Revitalizing WAQF Governance: A Theoretical ...

International Journal of Advanced Biotechnology and Research (IJBR) ISSN 0976-2612, Online ISSN 2278–599X, Vol-8, Special Issue-3, 2017, pp305-311 http://www.bipublication.com Research Article

Revitalizing WAQF Governance: A Theoretical Perspectives

Nur Azni Mohd Zeni1 and Noraina Mazuin Sapuan2 1

Department of Finance and Economics, Universiti Tenaga Nasional, Malaysia; [email protected] 2 Department of Finance and Economics, Universiti Tenaga Nasional, Malaysia; [email protected] ABSTRACT With the increasing demand for the revival of waqf institution in Muslim countries, a greater emphasis on good governance framework is needed to be highlighted. It is agreed that good waqf governance should be implemented due to its potential as a critical factor of success in revitalizing the waqf institutions. Even though, the implementation of good waqf governance is often raised by the researchers, yet the studies regarding this critical issue are limited. The inefficient and unsystematic management of waqf institutions is among the recent issues discussed nowadays. This situation is often associated with agency problems, which is the possibility of agency conflict between the principal (waqif) and agents (mutawalli). Many researchers agreed that the issues of agency problems can be solved if a waqf governance framework is developed. Islamic corporate governance can be used as a guideline in developing a waqf governance framework as it is in accordance with Shariah law principles. Hence, this conceptual paper aims to shed light on the issues of waqf governance in selected Muslim countries, with some discussion on corporate governance from the perspective of Western and Islamic context. Furthermore, this study also reveals the relation of agency theory in waqf institution, and the need for Islamic corporate governance in implementing a waqf governance framework in the Muslim world. Keywords:,Waqf, Governance, Agency theory, Islamic corporate governance, Muslim countries

INTRODUCTION Waqfis defined as the dedication of a specified asset (mawquf) by a settlor (waqif) into the administration of a trustee (mutawalli) through a legal instrument such as the usufruct of an asset that is beneficial to a stated beneficiary or is used for a purpose stated by the waqif. In Islam, waqf plays an important role as one of the poverty alleviation mechanisms in the society. The uses of waqf are not limited to religious purposes only but also serve as an effective system to eradicate poverty by improving nongenerating income such as in education, healthcare, and shelter (Sadeq, 2002; AbdelMohsin, 2013). Kahf (2007) categorizeswaqf as a non-governmental public sector due to the simplicity in itsestablishment in the sense that a mere declaration by the founder is considered sufficient to create it. Thisis whywaqf is considered the best Islamic endowment foundation and formed part of a Muslim’s life in the past.One of the factors that contributed to the

set-back to the glory of waqf in the past is the colonization of the Muslim lands by the colonial governments during the colonization periods (Rashid, 2008). Many waqf assets were taken over by the colonial governments during the periods, and this situation threatened the role of mutawalliin terms of moral degradation which led to the mismanagement of waqf. As noted by Noor et al. (2014), there are many cases in Muslim countries where waqf assets and properties were occupied illegally, and most of the assets were neglected and misused and even missing or lost during the supervision of mutawalli. However, for the past few decades, one of the main agenda of Muslim communities around the world is the revitalization of waqf institutions. This demonstrates an increase in awareness of waqfrevitalization among the population of Muslim communities in Muslim countries. Abdullah (2015) states that most of the governments in Muslim countries are aware


of the significant need of the waqf as one of the important tools in creating a better society. With the revitalization of waqf institutions, the role of waqf in serving the society better can be improved, which in turn can help in enhancing and improving the economy of the Muslim countries (Ayedh & Ihsan, 2013). Moreover, many international waqfconferences have been organized by various organizers in many countries, revealing a growing interest regarding the awareness and revitalization of waqf institutions, and an indication of waqf as one of the tools for community development in the future. In line with the growing demand for the glory of waqf institutions to be brought back, a greater emphasis on good governance of waqf institutions needs to be highlighted. Cajee (2007) strongly agrees that the best practices of good governance should be implemented due to their potential as a critical success factor in revitalizing waqf institutions. In addition, it is important for the management of waqf institutions to be guided by a Code of Governance, or at least a Code of Ethics, for them to have a better understanding of their job scope, ensure the purpose of waqf is delivered as stated in Islam, work effectively in shuratic (consultative) process, exercise control over the waqf assets, and operate with integrity and accountability. In order to enhance the accountability of the management of waqf institutions, Masruki and Shafii (2013) suggest that waqfinstitutions establish a Professional Code of Conduct and a Code of Ethics for the Mutawalli (trustee). Basically, a good governance system should be put into place so that the accountability can be released and applied to various stakeholders such as waqif and beneficiaries. Thus, this paper attempts to focus on waqf governance in Muslim countries, comprising a discussion on the issues of waqf institutions, waqf governance, the agency theory, as well as the need for a good Islamic corporate governance in the Muslim world. Waqf issues in selected Muslim countries In recent years in Malaysia, many studies have scrutinized the issues on waqf management including the inefficiencies in the management of waqf assets by the related institutions (Ismail

Nur Azni Mohd Zeni, et al.

et al., 2015), in which most of the waqf assets are not fullyutilized resulting in the failure to achieve the desired results. The studies demonstrate that the current management of waqf institutions in Malaysia is undeniably insufficient and inefficient. Furthermore, in many areas in states such as Selangor, Negeri Sembilan and Pulau Pinang, there has been a serious collapse of waqf administration. Hassan and Shahid (2010) state that waqf institutions are not given proper attention, which causes the ill-management of manywaqf properties. In addition, a lack of waqf experts is one of the main factors that affectsignificantly the progress and development of waqf institutions. Therefore, it is necessary to have a good corporate governance on waqfin order to overcome the issues of mismanagement and inefficiency of the institutions.Karim (2010) states that in Bangladesh, there are hundreds of waqf related disputes which are adjudicated by the courts and the waqf administrators’ office, and the numbers kept increasing. Among the issues areillegaltransfer of assets, improper management, and misappropriation in the administration of waqf institutions. In the country, the waqf administrators themselves will conduct the hearings like a judge and deliver judgement, unlessit is overruled by an Appeal Court. Should there be an illegal transfer of assets, or any illegal interference in the management of waqfassets, the waqf administrators will use theirauthority to solve the problems with the help from the local administration of the government. Yet, due to the large number of daily cases, a small number of expert officers of the institutions, and many other matters that require attention, the administration of waqf institutions is overburdened. This causes the institutions to operate in an inefficient and ineffective manner. In Indonesia, the management of waqf needs an optimal improvement, especially pertaining to cases of waqf assets that have been neglected, not properly maintained, or developed by a third party by fighting against the law. Such problems have occurred due to the incompetence of the waqf administrators in managing waqf assets, and the lack of concern and understanding among people about the

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status of waqf which should be managed in accordance with the underlying purpose, function, and benefits for public prosperity. It is important for waqf administrators in Indonesia to manage waqf assets well as an unproductive management of waqf may adversely affect the role of waqf in empowering the economy and well-being of the society in Indonesia. Therefore, to cope with such issue, the administrators need to manage waqf productivity by implementing good corporate governance that does not ignore Shariah principles. In addition, the waqfinstitutions need to appoint a Nazir that must be an expert on the concept of waqffiqh, as well as the regulation and legislation of the waqf, so that any inappropriate misconduct by the trustee can be avoided. In Yemen, Al-Shami et al. (2015) stress that waqf has been in decline for the past few years, especially after the intervention by the local government. The crippling political conflicts since the year 2011 have made the waqf institutions in the country to be more unstable, and there is no new endowment forthcoming into the waqf institutions. This has resulted in many people refusing to do the endowments because they do not recognize and trust these regimes. There are many contributing factors that have led to these intervention conflicts including (1) weakness in religious faith among the people; (2) the government’s control over waqf funds to provide for community, education, healthcare, and others; (3) widespread mismanagement of waqf funds which led to the weakness in the efficiency and performance of waqf institutions; and (4) various administrative challenges which have prevented waqf from carrying out its social functions and as the result hampered development and brought into question the credibility of these funds. All of these factors have caused the number of endowers to waqf to decrease and in turn resulted in the deterioration of waqf institutions in the country. In the report by the Department in the Ministry of Waqf (2013), it states that waqf in Yemen is not utilized efficiently and effectively, and the system itself is not being managed in ways that would enable improvement. Therefore, AlShami et al. (2015) argue that an effective waqf


governance should be designed by the authoritiesin order to improve the economic situation of the country. Corporate governance in Western and Islamic perspectives According to Cadbury (2002), the word governance is derived from the word “gubernare”, a Latin word that refers to the relationship between the governors and the governed on the basis of decision making by individuals to those in authority. In Arabic, governance is called “Al-Hakimiya”, which refers to a higher degree of moral social order to which all decision-making structures and authority have to submit (Noor et al., 2014). Corporate governance (CG) is defined by the Organization of Economic Cooperation and Development (OECD) in Principles of Corporate Governance (2004) as the set of relationships between the company’s management, its board, its shareholders and other stakeholders. There are six areas which are covered in the OECD principles of CG: the framework of an effective CG, the rights of shareholders, equitable treatment of shareholders, the role of stakeholders in CG, disclosure and transparency, and the responsibilities of the board. However, for nonprofitorganizations such as zakah and waqf institutions, such definition is not suitable since its underlying objective is to serve the interest of every organizationthathas various sets of stakeholders. According to Lewis (2001), the CG in Islam aims to enhance four values: (1) accountability; (2) transparency and disclosure; (3) responsibility; and (4) fairness. He states that Islamic CG is different from conventional CG as it has broader obligations and responsibilities towards customers, suppliers, employees, and competitors, embracing the spiritual as well as the temporal needs of the Islamic community. In addition, the Islamic CG is also more focused on the concepts of shura, hisba1, the shariah 1

Zulkifli Hasan’s theory of CG (2009), which refers to the core element of CG to ensure the compliance with Shariah law requirements in corporate and business affairs relating to weight and measurement, fair trading rules, checking business frauds, auditing illegal contacts, keeping free-market, and storage of necessities for black marketing.

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supervisory process and religious audit, which establish the basic building blocks of the system of Islamic governance and procedure for decision-making. In Islam, the foundation of good governance is based on the concept of tawhid (absolute unity of God). If the tawhid is not good, then the rest of one’s Islam will become worse. Therefore, embodying the role of governance, an individual must seek the guidance from the Creator of the universe in fulfilling the responsibility to the society. Tawhid will lead one to realize that his/her existence on the earth is as a vicegerent. Therefore, it is important for every mankind to practice good governance principles in his/her life. The explanation of good governance will be discussed further in the next sub-section. Agency theory in waqf institutions The Agency theory by Jensen & Meckling (1976) is the main contributing corporate governance theory to which most conventional corporate governance frameworks refer in developing the recommended best practices. This theory also mentions the possibility of agency conflicts between the principals (owners) and agents (managers). In other words, the managers might not perform in the best interest of the owners should the management is not in the hands of the owners. This agency issue exists in conventional business environment and in non-profit making institutions like waqf institutions. Many researchers have raised the problems of the mismanagement of waqf properties and issues pertaining tomutawalli (trustee). In addition, some of the researchers have highlighted the conflict of interest between the principaland trustees (Chowdhury & Alam, 2013; Ibrahim & Ibrahim, 2013; Htay & Salman, 2015).In the context of waqfinstitutions, the principal refers to waqif or the people who established the waqf. The agent is represented by mutawalli or the person who is expected to perform his or her fiduciary duty towards the waqf assets that should be distributed accordingly to those who are in need. The agency theory is applied in the management of waqf where at the beginning a waqif nominates the wrong mutawalli to handle his waqf assets. Ahmed (2015) asserts that it takes only one dishonest mutawalli over the life of a waqf to


lose the endowed assets. An honest mutawalli has to ensure that he performs the duties assigned to him efficiently so that the goal of the waqf could be achievedfor the betterment of Muslim society. Conflicts of interest may also arise after the process of nomination in which the mutawalli does not perform and commit his fullest responsibility for the waqf assets, or put the least effort to the duties, or carries out his duties inefficiently and is not serious about the tasks which are entrusted to him. This agency concept is known as mas-u-liyah (accountability) which refers to the responsibility of the mutawalli. Thus, the management of waqf institutions can be improved if the management itself is able to implement and develop good waqf best practices in their administration by integrating governance regulations implemented by successful conventional philanthropic organizations in their institutions accordingly in order to avoid any moral hazard and information asymmetry from happening, and sustain a competitive advantage in the financial market. Islamic corporate governance in the Muslim world The Islamic jurists claim that Islam is a religion that consists of a complete code of life that covers all aspects of economic, social, and legal structures (Abu-Tapanjeh, 2009). The Islamic law (Shariah) provides a comprehensive system to cover not only religious matters, but also many aspects of social and economic life, business, politics, and contract law. Even though ICG is new as compared to conventional governance, yet it plays a great role in shaping the minds of Muslim scholars, professionals, and economics alike. One of the main aims of ICG is Maqasid Shariah2, which was developed by a famous Muslim scholar called Al-Ghazali (d. 505H), as the ultimate goal of corporate governance that cannot be found in the concept of western CG. Corporate governance in Shariah generally provides comprehensive guidelines with encompassing practices and duties. In other words, the Islamic law teaches every Muslim to preserve a high moral conduct that prohibits 2

Protection of the welfare of the people, which lies in safeguarding their faith, prosperity, intellectual, and wealth (Al-Ghazali, 1937).

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betrayal, deceit, or exploitation of his fellowship and profit making at the cost of moral and business value. Hasan (2008) adds that any system without an appropriate ethical and moral climate may not be able to influence a proper system of governance. In addition, governance based on an Islamic system encourages and promotes the ethical norms of transparency, accountability, fairness, and honesty in every business transaction (Iqbal & Mirakhor, 2004; Hasan, 2008; Iqbal & Lewis, 2009; Hafeez; 2013; Sapuan, 2016).Therefore, by implementing ICG in waqf institutions, the management of waqf plays an important role as agents and have an obligation in providing for the best interest of Allah (swt) as the real owner of waqf properties, as well as for the waqif. ICG also presents a comprehensive framework of governance model that is based on Tawhid and Shura (Choudhary & Hoque, 2004). The principles of tawhid demand the agents to always be conscious of their responsibility as vicegerents and to act with good values in doing tasks entrusted to them. The process of shura may ensure that both parties, principals and agents engage in decision making in an effective and just manner. In order to develop a successful Islamic market, a good CG is essential and it must be in accordance with Shariah law principles to represent the true spirit of Islam. The waqf authority will need to come up with an ICG that is attractive to and consistent with international standards, while at the same time compliant with Shariah law (Lewis, 2005). An effective ICG must be consistent with the Islamic principles which require individuals to exercise their responsibility with integrity, judgement and transparency, which are central to Shariah law (Bhatti & Bhatti, 2009). CONCLUSION Waqf is one of the Islamic foundations that applies moral and religious motivation in serving the welfare of the nation as well as helping to improve the life of the society. In the Al-Quran, Allah SWT asserts that all Muslims are to help each other, regardless of the situation they are in. Thus, waqf is one of the mechanisms that can help in improving the life of others and plays a vital role in enhancing the political,


social, and economic aspects of the Muslim society. For the waqf institutions to be successfully developed, a good waqf governance is necessary, and it must be in accordance with Shariah law principles and the true spirit of Islam. It is important to come out with an Islamic corporate governance that is attractive to and consistent with the international standards as well as being compliant with Shariah law. A sound waqf governance may help to eliminate and overcome the issues of mismanagement that have occurred in the administration of waqf institutions. By implementing an ICG in the governance of waqf, the conflict of interest or “self-interest” of the agents can be slowly controlled and eliminated. Theoretically, the concept of ICG is in line with the true spirit of Islam that emphasizes Islamic values and principles in order to build a sound waqf governance in the management of waqf. Therefore, it is necessary to have a good corporate governance in order to bring back the glory of waqf institutions as enjoyed in the past. ACKNOWLEDGMENT The authors would like to thank the FRGS grant provided by the Ministry of Higher education, Malaysia, and Universiti Tenaga Nasional, Malaysia for the funding of this research. Grant Reference No: FRGS/1/2016/SS08/UNITEN/02/1 (08/2016). REFERENCES 1. Abdel-Mohsin, M. I. (2013). Financing through Cash Waqf: A Revitalization to Finance Different Needs. International Journal of Islamic and Middle East, 6(4): 325-348. 2. Abdullah M. (2015). A New Framework of Corporate Governance for Waqf: A Preliminary Proposal. Islam and Civilisational Renewal, 6(3): 353-370. 3. Abu-Tapanjeh, A. M. (2009). Corporate Governance from the Islamic Perspective: A Comparative Analysis with OECH Principles. Critical Perspectives on Accounting, 20(5): 556-567. 4. Ahmed, H. (2015). Integration of Islamic Financial and Social Sectors: Creating

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