Beyond Islamic Banking: How the Waqf Can Play the Role in Creating an Islamic Moral Economy
“They (Islamic law of inheritance, the strict individualism of Islamic law, and waqf) turned into handicaps by perpetuating themselves during the long period when the West developed the institutions of the modern economy.” (Timur Kuran, 2004, p.72)
The Islamic economics paradigm aimed at the creation of the Islamic paradigm of economics with its distinct values, norm, rules and institutions with a politically oriented systemic understanding. (Mehmed Asutay, 2011, p.4)
Abstract
The question why the economies of Muslim nations have been declining compared to the developed Western world has been subject to several academic studies. Kuran (2004), for instance, states that the legal and institutional stagnations are the main causes of the “underdeveloped” Islam (represented by the Middle East). Kuran, then, points to the rigid and poor management of Waqf as the obstacles in the economic development. In line with Kuran, Ebrahim et al. (2014), regarded that the “weak-form property rights and deficiency of Islamic rulings (ijtihad) in the development of new financial instruments, institutions and markets” as the causes of the decline of Muslim world. Acknowledging the current Islamic Banking and Finances (IBFs) development as second best solution, Asutay (2011) emphasized that, ‘new institutions should be created as a new project for ethical Islamic finance beyond IBFs, as the latter remains loyal to legalistic dimensions of Islamic but not Islamic ethics ‘.
In the light of the above three premises, this paper is aimed to: (i) discuss the function of Waqf in Islamic civilization; and (ii) develop new financial institution to revitalize awqaf (plural of Waqf) as the Islamic charitable trust and one of the Muslim eldest social funding practice, under the framework of complementing the role of Islamic banking to achieve the aspiring Islamic Moral Economy.
In achieving the above objectives, both the Islamic legal and theoretical concept relating to Waqf as investment instrument within Islamic finance will be addressed. Furthermore, discussion of how using of Awqaf funds for lending can be better alternative of financing in the case of the development intermediation will be considered. A standard loan contract with social preference will be adopted to see how much the structured contract superior compare to its legalistic Islamic standard contract employed in Islamic Bank. This is expected to empower the emerging Muslim economies and discharge them from the underdeveloped status.
Waqf was the main vehicle for financing both commercial as well as public ventures, a role that has been replaced by banks and other financial institutions (Hodgson, 1974; Kuran, 2001).
The success of equity financing and venture capitals in the developed world (Wright et al., 2007), are needed to imitate in the effort to improve the Muslim world. The financial structure offered by equity financing and venture capital can be utilized in creating a more efficient Waqf. This is inline with Mehmed (2011) and Sen (1999) that “Creation of ethical Islamic finance and investment institutions in the form of Islamic social banking as part of the civil society and also creation of social banks should be considered as the next stage of financial development’.
Waqf management has been traditionally poor and far from utilizing modern financial instruments despite is enormous potential. Indonesia, for instance, has as much as five times of Singapore’s size as waqf land, but this was managed simply as unproductive land pieces. However, this very same Islamic legal institution has contributed to the development of charitable trust system in the western world (Gaudiosi, 1988). Oxford and other English academic Institutions with college system in UK, for instance, “in its early phases of development, Oxford may have owed much to the Islamic legal institution of waqf charitable trust” (Gaudiosi, 1988, p.1231).
Some Islamic scholars, however, tried to revitalize waqf’s role and management. Kuran (2001) intensively explained the origin, impact, and limitation of waqf system in the provision of the public goods. Ibrahim et al. (2013) initiated cash waqf for development source of fund. Some other references come up with other ideas but none has engaged it within the concept of private equity.
To connect the use of Waqf fund in the equity financing scheme, key questions to address are: How Islamic contracts can accommodate the corpus-reservation rigidity of Waqf asset into of private equity? How the Islamic law perceives it? Under which design does the contract will create efficiency, self-empowering and social value aimed by Islamic moral economy?
This paper will fill the observed literature gap by finding the suitable Islamic contract used in channelling the waqf fund under the Islamic private equity scheme. The debate of debt-based versus equity based and the possibility of hybrid will then be analyzed in the light of finding the efficient contracts under the nature of private equity. This in turn will fulfil the premise built by Hodgson (19740 that the efficient use of waqf in Islamic society will determine the Muslim world economic success.
This paper is proposed to model the concept of integrating the private equity and venture capital concept with Waqf. An experimental study using principal-agent contract which mimic the possible contract in Waqf will be employed to see the effect of the use of social fund in investment and the social value embedded in such contracts. This will cover: (i) the structure of the investment (that allows the corpus of Waqf will still be preserved), (ii) the downside risk control, policy and other constraints imposed by the Waqf giver, (iii) the transaction cost and liquidity of the return, (iv) the certainty, timing of the return, (v) contract and commitment of the Nazir, etc.
The research hence will overcome the gap between form oriented Islamic finance and Islamic moral economy outcomes by using Islamic finance in a social welfare institution of Islamic civilisation, namely waqf. This is expected to contribute to the emergence of Islamic moral outcomes in Islamic financial operation through waqf; as emancipation and empowerment of individuals through socially failed Islamic finance will be achieved within developmentalist project.