The Islamic endowment industry could be worth up to US$1 trillion according to some estimates; yet the majority of assets are poorly managed and earning little return. This week we take a closer look at the size and scope of this little-known market, and explore what the future may hold for what could be the unsung hero of Islamic finance.
What is Waqf?
Zakat, or the mandatory charitable giving by Muslims of 2.5% of net worth (if possessed of over 85 grams of gold or 600 grams of silver in one year), is the third pillar of Islam and the form of philanthropy that is most familiar to Islamic investors. Waqf, on the other hand, is a type of Sadaqa, or benevolence, which is a wider form of charity that is not obligatory but refers to voluntary giving of all types: from a smile to the passing on of education to the endowment of funds.
Waqf, as a form of Sadaqa, in Arabic literally means ‘stop’, and involves the perpetual preservation of revenue or property for philanthropic or religious purposes (Awqaf). In essence, Waqf is a form of Islamic endowment that can take the form of cash, property or any form of private wealth which is donated in perpetuity for a charitable purpose set and directed by the endower.
Traditionally Waqf has taken the form of real estate, particularly in the Middle East where in the 19th century up to two thirds of all property in the Ottoman Empire was held as Awqaf (or Waqf assets) with revenues used for charitable purposes. However, there are many ways of financing Awqaf: including the use of Islamic financial instruments.
How big is the market?
In 2010 Ernst & Young estimated the global Waqf sector to be worth over US$105 billion. Although much of these assets are donated and managed privately, making it almost impossible to obtain an accurate total figure, it is suggested however that the real value of the industry could be considerably larger.
Informal estimates by experts suggest that Waqf assets could be as high as SAR1 trillion (US$266.6 billion) in Saudi Arabia alone, while in Malaysia, Waqf assets have been estimated at RM1 trillion (US$325.1 billion). In Egypt a recent report by the Ministry of Religious Endowment estimated Waqf endowments of around US$82 billion.
John Sandwick, an Islamic finance specialist and asset manager, is quoted as saying that: “This market is just too big to ignore, but conventional asset managers have spent their time selling derivatives and hedge funds rather than make efforts to unlock this sleeping giant.”
The importance of Awqaf
The Waqf industry is undeniably growing in importance as global Muslim wealth increases and coffers swell with charitable funds that currently are, many experts feel, woefully under-utilized. Waqf offers valuable opportunities for the Islamic finance industry and the development of new products, with key features of sustainability and consistent funding streams making it a stable revenue source for investment and public funding.
In many Middle East countries, such as Qatar, Kuwait and Saudi Arabia, Waqf structures are widely available and a favored method of charitable giving; while the sector is also once more growing in popularity in countries such as Lebanon, Egypt and especially Turkey; which has seen an explosion in charitable funding since the revision of its Waqf regulations in 1981, with wealthy families competing to make endowments particularly in the education sector.
Following the publication of the 2010 findings Ashar Nazim, the head of Islamic financial services at Ernst & Young, said: “The Shariah compliant endowment sector provides a unique impetus for the growth of Islamic finance including the nascent asset management industry. While Waqf has always been an integral part of Islamic countries’ economic system, it is only now that a more formal structure is evolving for professional investment management of this pool of money, with an emphasis on making a sustainable impact. More investment firms are eyeing this opportunity, adding a new dimension to the Islamic asset management industry.”
Challenges to growth
However, Ernst & Young warns that: “Tapping into the multi-billion dollar Waqf pool first requires ensuring a credible governance and operational infrastructure to safeguard the sanctity of the Waqf charter.” There have been repeated concerns raised in several countries about the mismanagement of Waqf funds and the inappropriate or confused regulatory and governance structure of the industry.
In Malaysia, for example, the management of Waqf assets is the responsibility of each separate state’s religious council, with no overall governance. In a recent paper entitled ‘The Governance and Investment of Waqf in Malaysia’ Dr Baharuddin Sayin of the Universiti Teknologi Malaysia comments that: “If the asset is managed professionally, definitely it will provide a handsome return towards the Malaysian economy. Unfortunately the management of Waqf assets, which is vested under the State Religious Council (Majlis Agama Islam Negeri or MAIN), is reported to be incapable of managing the assets effectively. This is due to several reasons: namely ineffective management organization, lack of expertise and financial support and incomprehensive law and enactment.”
Singapore, in comparison, offers an example of how a Waqf industry can be a valuable addition to the financial industry if well-managed. The Islamic Religious Council of Singapore (MUIS) operates a subsidiary company known as Wakaf Real Estate of Singapore (WAREES Investment) which runs Waqf properties and ensures they generate maximum revenue. According to a recent report at the 2012 International Conference on Economics Marketing and Management entitled ‘Preliminary Findings on Waqf Management Practices Among Selected Muslim Countries’, the value of Waqf property in Singapore has increased tenfold since the inception of WAREES Investment, making Singapore — a country with a minority Muslim population — a world leader in Waqf management.
Today the country reportedly has around 200 Waqf properties with a current value of approximately SG$250 million (US$203.4 million), generating yearly rental income of about SG$6-7 million (US$4.8-5.6 million). In 2011 MUIS disbursed SG$3.08 million (US$2.5 million) in Waqf grants, with SG$1.9 million (US$1.53 million) going towards funding mosques.
Lopsided weighting = low yields
At the present time however — perhaps unsurprisingly given the Islamic investor preference for property — the sector suffers from a highly lopsided asset weighting, with an estimated 70-80% of total Waqf assets in the form of relatively illiquid long-term real estate or real estate-linked products; and since the 2008 property crash these have been generating inconsistent returns, particularly in the GCC region.
According to Ashar: “These are prime properties, with huge scope for enhancing value through professional investment management of the portfolio. While Awqaf institutions have been successful in mobilizing donors’ money and disbursing it for the defined causes, they typically don’t possess asset management capabilities.” For example, although in Egypt Waqf endowments are reportedly valued at around US$82 billion, Ahmed al-Najjar of the Freedom and Justice Party in a recent interview claimed that these assets yield only around 0.3% per year, or US$247.3 million.
And where funds are not placed in property or related products, they are usually held in low-yielding Shariah compliant money market instruments in regional financial institutions, resulting in large quantities of cash generating very low returns. In 2010 Ashar suggested that: “Between Awqaf organizations and other entities, the cash Waqf alone is estimated at US$35 billion.”
Opportunities in asset management
This suggests a valuable opportunity for Islamic asset managers. If handled correctly, the Islamic endowment sector could offer a significant stimulus to the Islamic finance market, with billions in funds stashed away in bank accounts and property that could instead be channeled into developing the currently tiny segment of the global market that is the Shariah compliant funds industry.
And it is not just the funds industry that could benefit. Like any portfolio, diversification is vital and this has traditionally been a weak point for Islamic investors. To create a stable, sustainable and consistent income stream from Waqf endowments, the assets must be treated like any other diversified modern investment portfolio — including not only real estate but equity, fixed income such as Sukuk, cash and alternative investments.
Sandwick, in an interview with Islamic Finance news, commented that: “The funny thing about Muslim culture is that everywhere people have adopted the most modern technologies in their daily lives, from cell phones to heart surgery to traffic control — yet still Awqaf are managed much like they were 500 years ago. This must change. Awqaf must adapt to modern management and administration.”
Diversification is key
When compared to the big conventional endowment funds, for example, Islamic Waqf endowments begin to look woefully one-sided. For example, the US$35.6 billion Bill & Melinda Gates Foundation, which between 2004-11 disbursed over US$26.2 billion in grants, in 2011 reportedly held 58% in equity, 36% in fixed income, 5% in alternative investments and 1% in cash, with a zero weighting in real estate.
In stark comparison, up to 80% of Waqf assets are held in property, with the majority of the remainder in cash. According to Ashar: “The opportunity cost in terms of foregone wealth is staggering. The cash Waqf sector would potentially generate an incremental US$ 2-3 billion annually, simply by aligning with professional investment managers. The need is most critical given the high fiduciary responsibility of the trustees to manage the wealth in the best possible manner.”
And this year we are finally starting to see the first signs of stirring interest. As the Islamic finance industry grows larger and products become more sophisticated and more widely available, so inevitably institutions will seek new sources of funding and investors will seek new asset classes. Although as yet the Waqf industry has seen little in terms of interest, all this could be about to change.
Nigel Denison, the head of asset management at UK-based Bank of London and The Middle East, this week confirmed to Islamic Finance news that the bank has committed to a research project with Safa Investment Services (launched by John Sandwick) and Wafi, a Saudi Arabian Waqf advisor, to explore the opportunities available. “The idea obviously is that there is another source of funds that ought to be deployed in the Islamic finance market, and that doesn’t seem to be happening at the moment,” said Denison. “We want to find out why not.”
Although the research project is not due to be completed for another three to six months, Denison noted that: “What we would like to find is that there is a lot of Islamic money that currently sits in bank accounts earning no return because it hasn’t found the correct products. We can then provide these products through our Islamic funds.”
Sandwick has high expectations of the industry, and is keen to gain the first mover advantage: “I don’t think many people outside of my team have done as much work to analyze Awqaf. We are about to get some very big asset management mandates from some big-name Awqaf to manage their assets according to Modern Portfolio Theory but in a Shariah compliant manner.”
And Denison is optimistic that this partnership could be successful. “There is a substantial amount of money that needs to be banked Islamically that doesn’t have an obvious home. We have the funds, while John Sandwick has people who can act as aggregators – who can raise money from various foundations but who are lacking in products in which to invest it.”
This could be the first partnership of its kind, and if successful may pave the way for a vast new asset class in Islamic finance. It has taken its time, but if this sleeping giant is ready to wake up it has the potential to turn the whole industry around. — LM