By 2020, the global size of Islamic finance is projected to reach a whopping level of US$3 trillion, coincidentally equaling the size of the global annual gap in the UN Sustainable Development Goals (SDGs) financing. To tap the massive potential and capitalize on the innate strength of Islamic finance for sustainable development, there needs to be a next generation of digital technology that could accelerate development impact. GREGET KALLA BUANA and NIALL DENNEHY explore.
In seeking the solution, blockchain stands a chance of delivering such impact. When we talk about blockchain, the first things that come to mind are bitcoin and cryptocurrency; nonetheless this new form of technology can offer much more than just online financial transactions. With its emphasis on accountability and transparency, blockchain shares surprising commonalities with Islamic finance which also champions accountability.
One form of Islamic finance that is currently under-harnessed for the SDGs and can benefit from blockchain is the multibillion Waqf sector.
Waqf is a form of Islamic charitable-giving that generally involves donating a plot of land, building or assets for religious or social purposes, such as hospitals, schools and even farming. Waqf can also be used for economic growth and income generation. In Indonesia, the potential value of Waqf is massive. Around 4,300 square kilometers — or five times the size of Singapore — are classified as Waqf land with the economic value of US$27 billion. At the same time, cash Waqf in Indonesia is projected to reach US$12 billion per year.
Indonesia, being the world’s largest Muslim nation with a tech-savvy young population, is constantly in the pursuit to combine Islamic finance with disruptive digital technology. Through our Innovative Financing Lab, the United Nations Development Program (UNDP) has been working in partnership with Badan Wakaf Indonesia, the Indonesian Waqf board, to establish kitawakaf.com, a Waqf crowdfunding website which aims to target projects that are in line with the human and economic development spirit in Indonesia. The platform will operate on blockchain technology with support from IslamiChain. Information on money collected through the platform will be stored in digital assets which can be traced to the source of contribution (such as if a person makes a Waqf contribution, that asset can be traced to the level of resources distributed).
To understand how digital Waqf works, we need to first look at the core principles of blockchain. Firstly, blockchain allows immutable data to be distributed in a secure, accurate, incorruptible and transparent way. Since it does not have a central authority, its peer-to-peer transactions eliminate the middle man, thus improving accountability and efficiency.
Secondly, with an open, decentralized system and digital ledgers, blockchain is a valuable tool for financing, governance, identification, recording and services. This technology can protect money for social development purposes and help it to be distributed as it should be. Thus, greater public trust is gained through greater transparency. In the context of Indonesia and other countries in Asia and the Pacific, blockchain technology can be utilized for development, financial inclusion, land registry, supply chain management and such.
Cash Waqf has a relatively broad appeal. It has supported small and medium-sized enterprises and generated revenue through revolving investment mechanisms; nonetheless it cannot be considered an adequate social impact financing tool.
History has proven that Waqf has a versatile role in human and social development. According to Yedilyidiz, during the Ottoman period, a person could be born in a house belonging to Waqf, live off that that Waqf, receive instructions through Waqf-owned books, become a teacher in a Waqf school, draw a Waqf-financed salary and on his death, be place in a Waqf-provided coffin for burial in a Waqf cemetery. Given this historical evidence, Badan Wakaf Indonesia has collaborated with various parties to manage Waqf land productively; among the uses are for plantations, livestock, hospitals and mining.
The question is why is the role of Waqf insignificant in an economy nowadays?
Despite Waqf’s tremendous potential, numerous challenges remain. These include low awareness of the need to pay Waqf given its voluntary nature and widespread public skepticism to channel their Waqf through formal institutions like Badan Wakaf Indonesia. The actual cash Waqf collection in 2018 was only 0.2% (US$28 million) out of its total potential in billions.
Hence, it is important to convince people that giving through formal organizations with a long-term spending horizon and professional management will result in more substantial impacts than giving via an informal network with a short-term preference and interpersonal approach. Greater trust, transparent governance and the ability to demonstrate impact are critical for such social funds to realize the ambition of reaching their full potential. Equally critical is the overarching need for the enhanced performance of Islamic social finance institutions. Thus, addressing all these issues can build a more sustainable national Ziswaf system — or an integrated platform for Zakat, Waqf and other Islamic charity forms like Sadaqah and Infaq — and support the achievement of the SDGs.
Disruptive and faster, the business model of digital Waqf is fully in tune with the innovative spirit of the UNDP. As stated by UNDP Administrator Achim Steiner in his annual address to top management: “Next generation UNDP is already here, disrupting — or pushing the boundaries — in the way we think, deliver, invest and manage to perform better and faster at scale.” The business model of digital Waqf is an example of a new way of thinking to deliver a more effective and transparent platform for sustainable development and deliver benefits to millions of Indonesian citizens.
Greget Kalla Buana is an Islamic finance specialist with the United Nations Development Program and Niall Dennehy is the co-founder of IslamiChain. They can be contacted at [email protected] and [email protected] respectively.