waqif (Endower) Singaporean law requires the waqif to be a Muslim. Malaysian law is silent about the identity of the waqif and focuses on the purpose of dedication, which must be for religious or charitable purposes recognized by Islamic Law. Indonesian law recognizes a waqf by an individual, organization as well as by a legal institution (Art. 7). An individual waqif must be an adult, of sound mind, not put under legal restriction and must have full ownership on the article of waqf. (Art. 8.1) An organization and a legal institution can endow a property as waqif if the same is in accordance with their respective deeds of establishment. (Art.8.2 and 8.3) While section 3 of Indian Act defines waqf as a permanent dedication by a Muslim, section 104 of the Act extends the scope of the law to cover to properties given or donated by persons not professing Islam. Bangladeshi law, similar to its Indian counterpart, defines waqf as a permanent dedication by both Muslims and non-Muslims. Pakistani law

however, defines waqf as a “property of any kind permanently dedicated by a person professing Islam.” (Sec.2-e) 4.3.3.2. Iqrar of Waqf (Endowment Deed) The iqrar of waqf or the waqfiyyah is the most important document that formally brings a waqf into existence. Under current laws, the iqrar of waqf needs to be prepared by waqif as part of a formal legal process. Indonesian laws stipulate that the iqrar of waqf is prepared before the authority empowered with issuing the legal document. (Art.17.1) The iqrar may be expressed by a simple pronouncement and/or a written statement by the waqif and then dictated in the waqf deed by the authorities. (Art.17.2) Personal presence of the waqif is not insisted upon and a letter of authorization by the waqif and/or legal evidence of ownership of mawquf (the endowed asset) may be considered adequate for the purpose. (Art.18-19) The process requires two witnesses, each one of whom must be an adult Muslim, of sound mind and not put under legal restriction. (Art.20) The iqrar of waqf must include at the minimum: the name and personal identity of waqif; name and personal identity of nazir; data and specification of waqf asset; the purpose of waqf and its intended beneficiaries; the clear designation of waqf asset towards the purpose and the terms of waqf. (Art.21.2). 4.3.3.3. Mawquf (Endowed Asset) Indonesian law clearly states that an asset can be converted to waqf if it is legally owned and authorized by the waqif. (Art.15) It recognizes both movable and immovable assets as mawquf. (Art.16) The range of immovable assets include: rights on land, building or part of building established on the land; agricultural cultivation and other goods related to land; rights of ownership on a housing unit; and other immobile goods in line with the Shariah provisions and the rule of law. (Art.16.2) The range of movable assets includes any nonperishable and durable asset, such as money, ornaments, stocks, bonds and financial securities, transportation vehicles, rights of intellectual property, rights of leasing and other movable assets in line with the Shariah h provisions and rule of law. (Art.16.3) Thus, the law incorporates the views of contemporary scholars and looks at the possibility of corporate awqaf and other innovations. Indonesian law also deals explicitly with cash waqf in the following manner: cash may be endowed through Islamic financial institution duly identified by the government. (Art.28) While the waqif must express his intention to endow

17 It may be note that the above laws use different variants of the term waqf. For instance, Indonesian and Malaysian laws use the term “wakaf” while Indian laws use the term “wakf”. For the sake of uniformity, we have replaced the terms with “waqf” in the discussions that follow. 18 Islamic law was replaced by British law in all countries with the exception of Indonesia, which was colonized by the Dutch. 19 Administration of Islamic Laws (Federal Territories) Act Section 2 of Malaysia 20 Refers to the Administration of the Religion of Islam (Federal Territories) Act 1993, Part VI of Malaysia, unless otherwise stated

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through a written statement, a certificate of cash waqf is issued by the Islamic FI to both waqif and nazir as the legal fact of assignment of waqf asset. (Art.29) The Islamic FI, on behalf of nazir, must register the cash waqf within a week since the issuance of certificate of cash waqf. (Art.30)

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None of the laws in Malaysia, Singapore, India, Pakistan and Bangladesh explicitly define waqf properties in terms of financial assets. Laws in the Indian subcontinent appear to group all kinds of cash donations in the category of waqf.

social services, yet it took away part of the state’s tax base and protected properties from confiscation in times of fiscal emergency. As such, rulers sought to curb the creation of family awqaf by their Muslim subjects. Contrary empirical evidence, however, exists. A recent study of Ottoman awqaf shows that only 7 percent of awqaf registered during the 18th century did not provide any service outside the founder’s family; as many as 75 percent were family awqaf that also served non-family interests, and the remaining 18 percent were strictly charitable awqaf.22

4.3.3.4. Mawquf Alaihi (Beneficiary)

4.3.4. Ownership of Waqf Assets

Indonesian law specifies the purpose of waqf as ibadah and/ or public welfare. (Art 1.1 and Art 5) and therefore, does not recognize family waqf. It clearly defines the purpose of waqf and its intended beneficiaries, restricting the same to facilitate religious activities, provision of education and health services, aid and assistance to the indigents, abandoned children, orphans, scholarships to students, overall improvement and development of economic community and finally, to development of public welfare in accordance with Shariah rules and the rule of law. (Art.22) The same must be stipulated in the waqf deed by the waqif. (Art.23.1) In the absence of a clear designation by the waqif, the nazir is entitled to designate the waqf asset in accordance with the purpose and function of waqf. (Art.23.2)

The Malaysian case is unique in the sense that awqaf matters in each state are governed by a state-specific Majlis. Malaysian law requires that every waqf shall be registered in the name of the Islamic Religious Council as proprietor (Section 6 of the Enactment). Further, a Bayt al mal is created to include all financial flows from waqf assets. The income of a waqf khas or special-purpose waqf, if received by the Majlis, shall be applied by it in accordance with the lawful provisions of such waqf khas. (Art 64-1) The income of every waqf or nazar am or general-purpose waqf shall be paid to and form part of the Bayt al mal. (Art.64-2) Thus, it seems that in Malaysia, the traditional mutawalli appointed by the founder has been completely replaced by the Majlis. Not only is the waqf property vested in the Majlis, the income of every general waqf shall be paid to and form part of the Bayt al mal, administered by the Majlis.

Laws in other countries, such as India and Bangladesh, however, recognize family waqf. Indeed, Bangladeshi law provides for an interesting basis of differentiation between family and public waqf. Where more than 50 percent of the net available income of a waqf property is exclusively applied to religious and charitable purposes, such a waqf is deemed to be a public waqf. Similarly, endowments where more than 50 percent of the net available income is meant for the waqif’s descendants, such a waqf is treated to be a waqf alal awlad or family waqf. Law in Pakistan explicitly excludes family waqf from its definition of waqf (Sec.2). The institution of family waqf, with its clear roots in the Shariah, has nevertheless been subjected to unfair treatment by lawmakers at different points in time. The British Raj in South Asia declared family awqaf invalid, only to later re-validate them.21 The reasoning of the judgment was based on the English notion of charity and the concept of noncharitable trust in favor of children and other relatives. Also it was believed that unlike the religious and purely philanthropic awqaf, the family waqf usually added little in the way of

The central authority responsible for all aspects of awqaf in Singapore is called the Majlis Ugama Islam Singapura. It is the “Majlis that shall administer all waqf, whether waqf `am or waqf khas, all nazr am” (section 58-2) and “all such property shall if situated in Singapore vest in the Majlis.” (Sec. 59) However, as mentioned earlier, the institution of mutawalli is not completely redundant and irrelevant in Singapore. The situation is quite different in India, Pakistan and Bangladesh where the state plays a supervisory role devoid of actual ownership or direct management of waqf assets. India has a federal structure of supervision with a Central Waqf Council and State (Provincial) Waqf Boards in place. Pakistan has four sets of laws creating the office of Waqf Administrators in all four provinces. Bangladesh has a single Waqf Administrator. The central authority responsible for all aspects of awqaf in Indonesia is called the Badan Wakaf Indonesia, which does

The Privy Council declared the waqf alal aulad (family waqf) invalid in 1894 in the famous case of Abul Fata Mohomed-versus-Russomoy. The decision of the Privy Council caused considerable stir among the Muslims who believed that the verdict was an infringement of the Muslim personal law. The Mussalman Wakf Validating Act, 1913, was enacted in order to overturn the Privy Council decision. 22 Timur Kuran, ‘The Provision of Public Goods under Islamic Law: Origins, Impact, and Limitations of the Waqf System’ (2001) 35 Law and Society Review pp 858

not own or directly manage the waqf assets, but plays a supervisory role. All laws of course, require the registration of waqf assets with the government agencies as discussed earlier.

4.3.5. Management of Waqf Assets Shariah provides for the institution of nazir or mutawalli as the trustee-manager of waqf assets. At the same time, the history of awqaf in most countries shows a steady move towards control by government agencies over management of awqaf assets eroding and in some cases, entirely replacing its role. The circumscribing of the nazir’s role was dictated mostly by cases of misuse of waqf property by the trusteemanagers. At times, this was a case of deliberate usurpation by the governments and rulers. In their current form, waqf laws across countries show wide variations with respect to how they define eligibility and responsibility of the nazir and how they seek to motivate him/her to function efficiently and with integrity through use of appropriate rewards and punishments. 4.3.5.1. Eligibility At one extreme, in countries like Malaysia the Islamic Religious Council or Majlis is the sole nazir or trustee. The law effectively eliminates the institution of nazir. As it asserts “the Islamic Religious Council or the Majlis shall be the sole trustee of all wakaf (Art.61). Notwithstanding any provision to the contrary contained in any instrument or declaration creating, governing or affecting it, the Islamic Religious Council shall be the sole trustee of all waqf, whether waqf am or waqf khas (Sec. 32). Of course, the Majlis will “establish Waqf Management Committee to administer all matters pertaining to waqf. The committee has authority to frame any policy, to supervise, to administer, to manage, to develop and to improve any matters related with waqf administration”. (Sec.21) In Singapore, the law recognizes the role of nazir as appointed by the waqif, but circumscribes its role to the bare minimum. As it says, “the trustees of the waqf or nazr am appointed under the instrument creating, governing or affecting the same shall, subject to the provisions of this Act, manage the waqf or nazr am” (58-4). More common are cases of private entities acting as nazir in countries such as Indonesia and India, where the law seeks to put in place good practices, ensure transparency, accountability of the nazir through various provisions and placing it under direct supervision of a government body created for the purpose.

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Indonesian law permits an individual, or an organization or a legal institution to be stipulated as nazir. (Art.9) In order to qualify as nazir, an individual must be an Indonesian

citizen, a Muslim, and an adult. He must also be trustworthy, physically and mentally healthy; and not be put under any legal restriction. (Art.10.1) Thus a non-Muslim individual cannot be appointed as nazir. An organization or a legal institution may be nominated as nazir if its official concerned fulfills the requirements of individual nazir as above and the organization or institution is engaged in social, educational, community and/or Islamic affairs. (Art.10.2 and 10.3) 4.3.5.2. Responsibility Indonesian law clearly defines the tasks of nazir as: administering the waqf asset(s); managing and developing the same in accordance with the objective, benefit and designation of waqf; controlling and protecting the waqf asset(s); and submitting the report of waqf administration to Badan Wakaf, the central body created for the purpose of supervision of all Indonesian awqaf. (Art. 11 & 42) With regard to management and development of waqf assets, the nazir must undertake the same in conformity with Shariah and with efficiency. (Art.43.1-2) It is also required to seek the services of an Islamic guarantee institution in this matter. (Art.43.3)

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4.3.5.3. Compensation Not all laws stipulate a compensation for the nazir. Indonesian law stipulates that the nazir is entitled to receive a maximum compensation of 10 percent of the net income from the administration and development of waqf. (Art. 12) 4.3.5.4. Accountability All laws provide for centralized government supervision and control over awqaf and make the nazir accountable to the government body created for the purpose, though in varying degrees. The following exhaustive list of functions of state waqf boards as envisaged by Indian law (Section 32-2) point towards a central role for them in making the mutawallis accountable for achieving the objectives of the waqf: • to maintain a record containing information relating to the origin, income, object and beneficiaries of every waqf; • to ensure that the income and other property of awqaf are applied to the objects and for the purposes for which such awqaf were intended or created; • to give directions for the administration of awqaf; • to settle schemes of management for a waqf, provided that no such settlement shall be made without giving the parties affected an opportunity of being heard; • to direct (i) the use of the surplus income of a waqf consistent with the objects of waqf; (ii) in what manner the income of a waqf, the objects of which are not evident from any written instrument, shall be used; (iii) in any case Islamic Social Finance Report

where any object of waqf has ceased to exist or has become incapable of achievement, that so much of the income of the waqf as was previously applied to that object shall be applied to any other object, which shall be similar, or nearly similar to the original object or for the benefit of the poor or for the purpose of promotion of knowledge and learning in the Muslim Community: • to scrutinize and approve the budgets submitted by mutawallis and to arrange for auditing of account of awqaf; • to appoint and remove mutawallis in accordance with the provisions of this Act; • to take measures for the recovery of lost properties of any waqf; • to institute and defend suits and proceedings relating to awqaf; • to sanction any transfer of immovable property of a waqf by way of sale, gift, mortgage, exchange or lease, in accordance with the provisions of this Act: • to administer the Waqf Fund; • to call for such returns, statistics, accounts and other information from the mutawallis with respect to the waqf property as the Board may, from time to time, require;

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• to inspect, or cause inspection of, waqf properties, accounts, records or deeds and documents relating thereto; • to investigate and determine the nature and extent of waqf and waqf property, and to cause, whenever necessary, a survey of such waqf property; • generally do all such acts as may be necessary for the control, maintenance and administration of awqaf. An extreme case of concentration of authority in the hands of the state is observed in Pakistan. Under the Punjab Waqf Ordinance, the Chief Administrator has supervisory authority over all awqaf in the province, and in certain circumstances, he may even assume direct responsibility for the administration, control, management and maintenance of a waqf property by notification. (Sec.7) The Chief Administrator is also empowered to evict any persons wrongfully in possession of waqf properties (Sec.8) and to terminate a lease or resume a tenancy for breach of conditions (Sec.9) He may also require ‘any person-in-charge of or exercising control over the management of any waqf property … to furnish him with any return, statement, statistics or other information regarding such waqf property, or a copy of any document relating to such property’. There is no limitation as to scope or relevance, or with respect to undue burden or expense (borne by the waqf), and the authority of the Chief Administrator in this regard is simply open-ended. (sec 20-1) Further, the Chief Administrator may issue to the person in charge or control of a waqf, ‘such instructions or directions for the proper administration, control, management and maintenance of such waqf property as he may deem necessary’. This authority also is not limited in any way by the ordinance. (sec 20-2)

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4.3.5.5. Deterrents against Abuse Laws provide for deterrents against willful negligence, mismanagement and misuse by nazir. These deterrents vary in their intensity and impact in bringing about the desired behavior by nazir. Some laws seek to dislodge the nazir from its role and position. As the Singaporean law states “the Majlis shall have power to appoint mutawallis, and for such purpose to remove any existing trustees, where it appears to the Majlis that (a) any waqf or nazr am has been mismanaged; (b) there are no trustees appointed to the management of the waqf or nazr am; or (c) it would be otherwise to the advantage of the waqf or nazr am to appoint a mutawalli.” (Sect. 58-4) According to Indonesia law as well, a nazir can be dismissed and replaced by Badan Wakaf Indonesia if he does not carry out the tasks of nazir and/or violates the provision of management and development of waqf property in accordance with the rule of law. (Art.45.1-2) The dismissal or replacement by another nazir will not affect the designation of waqf property in accordance with purpose and function of waqf (Art.45.3) Of course, an existing nazir may also be replaced in the event of his/her death or in response to personal request. (Art.45.1) Some laws prescribe financial penalties and/or physical punishment against abuse of waqf assets. The Indonesian law views acts of abuse of waqf assets as criminal offences. Whosoever intentionally commits an act to mortgage, give, sell, bequeath, convert to another form of right of the waqf asset or to exchange the same without permission is liable to be imprisoned for a maximum of 5 years and/or a fine of maximum Rp 500 million. A lesser penalty exists for an act to convert the designation of waqf property without prior permission. It is imprisonment for a maximum 4 years and/ or fine of maximum Rp 400 million. Imprisonment for a maximum 3 years and/or fine of maximum Rp 300 million is prescribed for the nazir who takes compensation higher that the stipulated 10 percent. (Art.67) Singapore law also details the duties of the mutawalli and prescribes both financial penalty and physical punishment should the mutawalli fail to comply. Section 11 of the Act says that any mutawalli of a waqf who fails to (a) apply for the registration of the waqf; (b) furnish statements of particulars as required under this section; (c) supply information or particulars as required by the Majlis; (d) allow inspection of waqf properties, accounts, records or deeds and documents relating to the waqf; (e) deliver possession of any waqf property, if ordered by the Majlis; (f) carry out the directions of the Majlis; or (g) do any other act which he is lawfully required to do by or under this section, shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$ 5,000 or to imprisonment for a term not exceeding 12 months or to both and, in the case of a continuing offence, to a further fine not exceeding S$ 50 for every day or part thereof during which the offence continues after conviction.

In Pakistan the Punjab waqf ordinance also has harsh punitive provisions. If any person obstructs, resists, impedes or otherwise interferes with anyone acting pursuant to the ordinance, he is punishable by fine and/or imprisonment up to 5 years. Similarly, willful disobedience or failure to comply with any requisition, instruction or direction issued by the Chief Administrator is punished with a fine. (sec 24) In contrast, the Indian law while providing for an elaborate list of obligations for the mutawalli relating to registration, disclosure, failure to comply with directives of the Board etc, failing which financial penalties would be imposed (Section 61-1), the quantum of such penalties are ridiculously low at INR 8,000 (equivalent to US$ 150)!! In cases of outright fraud and usurpation, the mutawalli may be removed from office by the Board with the consent of two-thirds of its members. (Section 64-1) This action may however, be challenged by the aggrieved mutawalli before the judiciary.

4.3.6. Preservation of Waqf Assets Most laws seek to ensure the preservation of the waqf asset(s) in line with the classical principles relating to the same, such as ibdal and istibdal. The Indonesian law explicitly prohibits the waqf asset from being used as a mortgage, confiscated, given away, sold, inherited, exchanged or being alienated into any form of right. (Art.40) The waqf asset may however be exchanged as an exception to the above general rule, when this is deemed to be in the public interest. Such exchange would however, require prior permission from both the Ministry and the Badan Wakaf with an additional condition that the asset exchange must be against another asset of equal or higher value. (Art.41) Indonesian law requires that in managing and developing the waqf asset, a nazir is not permitted to alienate the designation of waqf asset, except if he has received a written permission from the Badan Wakaf Indonesia. (Art. 44.1) Such permission is given if the asset concerned is no longer beneficial as had been assigned in the waqf deed. (Art. 44.2) Malaysian law also prohibits a waqf that has come into effect cannot be sold or transferred by the waqif or be inherited by any person. (Sec. 4.2) The law entrusts the entire responsibility of waqf development to the Majlis or Islamic Religious Councils. Section 2 of the Enactment allows “istibdal as a substitution of waqf property with another property or cash either through substitution, purchase, sale or any other way approved by Shariah principles. Substitution can be divided into two forms i.e. substitution of one waqf with a similar one and the substitution of land with its cash value.” Section 20 of the Enactment provides that the Islamic Religious Council may substitute any waqf property, when it is no longer beneficial as intended by the dedicator and in the event that the usage of waqf property does not meet the

actual purpose of waqf. Singaporean law appears to be less cautious in this regard. As in the case of Malaysia, the law has created a general endowment fund and while the waqf assets do not generally form part of the fund (Sec.62-1), the Majlis under certain conditions (e.g. when it feels that it is no longer possible to carry out the exact provisions of any waqf) may direct to the contrary (Sec.62-2-5). There are no restrictions on the Majlis regarding liquidation of assets once they form part of the endowment fund. (Sec.57-4) Indian law (Sec.51) provides for prior sanction of the State Waqf Boards as a pre-requisite for sale, gift, exchange or mortgage of waqf assets (excluding religious awqaf which are inalienable). It prescribes a procedure and conditions for effecting the same, provided the above is (i) necessary or beneficial to the waqf; (ii) consistent with the objects of the waqf; and (iii) the consideration thereof is reasonable and adequate. The sale of any property sanctioned by the Board shall be effected by public auction and shall be subject to confirmation by the Board within such time as may be prescribed. Inalienability of waqf assets also seems to have been grossly compromised in Pakistan with unfettered powers to the Chief Administrator, who can actually take over completely the waqf and (with little limitation) and do as it pleases with its assets. And this action is subject to no meaningful judicial oversight or other legal intervention. In particular, the Chief Administrator has discretion to take over waqf property and assume its administration, control, management and maintenance. (Sec 7) Only two conditions restrict the take-over of waqf property by the Chief Administrator. First, the Chief Administrator must give notification (but not necessarily prior notice) to the mutawalli that the Chief Administrator is taking over the waqf property. Second, during the lifetime of a person founding a waqf property, the Chief Administrator may only take over the waqf with the consent of the founder and on such terms and conditions as may be agreed upon between the founder and the Chief Administrator. Once the Chief Administrator has taken over a waqf property, he has freedom to do with it as he wishes. The only restriction is that a waqf property must be used for the purpose for which it was dedicated, has been used, or for any purpose recognised by Islam as religious, pious or charitable -- all as the Chief Administrator ‘may deem fit.’ Furthermore, the provincial government may even permit the Chief Administrator to sell or dispose of the property and invest the proceeds in accordance with its directions, provided that the government is ‘satisfied’ that sale or disposal of the waqf property is necessary in societal interests. (Sec.16)


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4.3.7. Development of Waqf Assets Indonesian law envisages the following progressive role for the central body (Art. 49) in the matter of waqf development. • to bring improvements in the way the nazir manages and develops waqf assets; • to manage and develop waqf assets at the national and international level; • to give agreement and/or permission on the alienation of waqf designation and its status; • to dismiss and replace a nazir; • to give agreement on the exchange of waqf property; • to give suggestion and consideration to the government on the designing of waqf policy. The law however, is silent on how the development of waqf assets could be achieved or what models of development with or without private financing could be used. The Indian law provides an interesting balance between the objectives of preservation and development. Section 32-4 of the Act makes waqf development a mandatory obligation. It provides that where the Waqf Board finds that a waqf offers a feasible potential for development, it may serve on the mutawalli a notice of at least 60 days to convey his decision about his willingness to execute such development. Should the mutawalli fail to oblige, the Board may, with prior approval of the government, take over property, develop it and retain it along with its income till the investment along with a fair return is recouped. During this period, a modest amount as provided in the Act is paid to the mutawalli. At the end of this period the property reverts back to the mutawalli. One may observe that this is a rare provision and a highly desirable one found in any waqf law in any country.

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Some provisions in waqf laws however, unintentionally create hurdles for the development of waqf assets. For instance, Section 56 of the Indian Act restricts the maximum period for which a waqf asset may be leased to 2 years. The same is 5 years in the case of Bangladesh. Thus, the provision rules out any possibility of waqf development with private financing that essentially requires a lease period long enough for the private financier to recover its investment along with a fair return. This realization has indeed led to the proposed reforms in the Indian Act that seek to increase the maximum lease period to 30 years.

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It is interesting to note here that in countries like Malaysia and Singapore, where awqaf laws have seen little reform with a dominant role for the state, where the responsibility of awqaf development and management vests almost entirely with the Majlis, one finds the most interesting cases of awqaf development involving private financing. There is of course, a move to reform the law in Malaysia to mainstream the concept of corporate waqf and also to bring in large-scale waqf development by transforming the Malaysian Wakaf Foundation – a trust under the central government - into a corporate entity, and involving Islamic financial institutions as financiers in the development process.

4.3.8. Investment of Waqf Corpus It is compulsory to invest waqf assets, be it real estate or moveable assets. 23 Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created. However, this important fiqhi requirement is not explicitly covered by legal and regulatory framework of any country in the region under focus. There is a general agreement among Shariah scholars on the following rules governing investment of the corpus of waqf, which should be reflected in the regulatory framework governing awqaf in any country. • The assets purchased using the investment returns from waqf do not form part of the waqf and therefore, may be resold unlike the original assets that have been given as waqf. • The conditions given by the waqif with regard to the investment of the waqf is binding. Further, any stipulation by the waqif that the returns from investment are to be entirely spent on specific areas, is also binding. In this particular case, the investment returns or yield cannot be used to enhance the corpus of the waqf.

distribution of the yield is delayed, it is permissible to invest the cumulative yield. • It is permissible to use the accumulated reserves from the yield for maintenance, reconstruction and other activities that are permitted by the Shariah. • It is permissible to invest different awqaf funds in one investment portfolio, as long as nothing is done to contravene the conditions stipulated by the waqif and all the necessary obligations with regard to the various awqaf are taken care of. • Investment must only be made in Shariah-compliant sectors and the terms of the investment must also be Shariah-compliant. • For the purpose of minimizing risks, diversification should be considered as one of the investment strategies. Apart from that, risk can also be mitigated by seeking guarantees (kafala), affirming contracts and conducting the necessary economic feasibility studies. • High risk investment avenues should be avoided. • The investment strategy should be suited to the type of waqf, as well as capable of actualizing the benefits intended by the founder of the waqf.

The institution of waqf in order to play a meaningful role in solving development problems of contemporary Muslim societies must evolve to form the basis of a vibrant voluntary or not-for-profit sector. There is a huge body of literature that discusses the impact of the legal environment on organizations. Indeed, law provides building blocks of organizations, determines the types of organizations that may exist, affects transaction costs and determines the composition and growth of different types of not-for-profit organizations. One would expect that efficient models of organizations will grow, and inefficient ones will be weeded out. From the examples of several national waqf laws, it appears that in most cases, the state seeks a dominant role for itself in the management and development of waqf. This is often contrary to the fiqh of waqf. It is a welcome development that the fiqh of waqf itself has witnessed a steady move towards a more liberal and flexible approach that would encourage piety and charity and should lead towards a revival of the institution of waqf. The archaic waqf laws in most countries however have not been subjected to similar reforms. Thus, the positive developments in the fiqh of waqf have not led to positive results and development of the sector. What are needed are not just waqf laws, but efficient waqf laws.

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The Indonesian law dealing with cash waqf merely requires that the cash endowment must be made through an Islamic financial institution duly identified by the government. (Art.28) This is apparently to minimize the risk associated with investment of the corpus. Such undue precaution however, may be unwarranted. If a founder establishes a waqf in order to enhance entrepreneurship, he would not want to avoid risky ventures. As briefly presented later, Dompet Dhuafa Republika, a leading Indonesian NGO through its subsidiary organization, Tabung Wakaf Indonesia, has been investing cash waqf for microenterprise development.

• If the waqif in a family waqf did not stipulate any restrictions and did not stipulate that the waqf should be invested, then it is impermissible to invest part of the yield, except if such investments are approved by the beneficiaries. However, if it concerns a charitable waqf, it is permissible to invest part of it for a prevailing maslahah (public interest), subject to stipulated rules. • It is permissible to invest the surplus from the yield to enhance the principal amount or the yield. This is done after the yield has been allocated to the beneficiaries, the necessary expenses have been deducted and provisions to the reserve accounts have been made. In the case that the

Resolution No. 140-15/6, Rulings of OIC Fiqh Academy on Awqāf


4.4 Supporting Infrastructure Education & Training Providers In Indonesia, the Indonesia Magnificence Zakat (IMZ), in addition to programs in zakah management, undertakes a comprehensive range of short-term training programs in the area of waqf management that includes the following modules: 1. Fiqh and management of cash waqf 2. The role of the state in the development of waqf in Indonesia 3. Strategic organization and management of investment and productive waqf In Singapore, MUIS Academy, established by the Majlis Ugama Islam Singapura, the Islamic Religious Council of Singapore, offers training programs on waqf development and waqf management. In addition it organizes conferences on the theme. For conferences and various capacity building initiatives, it partners with the Islamic Research and Training Institute of the Islamic Development Bank Group, Kuwait Awqaf Public Foundation, and National Awqaf Foundation of South Africa. Other related training programs designed and offered by MUIS Academy include (i) Fund Raising and (ii) Mosque Management Systems.

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In India, the International Institute of Islamic Business and Finance offers a certification course on waqf development and management.

4.5 Success Stories & Good Practices 4.5.1. Johor Corporation, Malaysia Key ideas: Corporate awqaf as an innovation and a creative solution in the face of legal constraints Johor Corporation (JCorp) was established as a State Investment Corporation in 1968 in the state of Johor, Malaysia. It is one of the country’s largest conglomerates, with core business sectors encompassing palm oils, foods and quick service restaurants, specialist healthcare services, hospitality, property and logistic services. JCorp defines itself as “a state development corporation responsible to develop the state of Johor via the funding generated through profit maximization of its commercial entities which is later returned

24

AWQAF

proportionately to the community as its largest stakeholder.” It sees its milestones of excellence as “not merely corporate and business orientated, but aimed at strategic socioeconomic development through the market-driven approach that is careful, creative, proactive and innovative.” The emphasis on corporate social responsibility (CSR) is reflected in its mission statement that reads as follows: • Contributing to state and national economic growth through an efficient and effective business entity while upholding community interest. • Upholding position as a business entity that spearheads and controls market, is competitive, profit-motivated and recognized. • Catalyst to sustainable business growth which will further create success in fulfilling its obligation as a state investment corporation. • Contributing and adding values to the wellbeing of the community through business success as well as Corporate Social Responsibility undertakings. The corporate slogan of JCorp - Membina dan Membela - reflects its belief and philosophy that corporate success and social responsibilities go hand in hand and may be realized through approaches that conform to Islamic Shariah principles and universal values. As part of its CSR initiatives, JCorp has created nonprofit entities under its umbrella, called Amal Business Organizations (ABOs). ABOs function as a medium for JCorp to contribute towards the development of the society through various aspects of charity, wellbeing and recreation as well as entrepreneurship. In 2011, a total of 27 ABOs were in operation in four segments: social and public welfare development, entrepreneurship development, sports and recreation development and staff welfare. An analysis of major community initiatives undertaken by JCorp since its inception shows its growing commitment to community welfare through activities and programs falling in a range of religious, health, education and economic domains as follows: The innovative element that stands out is the operationalization of the concept of corporate waqf in the form of Waqaf An-Nur Corporation Berhad (WANCorp), a limited company established to guarantee proper management of Johor Corporation and its Group of Companies’ stocks and assets under endowment. WANCorp has formalized a Memorandum of Agreement with the Johor Islamic Council, recognizing its role in making a success of JCorp’s corporate waqf. WANCorp has consequently been endowed with powers of trustees and with the duty and obligation to manage JCorp’s corporate waqf.

JCorp’s Corporate Waqf took off in 2006 with the transfer to Waqaf An-Nur Corporation Bhd (WANCorp) of RM 200 million worth (on net asset value basis) of public listed shares owned by JCorp. WANCorp’s main income is derived from the annual dividend payout by the PLCs, a part of whose equity is now endowed and transferred to its ownership. These payouts are allocated for re-investment, as well as to fund Islamic CSR programs that are not restricted to Muslims as beneficiaries. For instance, in 2009, RM 4.9 million was received by WANCorp as dividends, and of this, 70 percent were allocated for re-investment. Another 25 percent of the dividends received were spent on various Islamic CSR initiatives including the nationwide chain of charity Waqaf An-Nur clinics and hospitals to serve the healthcare needs of the poor of all ethnic groups. Johor Islamic Religious Council is the beneficiary of the remaining 5 percent. The following are the flagship initiatives of WanCorp: Management of Mosques WANCorp currently manages a chain of 7 mosques catering to over 15,000 worshippers. The mosques also function as centres of community activities in religious as well as economic domains. For instance, the Imams at the mosques also play a key role in the collection zakah and execution of contracts between the Waqf and the beneficiaries of its Dana Niaga (seed equity) program. The mosque staff assists in the administration of this program on a voluntary basis. Mosque staff are also given the opportunity to become qualified to provide Umrah services offered by a travel subsidiary whose shares are also endowed. Healthcare Another flagship initiative by WANCorp is Waqaf An-Nur Hospital and Waqaf An-Nur Clinics that seek to provide healthcare and dialysis services to the less fortunate segments of society. It currently owns and manages a chain of 16 clinics and a full-fledged hospital. The clinics provide health services not only in Johor, but also in other states, e.g. Negeri Sembilan, Selangor, Perak and Sarawak in co-operation with the respective State Islamic Councils. The number of beneficiaries from these services has steadily increased from 0.56 million in 2009 to 0.67 million in 2010 and to 0.77 million in 2011. About 6 percent of the treatments were provided to non-Muslim patients.

Patients of Waqaf An-Nur clinics have to pay only RM 5 for treatment by a qualified doctor, plus the cost of medicine prescribed. Another program with high impact is the provision of treatment for kidney ailments through Dialysis Centers that operate alongside these clinics. These centers offer subsidized dialysis treatments. For many patients the cost is reduced to almost zero with further financial support from other charities (e.g. Bayt al mal Funds of state religious councils) that are part of the support network. The number of such beneficiaries increased from 113 patients in 2009 to 115 in 2010 and to 120 in 2011. Start-Up Capital for Microenterprises Waqaf Dana Niaga is another innovative program of WANCorp. Its objective is to develop business opportunities for poor and marginalized groups with low access to capital, such as young graduates, start-up small businesses operated by housewives and single parents and provision of interestfree financing as seed capital. The program is in a pilot stage in which the group’s foods and quick service restaurants play a leading role.

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Disaster Relief Waqaf Brigade is an initiative that aims to undertake relief and rehabilitation work during national calamities. As an emergency aid organization, Waqaf Brigade has been significantly helping the victims of floods, earthquakes and other natural disasters. WANCorp as a corporate waqf has essentially institutionalized the link between a corporate entity such as JCorp and its wealth creation and value adding business function, with a structured mechanism to address the needs of the poor and marginalized sections of the society on a sustainable basis. It has sought to ensure an efficient, transparent and professional management of waqf assets, coupled with the effective disbursement of waqf benefits. The official status of WANCorp is that of ‘mauquf alaihi’ or beneficiary and not that of nazir/ mutawalli or trusteemanager even while it effectively performs the latter role. This is perhaps warranted by Malaysian law that permits the Islamic Religious Council of the state or Majlis alone to be the nazir/ mutawalli. WANCorp, under an agreement with Majlis, is entitled to receive a major part of the benefits for onward transfer of the same to the ultimate beneficiaries.

Information about this institution has been extracted from http://www.jcorp.com.my, accessed on 1st November 2012.


4.5.2. Majlis Ugama Islam Singapura (MUIS), Singapore Key idea: Use of innovative financial instruments for financing waqf development The Majlis Ugama Islam Singapura (MUIS) is responsible for overseeing all the religious affairs of the Muslim community in Singapore, such as the administration of zakah, halal certification, management and administration of waqf, hajj, mosques and madrasah. It is also entrusted with management of Bayt al mal, a community corpus fund for Muslims. With respect to waqf, MUIS has the following responsibilities:

| Chart 4.7: Wakaf Syed Omar Ali Aljunied (Bencoolen)

• Management of waqf funds

Investors

• Distribution of waqf income • Upgrading of waqf properties • Promote creation of new waqf MUIS has come up with several innovative ways to develop waqf assets and enhance their income in a Shariah-compliant manner25.

Funds

Sukuk

MUIS (Baitul Mal)

Warees

waqaf

Funds

Management

Land

MUSHARAKAH

Ascot International

Examples of Transformations: 1. Income from Duku Road (Residential) $200 per month

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The success achieved by MUIS in transforming and significantly enhancing the incomes of awqaf assets in Singapore may be attributed to several factors, including good governance by MUIS that directly manages 68 waqf assets and indirectly through mutawallis’ additional 33 waqf assets. MUIS appoints mutawallis for privately managed awqaf, approves any development or re-development or purchases by them. It holds the title deeds of all including privately managed awqaf. Observers also attribute success to a very progressive fatwa that accords permissibility to give waqf property on lease for up to as long as 99 years without transferring the ownership to the lessee; and also to completely sell off waqf properties and replace them with purchases of new, higher yielding free-hold properties (istibdal). The other contributing factors are: innovative financing and enhanced professionalism and expertise (through public – private sector collaboration). The latter enables (MUIS) to focus on its regulatory functions with increased standards of efficiency, effectiveness and flexibility.

Residential Apartments

Commercial Apartments & MOSQUE

$2,400 per month

2. Income from Wakaf Kassim (Mosque/Commercial/Residential) $1,320 per year

Ijara

$562,400 per years

As an outcome, there have been significant increase in cash flows for the awqaf making them more responsive to market demands in terms of provision of intended benefits. The financial innovation involves the issue of musharakah bonds to finance development of waqf properties. The property in question is a mixed complex comprising a mosque, a commercial complex and 103 rooms of service apartments. The project located at Bencoolen Street needed a total financing of S$ 35 million for its development. It was considered an economically viable project in view of its good location.

91 | 1. A musharakah ( joint venture) contract is executed between (i) the Waqf, (ii) the Baitul Mal and (iii) Warees Investments Pte Ltd (a wholly owned subsidiary of MUIS to handle waqf properties) to build the mixed development at Bencoolen Street. Under this the waqf contributes land (valued at S$ 4.2 million) and capital amounting S$ 0.52 million. The Baitul Mal provides the necessary amount needed to develop it i.e. the S$ 35 million by issuing musharakah bonds of 5-year maturity to investors and Warees provides a nominal amount of S$ 1, and their expertise. 2. An ijarah (leasing) contract is executed between the musharakah or the Special Purpose Vehicle (SPV) and Ascott International Pte Ltd as lessee for a period of 10 years thus ensuring steady stream of income. The lease period is longer than the bond maturity in view of an option to investors to renew the bond after 5 years. 3. As per the musharakah agreement, revenues from rentals are to be divided according to a pre-agreed ratio. As the

rental income is pre-determined, the investors through the Baitul Mal now earn a steady stream of income of 3.03 percent. 4. The waqf gets a brand new mosque with doubled capacity and four stories of commercial properties to provide income for the mosques to maintain and run its operation. 5. Since Baitul Mal bears most of the risk to undertake the S$ 35 million investments it brings in, it receives the service apartments with a 99-year lease. 6. Warees Investments Pte Ltd will receive a nominal investment return and professional fees for managing the development. Thus, the structure has enabled the waqf to raise required funds through the capital market in order to expand the capacity of the mosque and also to receive a steady income.

To raise the capital for this project a musharakah bond was structured in the following manner 26.

Based on Presentation by Shamsiah Bte Abdul Karim at the Preparatory Workshop for this Report at Bogor, Indonesia on April 29-30, 2013. See Shamsiah Bte Abdul Karim, Contemporary Shari’a Compliance Structuring for the Development and Management of Waqf Assets in Singapore, Kyoto Bulletin of Islamic Area Studies, 3-2 (March 2010) 25

26

AWQAF


4.5.3. Tabung Wakaf Indonesia27 Key idea: Investment of waqf corpus for risky, yet desirable avenues (microenterprise development) In Indonesia, Tabung Wakaf Indonesia (TWI) is a newly established national level waqf institution that invests its cash waqf funds in several profitable micro enterprises in various industries. Specifically, TWI has been investing cash waqf funds in micro enterprises in the tahu industry (tahu: tofu) in Iwul village. In the late 1980s, there were hundreds of micro enterprises operating their tahu business in this village. However, an intensely competitive market saw steady erosion in profits and reduction in the number of micro enterprises. While a sizable number of such enterprises still exist, TWI sought to improve and stabilize business conditions through an intervention. It undertook detailed feasibility studies and provided for multi-purpose training before embarking on microfinance. TWI invested in a murabahah scheme with the initial quantum of financing pegged at just about US$ 40-50. The multi-purpose training consisted of capacity building and business development programs, such as work place management to ensure that the workplace is not unhealthy, skills enhancement in areas of marketing, basic accounting and literacy, spiritual management, and organizational

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management. TWI also involved local laboratories to ensure that end products meet norms of health and hygiene. TWI also educated the micro-entrepreneurs on how to package their products so as to realize greater value in the market. TWI also invested in an institution called Kampoeng Ternak (KT) operating in livestock business. KT is funding 29 partners and 7 other institutions that assist sheep breeders in their local area. Until recently, there were, 1,300 breeders across 16 provinces in Indonesia under the assistance of KT. The success of KT attracted local and international investors. However, KT has been reluctant to expand its operations in view of its limited facilities. For TWI, this was an opportunity to intervene and invest and assist KT to overcome its problems, thus increasing its efficiency and productivity to fill the demand of sheep meat in the region. Besides investing in KT, TWI also partnered with BMT Bringharjo, an Islamic financial cooperative engaged in community development through Islamic microfinance. BMT Beringharjo, which was founded in 1994 with a small amount of Rp 1 million (US$ 88) as start-up capital, received subsequent funding in 2005 from Dompet Dhuafa Republika, the parent NGO of TWI. In 1995 BMT Beringharjo had 393 members, but this number increased to 7,000 members by 2006. Currently TWI has invested Rp 175 million (US $ 20,000) in this BMT operating with 34 staff.

4.6 Lessons and Policy Implications 1. Waqf law should provide a comprehensive definition of waqf that includes both permanent and temporary waqf. However, it must be recognized that once the waqf has been declared, it is irrevocable. It must explicitly cover various types of waqf: family and social waqf, direct and investment waqf, cash waqf, and corporate waqf. 2. The legal framework must clearly articulate the permanent nature of waqf arising from the principle of “once a waqf, always a waqf”. At the same time, it must clearly recognize the importance of sustaining and enhancing the benefits flowing out of the waqf, this being the ultimate purpose of the act of waqf. This is possible only when the importance of the development of waqf is clearly recognized. An undue emphasis on preservation (e.g. constraints on leasing) would lead to neglect of developmental possibility with private participation. Similarly, an undue emphasis on development, to the extent that it results in loss of full or partial ownership of asset to private developers would dilute and vitiate the very concept of waqf. The regulatory framework must seek to strike a balance between concerns about preservation and development. 3. The legal framework must not put undue restriction on creation of new waqf. There is no reason to disallow individuals from making waqf beyond one-third of their assets, since fiqhi rules permit this unless made on a person’s deathbed. Legal requirements that make the process more difficult, e.g. approval from the head of the state, are both unnecessary and undesirable. A simple process of registration with the regulatory body is both desirable and adequate. While obstacles to waqf creation must be avoided, the legal framework should actually encourage creation of new waqf by minimizing financial and non-financial costs of waqf creation and management. 4. Awqaf in general, have fallen behind common trusts and other forms of organizing charitable and not-forprofit activities in terms of responding to evolving societal needs. Creation and management of waqf is a relatively more complex and demanding process and involves additional financial and non-financial costs. Incentivizing waqf in a manner similar to secular trusts and other forms of not-for-profit organizations, e.g. tax rebate on contributions for the donor/ endower would make the system both efficient and fair. 5. The legal framework should not restrict making a waqf only to Muslim individuals and should permit both non-Muslims and institutional waqif as long as the purpose of waqf is religious or charitable.

27

AWQAF

6. The legal framework should not restrict the definition of the endowed asset to immovable tangible assets such as real estate, but should also explicitly recognize movable, financial and intangible assets, e.g. cash, stocks, bonds and financial securities, transportation vehicles, rights on land and building, rights of leasing, rights of intellectual property. Given the many benefits of cash and corporate waqf, law must explicitly provide a framework for them including their investment dimension. 7. The institution of family waqf must be revived. Since the distinction between family and public waqf is largely a matter of the nature of beneficiaries, the law must provide for an explicit basis of distinction. For example, where more than 50 percent of the net available income of a waqf property is exclusively applied for religious and charitable purposes, such a waqf may be deemed to be a public waqf. Similarly, endowments where more than 50 percent of the net available income is meant for the waqif’s descendants, such a waqf may be treated as family waqf. 8. Waqf is originally an institution, and is always meant to be in the voluntary sector, with management of waqf entrusted to private parties. However, the state has often sought to play a role in the ownership and management of awqaf, at times governed by motives to expropriate and at other times, by a need to curb corrupt practices of private trustee-managers. Whether ownership and management of awqaf should be in private hands or with the state, has no clear answer. There seems to be some positive evidence that the state can indeed play the role of an efficient manager of awqaf. Contrary to general belief, state control may not necessarily hamper creativity and innovation in awqaf development (e.g. corporate waqf as well as cash waqf in Malaysia and large-scale development of existing awqaf in public-private mode in Singapore). 9. Where waqf management is in private hands, the state agency as regulator should clearly stipulate and clear eligibility criteria for a mutawalli or nazir or trustee-manager not only covering aspects of integrity and trust-worthiness but also professional competence. Given that the individual or institution so nominated meets the criteria, the regulator must respect the expressed intention of the waqif or endower. Laws must clearly articulate the responsibility of waqf management, which should not only emphasize preservation and protection of waqf assets, but also their development. The responsibility should also include transparent and honest reporting of financials. Laws must clearly stipulate the method of determination of remuneration of managers, sufficiently incentivizing sound and professional management of waqf assets.

Obaidullah, M (2013) Awqaf Development and Management, Islamic Research and Training Institute, Islamic Development Bank


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10. There is every reason for the state to take punitive action against mutawallis who fail the tests of efficiency, integrity, and transparency. The measures must act as effective deterrent against further acts of apathy, neglect and misappropriation. At the same time, the state should not be allowed to wield absolute power to engage in irrational or whimsical action against the mutawalli. Instances of unfair and unlawful action by the state are numerous, as are cases of corrupt mutawallis. There needs to be effective checks and balances in the law against wrongful acts both by the state as well as the private mutawallis. Power has a tendency to corrupt and the possibility of such action can significantly increase the non-financial cost of creating new waqf. Endowers are likely to seek alternative forms of organizing their charitable activities if there is a possibility of undue state interference in the management of the endowed assets or outright usurpation of the endowed assets by the state. 11. The law must explicitly prohibit the waqf asset from being used as a mortgage, confiscated, given away, sold, inherited, exchanged or being alienated into any form of right. The waqf asset may however be exchanged as an exception to the above general rule, when this is deemed to be in the public interest. Such exchange would however, require prior permission from the regulator with additional conditions that the same is (i) necessary or beneficial to the waqf; (ii) consistent with the objects of the waqf; (iii) against another asset of equal or higher value; (iv) and with due respect to the inalienability of religious awqaf.

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12. Waqf development must be a mandatory obligation of the waqf management. Innovating financing methods

may be employed that bring in new waqf capital for development of existing awqaf. Innovative methods may also be employed that facilitate private-public partnerships (e.g. involving issue of sukuk) that involve transfer of rights to lease as distinct from ownership rights to private financing entities for finite, yet long enough period to provide a fair return on investment capital. Legal constraints motivated by preservation concerns, such as those on long-term leasing of awqaf assets should be removed. 13. Financial penalties, especially when these are expressed in absolute numbers tend to lose their effectiveness as deterrents with time. These should either be subjected to continuous revision or be linked to the quantum over misappropriation. Physical punishments are potentially more effective. 14. It is compulsory to invest waqf assets, be they real estate or moveable assets like cash. Investment can alone generate returns which may then be applied to the purpose for which the waqf has been created. The assets purchased using the waqf investment returns do not form part of the waqf and therefore, may be resold unlike the original assets that have been given as waqf. Further, the conditions given by the waqif with regard to the investment of the waqf and/or that the returns from investment are to be spent on specific areas, is also binding. It would be rational to seek risk minimization through diversification or avoidance of high risk investment avenues. Risk minimization may however not be sought if the purpose of the waqf itself is to engage in specific risky ventures.

A farmer holds paddy seedlings in Bekasi, Indonesia’s West Java province July 1, 2011. Indonesia sees higher unmilled rice output in 2011 and a bigger surplus of the staple food as it expands production areas, government officials said on Friday. AWQAF

REUTERS/Beawiharta (INDONESIA - Tags: BUSINESS AGRICULTURE)


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cooperative and non -profit microfinance

People walk through Canary Wharf, London’s financial district November 11, 2008. REUTERS/Kieran Doherty (BRITAIN)

97

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The earlier sections have covered the flow of Islamic social funds through institutions based on zakah and waqf. These are institutions rooted in Islamic philanthropy. Mutual cooperation and solidarity is a norm central to Islamic social behavior and collective ethics. This is strengthened through philanthropic behavior. However, the Islamic economy also includes other forms of initiatives and institutions that engage with the poor using a variety of contractual mechanisms. Indeed, it is possible to visualize three distinct possibilities in terms of the organizational structure of Islamic microfinance providers and the nature of contractual mechanisms that underlie their products and services. There are for-profit Islamic MFIs that use for-profit contracts (e.g. murabahah, ijarah, mudharabah, musharakah, salam, istisna, wakalah etc.). These are beyond the scope of this report. Then there are not-for-profit Islamic organizations and memberbased cooperatives providing microfinance services that are based on for-profit contracts. There are also not-for-profit Islamic organizations and member-based cooperatives providing microfinance services that are based on not-for-profit contracts (e.g. qard, kafala, hawala etc.).

A major segment of the Islamic social finance sector comprises Shariah-compliant microfinance institutions that are not-forprofit and/or rooted in cooperation and self-help. Some are in the nature of member-based organizations called financial cooperatives, credit unions, baitul-mal-wat-tamweels (BMTs). Others are organized as not-for-profit entities, e.g. societies, trusts, foundations, not-for-profit companies. Therefore, the institutions covered in this section are either rooted in cooperation (so that profits are shared among all members) or, are legally not-for-profit entities (so that profits are ploughed back into the organization and cannot be shared by promoters and founders). What is common to all, however, is that charity and philanthropy contributes partially to the funding of operations. Since the organizations covered in this component of Islamic social finance are varied in nature and have taken roots in specific regions, e.g. the BMTs in Indonesia and not-for-profit entities in Pakistan, the analysis of enabling environment in terms of institutional structure and regulatory and policy framework and good practices primarily relate to these regions.

Size of Sector: The development of Islamic Saving and Loan Cooperatives or BMTs in Indonesia has been impressive. According to latest estimates there were more than 3,000 BMTs all over Indonesia with consolidated assets of more than US$ 100 million, employing more than 30,000 workers, more than 40 percent of whom are women. BMTs served 2 million depositors and distribute micro credit to more than 1.5 million micro entrepreneurs. A later study by the Centre of Business Incubation and Small Business (PINBUK) estimated that by the end of 2007, the number of BMTs in Indonesia had grown to over 4,000 with assets of about US$ 150 million (PINBUK, 2008). Among the various factors cited behind this phenomenal growth are: (i) growing Islamic fervor among Indonesian Muslims; (ii) activism by several Islamic scholars and Indonesian intellectuals to find Islamic solutions to social, political and economic problems of the country; (iii) enabling legal and regulatory environment for Islamic banking and finance; and (iv) supportive policies in terms of various government initiatives that emphasize the role of BMTs as important vehicles of financing the SME sector.

5.1 Overview of Cooperative and Non-Profit Microfinance This section presents some interesting facts about the Islamic cooperative and not-for-profit microfinance sector. However, with the exception of Indonesia, countries in South and Southeast Asia do not have what may be called an Islamic microfinance industry or sector. Islamic microfinance is offered by a tiny number of entities. Therefore, the practices at these entities are subjected to micro-analysis in the form of case studies presented in a latter section. Macro-analysis is restricted to Indonesia only, where the Islamic microfinance cooperatives are fairly large in number.

Here are some basic facts about the way this cooperation and member-based model has been operational in Indonesia. These are based on a survey conducted by Bank Indonesia on a sample of 118 BMTs conducted in 2011. The results are further supported by the findings of an earlier survey by BI in 2007.

In Indonesia, the Baitul Maal wat Tamweel (BMT) is an indigenous model of Islamic microfinance. Translated into English, the House of Funds and Financing is a financial cooperative. Conceptually, BMT is deemed to be inspired by the institution of Baitul Maal existing in the early days | Table 5.1. Initial Capital of BMTs

Amount (USD) less than 50

Individual

Group

Coop

Govt

NGO

FIs

Other

No.

%

No

%

No

%

No.

%

No.

%

No.

%

No.

%

4

11.8

7

11.3

2

18.2

0

0

1

33.3

0

0

0

0

0

0

1

9.1

1

16.7

0

0

0

0

0

0

14 22.6

4

36.4

2

33.3

1

33.3

2

50

3

75

51-100

1

2.9

101-500

8

23.5

501-1000

5

14.7

7

11.3

1

9.1

0

0

0

0

0

0

1

25

1001-2500

7

20.6

13

21

2

18.2

2

33.3

1

33.3

1

25

0

0

2501-5000

6

17.7

14 22.6

0

0

1

16.7

0

0

1

25

0

0

more than 5000

3

8.8

7

11.3

1

9.1

0

0

0

0

0

0

0

0

34

100

62

100

11

100

6

100

3

100

4

100

4

100

Total

COOPERATIVE AND NON-PROFIT MICROFINANCE

of Islam. Its uniqueness is said to lie in the marriage of two distinct institutional models. The first is Baitul Maal or a pool of various kinds of Islamic charity funds, traditionally referred to as zakah-infaq-sadaqah-waqf funds (ziswaf). The second is Baitut Tamweel or a pool of funds directed at profit-seeking financing using Shariah-compliant modes. The latter comprises funds in the form of founder equity, microsavings and investment deposits. A more recent avatar of this institution is Baitul Maal wat Tamweel wat Tamin (BMTT) with addition of micro insurance (tamin) as a third line of activity. Thus, BMT performs distinct economic and social functions for its members.


99 |

Initiation

Incorporation

To establish a BMT is not a complicated process. A group of people who are interested to establish a BMT in their society need to find support from their community leaders and prominent members of the society. With the approval and support of the community leaders, this group can make a founding committee (P3B) consisting of 5 people. The main job of this committee is to get 20-40 people as foundermembers who would like to invest in the initial share capital (simpoksus) of the BMT. With initial capital in the range of US$ 2,000-3,500, members may have the first general meeting to formally establish BMT and appoint the management. Out of the surveyed BMTs, about 70 percent were formed by groups; the remaining by individuals, cooperatives, NGOs, financial institutions, local governments and others. An earlier 2007 survey by Bank Indonesia has the additional finding that BMTs are mostly promoted by educated persons, teachers in many cases, who are apparently motivated by their concern for economic betterment of the community.

BMTs are generally incorporated as financial cooperatives, but not necessarily so. Out of the BMTs surveyed, 96 percent were incorporated as cooperatives, 1 percent as foundations and 3 percent were unincorporated entities.

| Table 5.3. Area of Operation of BMTs

While some BMTs start with a very small contribution of less than US$ 50, most start with an initial capital of US$ 101-500. The pattern of contribution based on the nature of promoter is presented below. The BMT sector does not appear to have a long history, with the average age of BMTs sampled being 8 years. Interestingly, most of the BMTs were established around the Southeast Asian financial crisis that hit hard the mainstream financial institutions. Being local institutions these were apparently perceived as robust entities insulated from the impact of the crisis.

| Table 5.2. Age of BMTs Year

Year Established Number

%

Number

%

1993 - 1995

3

2.5

2

1.7

2

1996 - 1998

40

33.9

22

19.1

3

1999 - 2001

19

16.1

25

21.7

4

2002 - 2004

14

11.9

20

17.4

5

2005 - 2007

26

22

33

28.7

6

2008 - 2010

15

12.7

11

9.6

7

2011

2

1.7

115

100

118

Is there a gap between initiation of a BMT and its incorporation? The answer seems to be yes. Out of the 115 sampled BMTs that have been incorporated, only 44 percent were incorporated at the time of initiation. 24 percent were incorporated after one year and 10 percent after two years of initiation.

100

%

2

1.7

21

18

Regency (District)

75

63.2

Province

20

17.1

Total

118

100

Sub-district

Due to the localized nature of operations, most of the sampled BMTs did not have a service network, with only 45.3 percent having some form of office network - branch offices, cash offices and service units. There were exceptions though, with one BMT having as many as 18 branches and 10 sub-branches.

Syariah, a Shariah cooperative association with local and regional chapters). The other organizations to which BMTs were affiliated were Microfin, United Muhamadiyah, IKSM, Inkopsyah, and BMI.

Affiliation

How does the asset structure of an average BMT look like? For all the sampled units together, murabahah financing accounts for the largest share of assets, though it has sharply declined from 65 percent at the initial stage to 30.4 percent when the survey was conducted. The second largest asset is investment mudharabah whose share increased from 11.7 to 24.9 percent.

BMTs are generally affiliated to meso-level networks and mother institutions who play an important role in setting the standards, prescribe operational procedures and best practices. Out of the surveyed BMTs, 45.7 percent were affiliated with PINBUK (Small Business Incubation Centre) and 35.3 percent to Puskopsyah (Pusat Koperasi

| Table 5.4. Asset Structure of BMTs Initial Cash

Area of Operation How localized is the operation of an average BMT? From the following Table 5.3, it follows that most BMTs are local institutions with district level operations. At the same time these are not be seen as village-level entities as only 1.7 percent operate at this level.

Present

15.7

9.5

11

8.6

Murabahah financing

65

30.4

Istisna

0.1

1.1

Funds in other LK

Investment Mudharabah

11.7

24.9

Musharakah investments

4.3

4.9

Ijarah

2.6

3.1

Rahn

0.1

0.2

Dana Qard

0.5

0.7

Fixed Assets

6.5

9.9

Other

3.5

3.3

Total Assets

100

100

Asset Size How large are the BMTs? Should they be categorized as nano or micro or small or medium sized financial institutions? From the following table showing distribution of BMTs according

COOPERATIVE AND NON-PROFIT MICROFINANCE

Asset Structure

Year of Incorporation

1

Total

Number

Village

Initial Capital

| 100

No

Work Area

to asset size at the initial stage, it appears that a large percentage of them (58.8 percent) had assets below Rp 100 million (approx US$ 10,000). Only 10.8 percent or one in nine BMTs had assets above Rp 500 million (approx US$ 50,000).


101 |

| Table 5.5. Distribution of BMTs Based on Asset Size

| Table 5.8. Sources of Funds for BMTs

Total Assets (Rp)

%

500 million

10.8

Zakah, Infaq & Sadaqah

0.18

0.16

Non-Halal Fund

0.10

0.08

Fund Owner

5.94

1.37

Member Dues

8.33

6.70

Government Contributions

1.08

0.12

Grant

3.04

1.24

Waqaf

-

0.01

Gift

0.00

0.00

Other

8.06

3.30

How have the assets grown over time (average age is 8 years)? Table 5.6 shows the distribution of BMTs according to asset size at the time of the survey. It reveals significant growth with

one-fourth of BMTs now holding assets above Rp 5 billion (approx US$ 50 million). 4 of the sampled BMTs have assets over Rp 20 billion (approx US$ 200 million).

| Table 5.6. Asset Growth of BMTs Total Assets (Rp)

| 102

Inception

%

20 billion

3.5

Is there a relationship between age of a BMT and its asset growth? Table 5.7 provides age-wise asset growth of BMTs. It appears that BMTs on average, experience abnormal growth

103 |

of about 40-50 percent at all stages of their operation, though the growth slows down a bit when BMTs are 5-6 years old only to accelerate again after they are over 10 years old.

| Table 5.7. Age and Asset Growth of BMTs Total Assets (in Rp Million) Age

Average growth (%) Year established

Year of Survey (2011)

10 years (