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KERTAS KERJA
7
INNOVATIVE
MODES OF
FINANCING THE
DEVELOPMENT OF
WAQF PROPERTY
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INNOVATIVE MODES OF FINANCING
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THE DEVELOPMENT OF WAQF PROPERTY
Oleh:
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DR. MOHAMMAD TAHIR SABIT HAJI MOHAMMAD
Abstract
This paper is based on the presumption that the institutions of waqf (Majlis
Agama Islam) are avoiding dependence on funding from Government and statutory
bodies, by seeking development financing from private sector. Also it is thought
that the waqf institutions are not exposing their assets to liabilities arising from
a particular development project and therefore the development financing is a
project based funding. Additionally, the paper presupposes the grant of hikr (long
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lease) by the waqf institutions to their development arm i.e. Waqf Holdings
(corporations authorized by law to do business on behalf of the waqf institutions),
which in time may incorporate its own subsidiary and sublease a particular parcel
of land to the newly formed corporation.
INTRODUCTION
The intended development may be either for the purposes of revivification of
waqf property, or advanced in the sense of investment. Where it is a matter of
need as in the case of revivification, the institution of waqf possibly has no
capital and therefore may seek 100 per cent financing while in the case of
investment when the institution acts as a financier it may need financing partners
in return for a small share in the completed project. The application of Shariah
compliant Financing Instruments is easy in the latter, but a challenge in the
former. To deal somehow with this challenge, this paper discusses the new
financial schemes, in contrast to the classics, as proposed by modern jurists.
The paper also looks at the practicality of such instruments where the nazir (i.e.
any one in charge of development for the benefit of waqf) of waqf has zero funds.
The paper also has new proposal to complement the existing.
This paper is not about the financing itself but a fiqhi framework that can avoid
legal constrains on waqf properties to use them as collateral and show that
financing such financing remain attractive to financers and private investors,
while at the same be beneficial to the preservation and better utilization of waqf
property. The reader therefore will find financial modes and instruments suitable
to Waqf Real Estate Development Investment bodies authorized under Malaysian
law as Waqf development corporations.
The writer also takes note of the restraints limiting development finance, which
may not be so if the institution of waqf intended to invest waqf funds. In such an
event, many restraints such as the sale of developed property, as being revenue
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of the waqf capital, would be easy. Several methods of financial schemes, that
are inapplicable to development, would be available to the investment. This study
however is not discussing instruments suitable to investment.
In the course of discussion, development finance is divided into three: first,
credit based finance, second joint venture or equity and income sharing including
institutional and corporate financing, and third self-financing_ finance raised by
waqf institution in ways permissible by all or some ulama and fuqaha in the four
schools of Islamic law.
CREDIT-BASED FINANCING
Debt-based financing refers to the funding obtained by waqf institution through
the Islamic modes of financing i.e. sale and purchase, sale by order and leasing
agreements. This is called debt-based financing because the sum owed to the
financing company would be a debt payable by the waqf institution in lump sum
or on installment.
The sale and lease contracts may stand-alone or be combined with each other
depending on the arrangement made by the parties concerned. For this reason
the following discussion will begin with the concept and legality of sale by
installment (murabahah and bay’ bi thaman al-ajil), forward sale (Istisna) and
lease called ijarah. This discussion will be followed by practical significance of
these transactions.
BUILD AND TRANSFER _ MURABAHAH / BBA (BAY’ BI THAMAN ALAJIL)
Murabahah is a mark up sale capable of being a spot sale or on installment.
Today, it is associated with a credit sale settled on installments, called bay’ bi
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thaman al-ajil (BBA). In Islamic financial transactions jurists requires that there
must be one who orders the financer to purchase (amir bi al-shara) and another
to execute the order (ma’mur). Upon procurement and delivery of the equipments
or objects ordered by the purchaser, the bank will sell the assets to the purchaser
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at a price, which ensures a reasonable rate of profit to the bank.
This type of financial instrument is accepted by the OIC council for fatwa, if the
sale takes place after the object comes within the control and possession of the
seller (mamur); the seller does not transfer risks to the purchaser before
possession of the object by the purchaser; and the purchaser has been given
the option to reject the object based on defect, and all other conditions for the
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validity of a contract under Islamic law.
In Malaysia, murabahah is incorporated in sale with deferred payments (al-Bay’
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bi Thaman al-Ajil (BBA). Both are the same in terms of effect and payment
though murabahah may also apply to spot sale. Since BBA is a sale at core, the
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practice of banks does not comply with the OIC fatwa; that is the bank does not
own the property first, transfer risk to the purchaser, and the purchaser of the
property does not have the option to reject the transaction if the object of the
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transaction is defective. Saiful Azhar explains that there is no difference between
the practice of a conventional and Islamic banks as the purchasers buys the
property first and then looks for finance. Even though there are three types of
contracts (i.e. Property Purchase Agreement, Property Sale Agreement and Deed
of Assignment) the transactions look more like a loan rather than a sale. This
presumption was confirmed by the case of Dato’ Haji Nik Mahmud bin Daud v
Bank Islam Malaysia Berhad [1996] 1 CLJ 737 where the presiding judge thought
that there was no intention of the parties (customer and bank) to effect the
transfer of the property, and that it was merely a device to facilitate the BBA
transaction. This decision is erroneous fundamentally; however it illustrates
questionable practice of the Malaysian Banks that makes us think that BBA as
practiced by some banks should be avoided in case of waqf properties.
A further element in the banking practice is the element of unsubstantiated
mark up. The banks sell the property plus mark up together with a premium that
reflects time value of the money. The mark up usually depends on the amount
involved and the length of time to be paid. This time value of the money raises
the question of riba and this doubt alone makes the transactions unsuitable for
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the development of waqf properties. These fees are charged in all transactions
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of mark up sale (murabaha), leasing (tajir), and the sale by order (istisna’). As
such one will view the finance provided by banks to waqf is doubtful and expensive
if the repayment period is longer. (See table 1) Mahmud Ahmad Mahdi has
proposed that the transaction of sale by installment may be used only if the land
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is dead and costs too little. This however does not mean that if the conditions
set by OIC fatwa are met and the charges are less and fair, the institution of waqf
cannot utilize this financial instrument in any other development project.
Kahf believes that this instrument is applicable to waqf. Murabahah would require
the waqf institution ‘to take the functions of an entrepreneur who manages the
investment process and buys necessary equipment and materials through a
murabahah contract’. Payment can be on delivery or deferred. ‘The management
of Waqf becomes a debtor to the banking institution for the cost of the material
purchased plus the financing markup which represents the price of the second
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sale contract in the Murabahah to the purchase orderer. The orderer of the
goods will pay the purchase price over an agreed period of time. Here the project
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is owned by the waqf completely.
Figure 1: Finance Arrangement under Murabahah (Build and transfer) Contract
▲
Developer delivers
building to Takaful
Waqf
Holdings
(e.g. Takaful)
Takaful sells building to WH
▲ ▲
Legal relationship under murabahah contract
- - - - - - - Other legal relationships
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- - - - - - - - - Majlis
--------▲
- - - - - - - - - Financer
--------▲
Developer
WH orders purchase of building on
its land
Majlis leases land to WH for 30 years
▲
Takaful orders development
of building on WH land
WH pays rental to Majlis, during lease
and transfers building and land to after 30
Kahf does not discuss the issue of borrowing by waqf. This is not however an
issue for this may be justified on the ground that such borrowings are in the
interest of waqf. Issues that need consideration include the capacity of waqf to
develop the land, the ownership of the site, and the possibility of security for the
sum borrowed. At the moment the majority of waqf institutions is perhaps not
capable of entrepreneurship and thus cannot manage development project in
many places. They have no resources to pay for operation and labor costs. An
alternative may be found if the development of the site is ordered by waqf, and
the financer either develops it or contracts it to another party. Once complete,
the financer can sell it to waqf based on murabahah. Once the project is sold to
waqf it is obvious that waqf would be the owner of the completed project, but the
problem is the Deed of Assignment or custody of title by the financer as allowed
by some modern jurists. The Fiqh may support it, as such is in the interest of the
waqf, and therefore the principles governing the sale of waqf land, and borrowing
apply. Legally this may be doubtful, for under current law waqf land is inalienable.
This may be avoided by devising a long lease to a newly formed single project
based corporation by Majlis, and thereby entering into a transaction with financer.
Here, the newly formed company will be a leaseholder for a specific period and
within that length of time the land can be subleased to another party. In case of
security, the financer will have limited right in the land depending on the length of
the lease. See figure 1.
Table 1: The Costs of Financing under Murabahah Based On Bank Islam Rates
Financer’s
Financer’s
purchase price selling price
in RM
4800000.00
Amount paid at the end of term @ 2.8 %
Monthly
first; 6% second year; and 8% for remaining installments
years
6182923.80
5 years
5837323
150414.55
6607601.40
7 years
6262001.40
97327.69
7282181.86
10 years
6936581.76
49587.55
8503657.80
15 years
8158057.80
67856.06
9839613.36
20 years
9494013.36
41998.21
11279658.72 25 years
10934058.72
38085.72
12811721.76 30 years
12466121.76
35844.41
Following the acceptance of murabahah instrument as carried out by the newly
formed Waqf Corporation or Waqf Holdings; it is necessary to see if this instrument
is suitable in terms of development costs. Presuming the project is completed
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by a contracted developer, at RM 4.8 million, and rented at RM 25040.00 per
15
month. The loan is 100% and the financer charges variable fees of its services,
and profit. It is obvious that the price of the building after 30 years of repayment
of loan will be three times of the costs of the building. In case the Waqf Corporation
chooses to pay in a shorter period, the monthly installments will be higher than
the income of the building. In either case the Waqf Corporation cannot pay the
installments in full, whether or not the corporation deducts its fees and charges.
(See Table 1) this therefore, necessitates the reduction in finance, which can be
at 60 to 80 per cent. While the Waqf Corporation may be able pay installments in
such a case, the question is whether it will be able to raise the remaining 20-40
per cent of the financing costs. This shows that a waqf corporation without cash
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in hand or some source of finance, this instrument of financing is costly. It can
however be used together with other forms of finance as will be discussed in due
course.
FORWARD SALE _ISTISNA’ / SALAM MODE
This financial instrument refers to a contract whereby a manufacturer agrees to
produce and deliver a certain agreed good in specified quantity on a given date
in the future. The waqf institution will be the purchaser of the project. The price
gets fixed in advance but need not be paid at the time of the agreement. The
price may be paid in installments in step with the progress of the work (a house,
a building, or a factory) or partly at the front end and the rest at the time of
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delivery. This is somehow similar to the contract f salam another form of forward
sale. Salam however applies to commodities, where the financer advances
finances as purchase price for agricultural commodities to be delivered in future.
This may apply to waqf land if the land is used for agricultural activity.
In 1984 the second conference on the development role of waqf held under
auspice of IDB recommended the sale by order (istisna’) as an ideal instrument
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of finance for waqf proper ty. It considered necessar y to imply this mode.
According to the OIC Islamic Fiqh Academy Resolution, Istisna’ is a Shari’ah
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compatible contract in which payment may be deferred by mutual agreement.
Istisna’ can be used for financing to purchase goods and also the purchase of
assets. Muslim jurists seem to have considered both in terms of waqf development
projects. Istisna’ is practiced by IDB which involves a contract with Construction
Company, whereby IDB undertakes to provide a specific equipment or construction
material according to certain specifications requested by the beneficiary, and to
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sell it to the beneficiary at a determined price to be paid over an agreed period.
This model is repeated in the IDB publications and used in the banking context.
Taqi Uthmani, al-Zarqa, Nazih Hamad and Kahf perhaps have a better solution.
Nazih Hamad proposed that the waqf institution could allow financer to construct
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a building on the waqf land. The bank then enters into another contract with a
contractor to provide the same to the order of the bank that will be delivered on
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the bank’s behalf to the Awqaf management. Taqi Uthmani contends that it is
not necessary that the financier himself construct the house [or the building]. He
can enter into a parallel contract of Istisna with a third party, or may hire the
services of a contractor (other than the client). In both cases, he can calculate
his cost and fix the price of Istisna with his client in a manner that may give him
a reasonable profit over his cost. The building will be the property of the financer.
The waqf institution will promise that the building will be bought by the institution
from the financer after its completion on a predetermined price. The amount will
be paid on monthly (or annual) installments. The installments should be less
than the expected rentals from the building. On the payment of the last installment
the ownership of the building will be transferred to the waqf institution. This is
what has been practiced in Sudan and Mauritania. It is possible that the title
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remains with the financer till the last installment. In the context of waqf land
development, Istisna’ mode of financing creates a debt on the Waqf management
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that should be settled from the returns of the expanded Waqf property and the
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financier will not have a right to interfere in the management of the same.
The istisna’ mode of finance has similar weaknesses as that of murabahah. It is
noted that the above model lacks a scheme according to which the bank can
finance the purchase of the goods and material required by waqf institution.
Based on this point, al-Mahdi points that istisna’ is more to the mode of execution
rather than financing. Al-Mahdi further questions the practicality of this solution
for this presupposes the waqf institution to be able to implement the project and
have enough cash flow to fund the development work. He reminds the reader
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that in many instances the waqf institution is cashless. This writer illustrated
the model based on similar presumptions as were applied to murabahah model.
LEASING AND HIRE PURCHASE MODE (IJARAH THUMMA BAY’)
Ijarah means leasing. Early jurists approved it, except Ibn Nujaim who thought
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that waqf land lease is allowed only if such is for agricultural purposes . Ibn
Nujaim rejected the lease of land near to city for construction of housing estate
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where the leaseholder can then rent the houses for a period of time. Sheikh
Muhammad Mukhtar al-Salami a former Tunisian mufti, disagree with Ibn Nujaim
on ground that his opinion is perhaps based on the custom of his time. Modern
circumstances are against the opinion of Ibn Nujaim for a land near city might be
more productive in term of development of buildings rather than agricultural
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produces.
The Maliki and Shafie schools allowed long leases even if they were for a period
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of 100 years. Other jurist in Hanafi and Hanbalis schools allow leases not
exceeding three years. The Hanafis, nevertheless, in addition to long leases
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such as hikr, ijaratain, mirsad and khulw, allow succeeding three year contract
extending up to 50 years or more. Contemporary jurists however limit the period
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up to thirty years.
The lease of waqf land is enforceable unless the rental is below market except
justified by necessity. To Hanafi jurists, rental below market with a difference
more than 20 per cent gives the waqf institution the liberty to terminate the
existing contract and lease the property to another willing party, provided the
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leaseholder does not agree to the desired revision of rent. The Malikis and
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Shafi’is do not recognize such option for the existing leaseholder as they consider
the contract a binding nullity.
The second conference on the development and investment of waqf properties,
concluded that the contract for leasing waqf property should include revisions in
terms of increase or decrease of the rentals, and the taxes to be payable by the
leaseholder alone, and that the leasehold should not use the premises for
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purposes against Shariah, law or against the interest of the society.
Leasing is a flexible type of financing compare to murabahah as the rate of rental
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can be adjusted according to the market movement and the client can enjoy full
financing of the cost of capital goods without any down payment and additionally
the qualification of the lessee to tax cuts.
Today, lease can be used in two ways: by waqf institution to finance the
development of the given land; or by financial institution to recover the credit
extended to waqf institutions. The latter is divided into build; lease and transfer
mode of development (hire purchase al-ijarah thuma al-tamlik), and also sale,
leaseback and transfer both are discussed below.
BUILD OCCUPY AND SALE (IJARAH + BBA)
This mode is based on the long lease of the land alone, Al-Zarqa and Nazih
Hamad has proposed that the waqf institution can lease its land to another
party, based on annual rate of rental for a longer period. The leaseholder under
the lease contract would be allowed to construct a building on the land which is
owned and used by the developer, provided the total amount of annual rental
should be sufficient to discharge purchase price of the building at the expiry of
lease. Thus, the contract will include two issues: the long lease and the promise
by the waqf institution to buy the building, by considering the annual rental to be
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the cost of the building payable to developers account. This model can be
applied only where the cost of construction is not high. Otherwise, rental of land
may not be sufficient enough to pay the price of the building for a very long
period of time. In addition, one would think that such an arrangement would be
detrimental to the interest of beneficiaries, as the developer occupies the building
for free. This is so because the price would be paid from the income of land and
not the building. Al-Zarqa considered this risky because the developer may not
intend to stay longer in the building. One would wonder why he should quit the
transactions. It is perhaps the illustration of the proposal made by al-Amin in
terms of mersad discussed below.
BUILD LEASE, AND TRANSFER (IJARAH THUMMA TAMLIK)
This is similar to hire-purchase transaction. According to Kahf ‘this mode of
financing is a special application of Ijarah in which the Waqf Nazer keeps full
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control over the management of the project.’ The modus operandi proposed by
Kahf is such as:
‘Nazer issues a permit, valid for a given number of years only, to the institutional
financier allowing it to erect a building on the Waqf land. Then the Nazer leases
the building for the same period during which it is owned by the financier, and
[the nazer] uses it for the benefit of the Waqf objective, being a hospital or a
school or an investment property such as rental offices or apartments.’ The
building after the expiry of the lease would end up in being owned by the waqf
either through sale, gift, or mere disposal by way of abandonment. Since the
permit lapses, the financier would have no accessibility to the Waqf property.’ At
8
the end of the permit period, the financier would have obtained its principal and
desired profit He allows the contract to be review able after some period of time
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‘Nazer runs the management and pays the
in order to adjust the rentals.
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periodical rent to the financier. (See table 1 Leasing) this model is practiced by
IDB which finances including others fix assets for a certain period of time during
which the borrower pays biannual rentals. At the end of the rental period, the
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ownership of the assets is transferred to the beneficiary.’
The Muslim jurists use the term ijarah thumma al-bay’ which is the same as the
conventional mode of Hire Purchase transaction. The Banking and Financial
Institution Act 1992 of Malaysia, however, does not allow a bank to directly
provide operational lease under one roof unless establish a leasing subsidiary
registered under Companies Act. It, nevertheless, to a cer tain extent, is
accommodated under the Islamic Banking Act 1983 whereby the bank can operate
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the real leasing business under one roof.
Ijarah thumma al-bay’ (hire-purchase) is perfectly within the context of the Hire
Purchase Act 1967. In a true sense of a lease the lessor should pay for insurance,
taxes, and maintenance. This side of Islamic hire purchase however is not covered
by the Hire-Purchase Act 1967. To accommodate this Islamic requirement there
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is need for amendment of the said Act or the enactment of new legislation.
BUILD SALE AND LEASEBACK (MERSAD)
The administrator or the judge allows the tenant to develop the land and the
incurred expenses shall be a loan on the waqf, payable by the waqf on installment.
The building or plantation shall be the property of the waqf but the developer
would have proprietary rights (e.g. lessee) which shall be transferable and
inheritable, provided the transfer to another party is done with the approval of
the court or the consent of the administrator of the waqf. The developer after the
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completion of the building would rent out and pay monthly market rental to waqf.
According the ancient model the waqf institution would not be able to evict the
developer. This according to modern circumstances is perhaps not attractive.
The abovementioned right of the developer needs to be limited in time, the shorter
period be based on proper study of the project, and market demands, while it
should not exceed 99 years.
Al-Amin has contended that this is done based on the contract of istisna‘, and
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Anas al-Zarqa has added deficient partnership. Mersad is, therefore, perhaps,
the catalyst for change on which much of the modern modes of finance are
based. An example of bare mersad may be the practice in Sudan where the
developer constructs a building, and then rents it out according to the market
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value.
As can be seen in Table 2, this mode of finance seems simple and attractive.
The financer can develop the land at lower cost and make a realistic profit when
it sells it to the waqf institution. Additionally, the developer can enjoy the low
rental for the economic life of the lease and be paid in full. Similarly the waqf
9
institution can get the land price by the end of the lease and have both land and
the building reverted to it. Would the waqf institution acquire management skills
the profits from the management will be an added advantage; otherwise, the
service can be contracted to third party or be given to the developer. Nevertheless,
it is to be noted that the transaction need another contract of sale by installments.
If one has to maintain the above model it is necessary that the financer waive its
service charges and mark up based on length of time.
INSTITUTIONAL FINANCING: JOINT VENTURES
The need for joint ventures arises where the land owner lack expertise and finance,
or a development company lack land, lack capability to raise development finance,
or where developers seek to reduce development debt and thus development
risk, and due to external pressure such as the lack of equity in property market,
or the demand of overseas investors.
Joint venture may be in the form of partnership or forming a limited liability
company. In both partnership and Limited Liability Company the investors have
co-ownership of project or equities. Joint venture may also be formed if the
partnership arrangement does not result into project ownership. It is a scheme
where the landowner works with the property developer; the former remains the
owner of the project on its completion and the latter works to manage the project
based on a percentage in the generated profits.
Looking at the existing capability of waqf institution, a possible way of joint venture
can be one where the waqf institution plays the role of a landowner and enters
into a venture with Development Company with or without financing entity. In
case where financer is not a partner, the funding for the development of the land
can be the sole responsibility of the developer. In this way waqf land may not be
the subject of charge and even if there is such a need, the charge can be effective
up to a period when the life span of the lease, granted by waqf institution to its
development subsidiary, expires.
Joint ventures are possible by way of forming Limited Liability Company, or
partnership with developers and financers and partnership arrangement for profit
division. Forming partnership by waqf institution is disadvantageous because of
the risk involved, unless the waqf institutions forms subsidiary limited company
first and thereby enters into partnership with other investors. This is a safe way
for waqf institutions. In the newly formed limited liability company the equity can
be on 51-49 basis or otherwise depending on the nature of joint venture in terms
of capital and expertise. The waqf institution is advised to lease a piece of land
on Hikr basis, discussed latter, to such a company. This will arrangement will
avoid the current legal restraint on transferability of waqf land even though this
is not a problem when the building is considered the property of the developer
and land under waqf ownership as devised by fuqaha of various jurists of four
schools of jurisprudence.
10
The manner in which the joint venture between the waqf institution and the
development company can proceed is either through mudarabah or musharakah
partnership.
MUDARABAH
Mudarabah is a kind of partnership where the investor (rab al-mal) and the fund
manager (amil) agree that the former provide capital and the latter manages it
(by doing trading), whereby the profit would be shared according to a predetermined
ratio. The Shafi’i jurists add the condition that the manager is not allowed to
work other than trading and that the manager should be free from interference
44
by the investor. Imam Hanbal however allowed mudarabah between the owner
45
of fishing net and a fisherman where the catch would be shared between them.
This would mean that one provides equipment and another labor.
46
Anas al-Zarqa has proposed the practical scenario of mudarabah as such that
the waqf institution can offer its land for development. The institution can let a
financer to construct a building on the said waqf land, and after completion, can
rent the building to a third party. The institution and the developer can then
share the rental. The institution of waqf can then divide its revenue from the
building into two: one to increase its share in the building and second to distribute
among its beneficiaries.
It is obvious that this is not a case for the classic mudarabah joint venture, for
funds and labor are supplied by the financer and the waqf institution has supplied
land only. Only if the funds come from waqf institution and a financial entity, then
the developer would have the task of development. Even this will not make the
case for a mudarabah, as it will involve services and not trading as conditioned
47
by Shafi’i jurists. Al-Zarqa has justified this opinion based on the view of Imam
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Ahmad ibn Hanbal, but even that, strictly speaking, would not qualify the above
proposal to come within the ambit of mudarabah, for it involve cash, equipment
and labour coming from the manager. One of the conditions of mudarabah is that
the capital owner should not work in the management of the funds. Ibn Qudamah
has distinguished this type as he has considered it to be a mudarabah case
49
similar to muzara’ah. Monzer Kahf followed Ibn Qudamah and called this
transaction “output sharing mode” of financing waqf proper ty development.
Therefore under this mode the management of the project should be in the hand
of the developer exclusively. Therefore, the waqf will provide land, the same as in
muzra’ah, and the manager will provide ser vices, operational funds and
equipments if necessary. Waqf cannot be the manager of the project or its
50
maintenance.
Al-Zarqa’s proposal is almost identical to that of al-Sarakhsi. He considered this
as a case of a bad ijarah amal (ijarah fasidah) where the costs of development
are not known. It will also be an example of bad mudarabah (mudarabah fasidah)
for the same reason. Consequent to this, the waqf institution will be the owner of
the land and the building while the financer will be entitled to a service fee for
11
51
constructing the building. Nevertheless, one will presume that if the cost of the
building are determined and the ratio of dividend are fixed according to the costs
incurred, the objection of Hanafies may not be applicable to the case and hence
the proposal by al-Zarqa will be acceptable according to the views of Hanafi and
Hanbali jurists.
Supposing we accept the majority view of Hanbalis, and the costs of development
re predetermined as pointed by Hanafis, then al-Zarqa’s proposal would be a
typical example of a single asset joint venture between a financer and landowner
in the property market. The return of the rental can be divided among the waqf
and development company. Still two observations are made by some jurists:
first, is this practical? Mahmud Ahmad al-Mahdi would have answered this in the
affirmative, only if applied to commercial projects in big cities as only then the
52
waqf institution can have sufficient revenue from the development , whereby it
can pay the costs of development. The second observation is made about the
legal ownership of the land. Al-Zarqa has raised the question and has answered
53
by saying that the developer would have ownership of the building alone. This is
not normally conceivable, for in case of project failure the developer would like
very much to sell the land in order to compensate his losses. Where the land is
not owned by the developer the project may be considered risky and it is probable
that the developers would not be interested in the project. All these indicate that
al-Zarqa proposal is not attractive unless modified. Alternatively, one can propose
that the land should be transferred to waqf trust entity, and the said legal body
shall enter into a joint venture with the financer, after ensuring the constructed
building would be rented by another party with whom a lease agreement is signed
before a joint venture agreement is reached.
According to Kahf the mode of Mudharabah can be used when the Nazer assumes
the role of entrepreneur. He can receive liquid funds from the financing institution
to construct a building on the Waqf property. The management will exclusively be
in the hands of the Nazer and the rate of profit sharing will be set in a way that
compensates the Waqf for the effort of its management as well as the use of its
54
land. The waqf institution does not count the land part of the capital but it is
55
considered part of expenses so that the share of waqf can be extended. (Table
2)
This proposal is in a sense better than the previous for work would be totally
done by the waqf and the capital owner would financer alone. Nevertheless, it
also the same as the previous proposal because it is a bad form of mudarabah
according to Shafiis for the mudarabah is used in trading and not services. The
Hanafis objection may be raised but supposing that the finance is exactly for the
purchase of raw material and building costs, the said objection may not apply.
Even so, ideally, this proposal will apply when the institution of waqf have capability
of the development in the terms of skills. Otherwise, the project can be contracted
to another party. This proposal is also silent on the ownership of the building.
Nevertheless, one may presume that the building should be owned by the financer
as security for its capital.
The major factor that we have to take notice here is that the land has rental
12
revenue after completion of the building; therefore the mudarabah model may
not be very attractive compare to model based on musharakah arrangements.
PARTNERSHIP (MUSHARAKAH)
Musharakah is of two types: contractual and co-ownership. Both can be the
basis for a joint venture, and both are discussed respectively.
Contractual Partnership (Shirkah al-‘uqud) refers to a contractual relationship
between two or more persons who have willingly entered into an agreement for
joint investment and sharing of profits and risks. Contemporary writers such as
Kahf, al-Zarqa, Hasan al-Amin and Nazih Hamad have proposed that a subclass
of this type of partnership can be applied to waqf property development which is
discussed below.
Initially the first working committee formed by IDB proposed musharakah for the
development of waqf properties; that the institution of waqf and bank should join
where both should provide finance for the development of waqf property. They
should divide the profits according to the funds they have contributed. Latter the
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waqf institution should try to purchase the property from the bank.
Several explanations for practical models were proposed by jurists:
a.
Some thought that the contribution of waqf comes from the price of
land, and of the bank from providing funds for the cost of the project.
The revenue from the project should be divided into two: one, to be
used for paying the bank for the funds it provided, and second should
be divided among the bank and the waqf institution as profit.
Would this be acceptable to the bank? The question remains to be
unanswered. The ownership of land in this model is apparently vested
in the partnership.
b.
The second view was that the joint venture should not be limited to
contribution of waqf institution by providing only the land rather; it should
contribute to the cost of the construction too. According to this view the
revenue should be divided into two: a share should be determined to
pay for the rental of waqf land and the balance of the revenue be divided
between the waqf institution and the bank.
Here the joint venture will not own the land. This rather looks like a
hybrid partnership based on co-ownership (shirka al-milk) and contractual
partnership (shirka al-aqd) as proposed by Kahf.
Subsequent conferences affirmed the views of early jurists and considered
musharakah as one of the acceptable instrument of development finance for
waqf lands. IDB has implemented this instrument in several development projects.
Some of them are:
a.
Of a residential settlement in one member countries where the bank
13
had contributed US$3.3 million and the institution of waqf US$6.2
million. The profits were shared according to their share in funding the
project.
b.
Of undertaking a mixed commercial and residential development on
mosque land. Development costs were estimated at 53 S Riyal. The
revenue to be spent on the expenses of mosque, mosque amils, and a
religious school and its employees. The bank contributed around 53
million while waqf contributed around 6 million of Saudi Riyal. The
Ministry of awqaf was the trustee to supervise the project and after
completion to manage the project. Separate banking accounts were
opened for the project where all the revenue would be banked in. The
accounts were to be audited by experts annually.
c.
The last project of joint venture is one where the bank and waqf had
undertaken to develop a commercial building inside the capital costing
US$ 5.86 million. It was proposed that dividend distributed among the
partners would continue for a period of 13 years after which the
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ownership would revert to the waqf institution.
The above models of musharakah for joint venture may be explained by the one
proposed by Anas al-Zarqa. He thought that the waqf institution could offer its
land to a developer to construct a building. The price of land and the building
should be determined at the time of contract. The jointly contributed capital
must be the price of land and the price of the building. Through the said contract
the developer should undertake to construct the building on the subject land.
Both the developer and the waqf institution would be the joint owners of the land
and the building. The agreement should also stipulate that the building would be
rented to a third party for a predetermined rental. Such a rental should be shared
between the partners based on the same agreement. (Table mush 1)
Al-Amin and Kahf have considered the issue of land ownership under musharakah
a problem in the implementation of partnership (musharakah) for waqf land cannot
58
be transferred to another party under classic fiqh. Al-Zarqa is mindful of
compliance with Shariah. He admits that through the agreement the developer
becomes a co-owner of the waqf land, which is not permitted by jurists. But he
justifies this by the application of istibdal. He thinks that share in waqf land is
substituted by the share in the building and since both are immovable properties
59
the substitution is justified. But this justification may not convince some jurists
who allow istibdal only if needed or necessary; even if it is permitted where it is
in the interest of the waqf, it is obvious that building is dependent on land and
therefore inferior. In bad time it may expose the waqf to sell the whole building.
Therefore it is proposed that the waqf institution can use long lease first, and
the owner of a long lease then can enter into joint venture with development
financers. In such a scenario the waqf land will not be exposed to risk and yet the
long leaseholder (waqf trust company) can conduct business without too many
restrictions.
Another shortcoming of musharakah scheme is pointed by al-Mahdi. He thought
that the contribution of waqf to the joint ventures presupposes its ability to
14
participate in the venture. Considering the weak financial capability of waqf
institutions around world, he pointed out, the share of the waqf institution in the
joint venture would be minimal, even if we include the rental payable to waqf for
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its land, for many land do not have high rental return due to their location.
Based on this the waqf institution may not be able to repurchase the share of
the bank in the project according to a pre-agreed period of time. It is possible
that the repayment period becomes longer. This is an element of risk in the
project and for this reason the financing institution may not be willing to fund the
project as proposed by the jurists.
In alternative to the proposal by al-Zarqa, Nazih Hamad has proposed that waqf
may allow a developer to construct a building on waqf land. The building would
belong to the developer and the land would be the property of waqf. The building
can be rented out once completed. The revenue from leasing would be distributed
among waqf and the developer according to the value of the land and the building.
He justifies this based on the fatwa of some Hanafi scholars concerning kadak
and kerdar, both a type of proprietary rights that would allow the developer of
waqf land to occupy it for unlimited time as long he is not paid for his expenses
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in return for a fair annual rental.
Similar proposal is made by Kahf. Kahf justified it on the basis of co-ownership
(shirkah al-milk). The building can be built on waqf land by a developer at his own
costs, or funds being given to nazir to construct the building. In each case the
developer would be the agent for the other party, and the building should belong
to the financer. The income from the development should be divided into three:
for the value contributed to the project i.e. land and cash, and the management
fees (fee for management are based on principles of ijarah or mudarabah).
According to this principle the maintenance fees would be born by the financer,
as land is not exposed to depreciation. (Table mush 3)
Al-Mahdi’s critique will also apply to Nazih and Kahf’s proposal. Similarly the
analogy of kerdar and kadak is not in the interest of waqf for under that concept
the nazir will not be able to evict the kadak holder as long he pays the fair rent.
Now, this is the problem, for modern methods of property management would
consider the kadak arrangement detrimental to the interest of waqf. As for the
Kahf proposal it must be noted that the transfer of maintenance costs to the
financer would cause extensive bias in favor of the waqf institutions.
Reflecting on the abovementioned proposals for musharakah and the issue of
the ownership, it is difficult to conceive them judicially for even though one treats
land and building separate interests, strictly speaking once there is a contract
about the division of the income this will automatically bring the capital (i.e. cash
and land) together with the intention of the parties to share revenues under one
roof of the agreement. This is not what is referred to, as shirkah al-aqd as under
that context there is no agreement at all. In term of economic and legal significance
the proposed models are not applicable in Malaysia to the non-transferability of
waqf properties under current laws. One can, therefore, submit that Hikr or long
lease, comparatively, is the best basis for making the joint ventures Shariah
compatible.
15
A problem common to musharakah transactions is the equity ownership. The
property will remain under the ownership of the partner until taken or transferred.
In the above model, the waqf and the financer will enjoy the income form the joint
venture according to the terms of the contract. In case the waqf institution intends
to purchase the building, the rental will not be sufficient to pay for the value of
the building within a short period of time. For this alternative methods should
thought of so that the waqf institution can comfortably purchase the building.
This may be possible through corporate or self-financing. Both are discussed
below.-
CORPORATE FINANCING: SECURITIZATION OF PROJECT (SUKUK AND
SANADAT)
Corporate financing here refers to equity participation and equity securitization
or the method of finance where a development project is financed by waqf
institution through private investment funds. Equity securitization refers to a
tradable security the return of which is parallel to the direct ownership and or
right to the income from rental and capital appreciation. In the light of waqf
property financing, it means a project-based financing and thus the securitization
of the project only. Securitization of a project is permissible when the waqf
institution is ready to be in charge of the project management. The institution
solicits funds from the public together with an agency agreement so that it can
manage the project on their behalf. Few instruments are proposed by contemporary
jurists the significant of which are mentioned below.
PUBLIC ISSUE: EQUITY PARTICIPATION
The waqf institution through its representative, e.g. single project waqf holding
corporation, must issue a prospectus that assigns the subsidiary as a project
manager. The assets assigned to the waqf holding corporation and the project
can be unitized, and each unit would be given a nominal value say RM 1 per unit,
representing, not a debt, but a share in the physical assets of the project. The
title in the prescribed unit would be transferred to the unit-holder upon subscription.
The issue of the units will be then listed on the Stocks Exchange, where the units
would be a tradable security.
The capital raised through public issue will be spent on the project. The
shareholders will get dividends once the project generates profits. The dividends
will be assigned only if there is real profit after deducting costs, overheads and
operational expenses. For instance when the waqf institution intends to build a
hospital on waqf land, and then rent it to the Ministry of Health, the unit holder
will be entitled to a percentage of the income form the rentals.
The waqf holding corporation will be the manager of the project. His task will be
to manage the completion of the project and spend the newly raised funds from
public issue on its expenses. Once the project is completed and starts to generate
16
income, the said revenue will be spent on the costs, management, and
maintenance fees, and lastly the balance are distributed to the shareholder. In
other words the income of the project will be used for three things: (1) payment
for the rental of land to waqf institution, (2) management fees to the waqf Holdings
Corporation, and (3) actual costs for maintenance. The balance, if any, will be
then distributed among shareholders.
Following the issue, and listing, the shares can be sold and purchased in the
open market by the interested public in the investment community. At a time,
when the waqf institution intends to increase its equity shares in the project, it
can purchase it in the open market. Other time it can amortize the nominal value
of the unite reflecting the realistic value of the shares. The institution can also
classify some shares as waqf shares that either are so from the very beginning
or at a later stage. Once the shares are classified, as the nature of waqf would
be considered a usufruct waqf tied to the real state.
The ideal method for implementing this mode of finance will be to have the waqf
institution let waqf land be developed. Say it rents the land to its development
arm, the Waqf Holdings Corporation (a trust company exempt from taxes), and
the latter contracted the development to a construction company for a price of
RM 4.8 million. This amount can be partially financed, says at 60 per cent, say
RM 2.88 million. To finance the remaining 40 percent the waqf institution can
value the building and then use the building as equity for securitization. That is to
take the RM 4.5 Million and add RM 500000 as land price, the cost of the
building will equal to RM 5.3 million. The market price of the completed building
should be valued at RM 6.89 million (at cost +30 mark up). A 40 % of the value
of the completed building can be financed through public issue of shares, at a
nominal price of RM 1, equal to the 40 % of the value of the building. The issued
capital then will stand at 6.89 million. The forty percent of the value of the
building will be RM 2.756 million. By this the waqf institution would be able to
have financed its development project completely.
Public issue can be implemented in two Shariah compliant modes of transactions.
First mudarabah, and second musharakah. Each of them is briefly discussed
below.
MUDARABAH EQUITY
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Kahf proposed that the Shariah compliance of mudarabah shares might be
achieved if the mudarabah similar to muzara’ah mode of finance is applied. This
was discussed early where it was proposed by this writer that if the uncertainty
concerning the subject matter of the contract is removed, this mode would be
agreeable to Hanafi and Hanbali schools of law.
Following this model, Kahf proposed the following procedures:
1.
A permit from the Waqf Nazer of shareholders to construct specific
construction on the Waqf land.
17
2.
An appeal from the Waqf Nazer as an entrepreneur/Mudharib to the public
to buy output shares at a given price and conditions as follows:
a.
The existence of a permit from the Waqf to the shareholders to erect
the specific construction with all necessary conditions, specifications,
etc.
b.
An agency contract given to the Waqf management to utilize resources
thus mobilized from the sale of output shares to establish the said
project.
c.
Appointing the Waqf as a Mudharib to hold the fixed asset of the project
after completion for management and investment.
d.
An agreement on the ratio of distribution of gross output of the project
after completion of construction and beginning of return giving period,
between the owners of the construction, as Rab al Mal, and the Waqf
as Mudharib, according to an agreed upon ratio. This distribution does
not specify any income to the land since the return on the Waqf land
should be implicitly included in the share of the Mudharib.
1.
The Nazer takes charge of the construction by virtue of the power of attorney
on behalf of the owners of output shares.
2.
After completion of construction, the Nazer receives it and starts investing
and managing it as a Mudharib.
3.
The Nazer actually distributes gross returns according to the agreement.
The characteristic of mudarabah shares is that unlike musharakah the dividends
are calculated based on the gross income of the project and not the net value of
the assets. The basis for such distribution would be the price of land, and the
management costs and fees and the liquid capital provided by the shareholders.
Management costs will be deducted from the waqf share, but the costs of
maintenance and insurance will be cut from the share of the shareholders.
MUSHARAKAH EQUITY
The musharaka equity has the same procedures as that of mudarabah in issuing
stocks to the members of the general public. The feature basic to musharakah,
which distinguishes it from mudarabah, is that of distribution of the dividends
according to the net value of the profit. This is because here the shareholders
have rights to the title and also to the income the assets. The shareholder will
not be the entitled to the profits but also to the capital appreciation. For this the
management shall ascertain the market value of the assets and amortize the
value of the shares. The distinction between this and mudarabah shares is that
in the latter, the maintenance fees were not deducted from the revenue before
distribution. In musharakah however the all costs including management, land
use, and maintenance are deducted first and the balance is then distributed
according to the share in the equity.
18
ISLAMIC BONDS (SUKUK)
Sukuk is an Islamic bond issued by Islamic banks and financial institutions.
Sukuk has similar characteristics to a conventional bond, the difference being
that it is asset-backed and represents proportionate beneficial ownership in the
underlying asset. The return on the sukuk derives from the yield generated by the
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client’s lease of the asset. In other words the bods are representing the
ownership of usufruct (manfa’ah) and therefore compliant with the nature of
waqf law. The same as equities, the bonds or sukuk cannot represent debt for
purposes of tradable security in a secondary market. Though such a bond may
be issued, as in the case of Malaysian BBA (murabahah) sukuk and sometime
the istisna’, such bonds are rejected by the majority and therefore it will not be
economically prudent and yet not well suited to the nature of waqf development
activities from perspective of fiqhi principles.
Following the established principles of fiqh, three asset-backed bonds namely
muqaradah, ijarah, and hikr certificates are discussed below.
MUQRADAH OR MUDARABAH BONDS
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Muqaradah bonds are based on the idea of muqaradah / mudarabah contract
similar to the investment deposit contract in Islamic banks, but with the addition
of securitization of their value, by backing them by assets. In muqaradah bonds,
the nazir as mudarib (fund manager) accepts cash deposits against issuance of
certificates given to the financer (rab al-mal). Unlike the mudarabah shares,
bonds do not pass title to the assets from waqf to the financer but instead give
them the right to usufruct (benefit/manfa’ah) of the attached assets. Hence it
would be argued that a muqrada bondholder, based on muzrah principle, is not
entitled to capital appreciation.
Muqradah bond is a multipurpose facility that can be used by developers and
investors alike, but the form of the operation may differ. It can be used for a
simple transact or complex where the revenue does not come from a single
activity. This is permissible because in mudarabah the management of the fund
is free to decide what type project they have to invest in. sometimes the expected
receivable be in term of rentals, capital appreciation through sale and other
forms, and may be in form of istisna, musharakah, and lease. The investor would
not be concerned about the form but how much is the profit of all these
transactions and the amount he receives. This feature of mudarabah/muqradah
bond makes it similar with musharakah bond but the latter is a fully asset backed
bond where the title covers both capital appreciation and its generate revenue.
The general application of mudarabah makes it different from ijarah because
ijarah is a special purpose facility, discussed in due course, where the income
tied to the rentals of the asset alone. A mudarabah bond nevertheless may be
used for the same rentals too, which is not advisable in a single project based
development.
19
Under this mode of finance the waqf management utilizes the proceeds for the
development of the waqf land as agreed upon with the investors. The distribution
of profits should commence once the project is productive. Up to such a time,
distribution may not commence. But where the rentals are secured due to an
existing lease agreement with a third party, the payment of profits may commence
early on advance basis. The net return would be proportionate and periodical
until the end of the mudharabah agreement, which could be for short, medium
and long term. It must be noted that distribution of profit and repurchase of bond
may be guaranteed by a third party who is not signatory to the contract of muqarada
bonds.
On maturity of the bond, say after 5 years, the waqf management would be
required to return the principal cash to the bondholders and retrieve the bonds
they had. Muqaradah bonds may also come to an end by either transferring the
property into a waqf or buying it from the market by the waqf management.
IJARAH BONDS
The trend in the Islamic capital market has changed dramatically. Sukuk are now
often structured on a bundle of ijarah transactions especially where the ability to
65
trade on a secondary market is required. Ijarah sukuk can be sovereign,
institutional, and corporate. This can be used for waqf property developmental
finance as well.
Under this model a sukuk certificate will be issued by waqf’s incorporated company
(Waqf Holding Corporation) to investors. The proceeds will be used by the said
company t develop a rental generating real property or other cash generating
asset. The incorporated company will then lease the property or asset, either
party or to waqf institution, for a period corresponding to the duration of the
tenure of the Sukuk certificate with the property or the asset being held on trust
for the sukuk holders either by the issuing company or a separate trustee. The
rental payments due from the third party to the incorporated company will exactly
match the periodic payments under the sukuk holders. These payments may be
fixed or calculated with reference to the inter bank offered rate plus a margin
which represents the market rat for rental payments. The waqf institution will be
under obligation to repurchase the bonds from the bondholders after maturity of
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the lease.
The above model is a simplified facility that can be easily understood and
implemented in the current Malaysian Islamic financial market. A bet sophisticated
and complex mode proposed by Kahf called hikr shares, which is a cross between
equity and bond. But that is not discussed here for the sake of practical application.
New mode may be developed fur ther and until it is hoped the current
abovementioned mode of financing, institutional, corporate both through equity
and bonds are realized. These modes however sometime may not work profitably
alone unless combined with each other or a portion of costs is contributed by the
waqf institution to the development of the waqf land. Before we propose the
20
amalgamated model for waqf development financing, few possible modes of
self-finance are discussed in the next section.
SELF-FINANCE
By self-finance we mean the cash or land contributed to the costs of development
by the institution of waqf. There are several methods whereby the institution of
waqf can reduce the costs of financing. These are the use of land, its securitization,
and obtaining advanced rentals under the concept of hikr. In addition, the institution
can also resort to substitution of one land with value to be used for the
development of another resulting in amalgamation of different waqfs. The
institution can also use attract cash waqf, saham waqf, usufruct waqf and waqf
amal. All these will be discussed below.
LAND AS CAPITAL
Land is an asset and valuable and should never be used for free in the
development. It should be value in terms of costs and revenue in the account
books, otherwise waqf will loss a substantial portion of income due to this
miscalculation. The subject waqf land can used as partial financing contributing
to the cost of a project. The price of the same land can also be used in the
exercise of securitization thereby enabling waqf to come up with substantial
percentage of costs and henceforth owner of a larger share in equity and thus
entitled to a larger share in the dividends, in addition to service charges imposed
on the investors.
LUMP SUM RENTALS OBTAIN THROUGH LONG LEASE (HIKR)
The term Hikr means monopoly or exclusivity. Under this mode of lease, the
leaseholder has an exclusive right over the property for a long period that usually
goes beyond the normal natural life span of human beings or it may be permanent.
67
It is one of the financial rights that can be marketed, transferable and inheritable.
It is marketable as it can be sold, subleased, made gift inter-vivos or through
68
will, donated and then transmitted or inherited. Under this right, a building or
69
plantation developed on the land would be the property of the lessee.
This mode is allowed by Shafi’i and Hanbali jurists. This is also permitted by
Hanafi fuqaha in order to go around the prohibition of selling a Waqf. Instead of
selling the Waqf property the Nazer can sell a right for a long lease, for a large
lump sum, the equivalent of the value of the waqf property, paid in advance to be
followed by a nominal periodical rent. The purchaser of the right of long lease
can then develop the property using own resources and at own risks as long as
she/he pays the periodical rent to the Nazer. Hikr has been approved by
contemporary Arab jurists and Sharia advisers to financial institutions.
21
In the context of joint venture Hikr can be used a ground for further financial
arrangement as well as a vehicle of getting direct financing for the development
of another property. Mustafa al-Zarqa viewed it that it can finance waqf land
70
development or even investment. According to Kahf ‘must be used for the waqf
objectives, such as reconstructing a decayed mosque by selling an exclusivity
right on an agricultural land that was a waqf for spending on the mosque. In other
words the right in one waqf is sold for the benefit of another. Since the sale of
the exclusivity right is not considered a sale of the waqf itself, the management
is not required to put the price obtained in a similar property as in the case of
substitution.’ The nominal value would be considered the income of the leased
property while the lump sump acquired from the lease of the given property may
71
be mobilized, as liquid funds are needed for another
In terms of self-finance, hikr can be used in two ways: first let a piece of land in
other location on long lease in return for a lump sum. Use the said lump sum as
capital in a joint venture. Similarly, the waqf institution can demand a lump sum
payment as an advanced rental for the land under development and as the amount
as capital for the same project. As how this can done is illustrated in the proposed
vehicle for financing the development of waqf land later.
Perpetual grant of rights in waqf property is contrary to the interest of waqf. The
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limits on long lease of land (i.e. 100 years) as recognized by Shafiis, almost
the same as the current life span of 99 years in government alienation of state
lands need to be applied. This could be perhaps further modified by the economic
life span of a development project i.e. 30 years where the investor can get his
capital plus reasonable profits. To be clear, the time for lease of waqf land shall
depend on the economic life span of the development project. Where the project
need 30 years of maturity the lease shall follow and where the maturity of the
project needs longer time, the lease shall follow too. Therefore, a long lease or
Hikr shall be the option of the waqf institution in return for finance only if they
study the project carefully. Based on such study they can award long leases to
developers.
SUBSTITUTION (IBDAL AND ISTIBDAL) OF WAQF
The term substitution stands for two Arabic words, ibdal and istibdal. In past,
only covenant writers of waqf have used the word ibadal to indicate the substitution
of a piece of land with another piece, and used istibdal to show substitution of
land with its value. The majority of jurists do not allow this type of disposals if the
original object is substituted by its value. The Hanafis, however, are exception,
who allow substitution by value, for both the object and its value are properties
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and hence permissible.
Substitution, therefore, may be divided into two primary forms: substitution of
one waqf with a similar (ibdal), and the substitution of land with its cash value
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(istibdal). In modern transactions the combination of both is practiced too. This
may be referred to as mixed or partial substitution.
22
SUBSTITUTION OF WAQF LAND BY A SIMILAR (IBDAL)
This mode of substitution may be defined as the exchange of a Waqf property for
another that provides at least similar income or service without any change in
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the provisions laid down by the founder.’ This may be true where the whole
piece of land, a tool, or another object is substituted with another.
Substitution of (munaqalah / mu’awadah) of one waqf, with another according to
Ibn Rushd (a maliki jurist) is permitted if it is ruined and there is no means to
reconstruct; provided the exchange is with permission of court and be recorded
76
and witness in the court. The Shafi‘ies do not allow a mosque even if it is
ruined and it’s rebuilding is impossible, but has given different opinions in a land
that does not produce or generate income. In the latter case some jurists of the
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school allowed the change and exchange of the given piece of land. The condition
of ibdal according to Shafi’i is that it should not contradict the conditions of the
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settler .
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According to Nazih Hamad, in principle, the majority of jurists allow both ibdal
and istibdal of one waqf with another, if they are conducted for need and benefit
of waqf. Jurists however differ in flexibility and rigidity of their application, among
whom the Hanafis are liberal as they allow substitution in both forms if that is
needed, or in the interest of waqf or its beneficiaries, whether conducted by the
waqif, nazir, or government, irrespective of whether the property is productive,
ruined, immovable or chattel, as long the transaction is not below market price
(does not involve ghabn fahish_ less than 50%), for in such a case the transaction
result in disposal of waqf property without value which is not permissible under
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law. This type of substitution may not too relevant to financing of waqf land.
SUBSTITUTION BY CASH VALUE (ISTIBDAL)
Kahf defined istibdal as the sale of all or part of a waqf land and to purchase
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with its proceeds another piece of land dedicated as waqf for similar purposes.
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This is what kahf called substitution . It is reported that Imam Malik did not
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allow the sale of waqf estate at all. Nevertheless it is also reported that Rabi’ah
from Malikies allowed the sale of waqf property, called mu’awadah, provided the
proceeds of the sale are used to purchase another piece of land and then declared
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as waqf, the same as the previous. Shafi’is, similarly, are very strict. Some
jurists of the school allowed the change and exchange of the given piece of
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land. According to some Shafi’is, however, a horse for jihad can be sold, and
according to Ramli from the same school, the mosque if impossible to rebuild,
can be broken, the items sold, and kept the proceeds if there is hope for its
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reconstruction, otherwise the proceeds can be spent on another mosque, ….
According to Hanbalis, if the benefits of waqf are not obtainable, such as where
a house is ruined, a land is turned barren, or a mosque, for some reason, is not
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used by people for prayers, and cannot be developed due to lack of finance,
the land can be sold provided the purchased land is considered waqf too in the
same category as the first one, or the money is used to improve another waqf.
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For example a piece of waqf land may be sold in order to improve the remaining
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part of it. . The sale of mosque is an extreme case, yet to these jurists, if
needed, can be sold. The Hanafi jurists have unanimously approved the process
of istibdal in the following circumstances:
1.
The donor makes provisions thereto.
2.
The donor does not make any provision that is he negates or is silent
about, but the property becomes stagnant, as it does not produce
anything, or its expenses and produces are equal. In the both cases
istibdal is valid.
3.
The donor provides for istabtal and the property is still productive, but
its exchange is more profitable in general. In this case, istibdal is not
valid according Ibn Nujaim and Ibn Abidin. Thus it is the discretion of
the donor to make such condition. If the founder is silent, then change
or exchange of the property is allowed only if it is necessary but not
when doing so is more beneficial.
4.
Istibdal shall be made by the state (court) in general philanthropic trusts;
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otherwise the power is vested in the administrator.
Ibn Nujaim and Ibn Abidin, however, prohibited the sale of waqf without substitution
by another for the reason that it is open to abuse and misappropriation by the
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nazir. Ali Jum’ah however thought that such a weakness is not fundamentally
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conceptual, but a defect attributed to the trustees. The defects can be rectified
by the fact that today waqf estates are managed by institutions in many countries.
This coupled with the requirement of court permission alone can prove effective
to prevent abuse of power and misappropriation of waqf properties by the individual
nazir. In addition it is proposed that all waqf account should be audited by an
independent body. This will further strengthen the safeguards necessary for
preserving the waqf property.
For purpose of finance, this mode may be used as proposed by Nazih Hamad. He
asserts that where different waqfs of similar or diverse objectives have small
estates in the city, the development and management of which is not within the
capability of waqf institution or its management is not economical, istibdal can
be used. That is all of the small estates could be sold, the proceeds of which can
be used to purchase another piece of land [perhaps in a strategic area] and
building be erected on the land. Similarly the proceeds can be used for purchase
of another estate [perhaps a building] with a higher capability of higher income.
The new property can be a substitute for the sold estates, and income of the
new property should be distributed according to the capital generated by the old
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estates. This proposal is practiced in Singapore.
MIXED OR PARTIAL SUBSTITUTION
Mixed substitution means the sale of a portion of a land and making the proceeds
or the purchase price a cash waqf used for financing the development of the
remaining portion of the same piece of waqf land.
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Kahf recognized partial substitution as a mode that essentially allows for providing
liquidity that is needed for the operational activities of a Waqf. It is ‘a means of
financing, especially, in case of urban lands whereby the price of a part of the
property may be sufficient to construct a building on the remaining land and
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therefore increase its revenues.
The result of the discussion is that substitution in either form may be utilized in
the following ways:
a.
selling of a part of the waqf property in order to develop the remaining
parts of the same property;
b.
selling a bundle of waqfs (i.e. properties) and buying new one in
exchange, to be used for the same purposes of the sold properties;
c.
selling one waqf and buying another having a common purpose;
d.
Selling a handful of properties belonging to various waqf s, and buying
a new property which has higher income, and the same revenue is
distributed on all sold waqfs according to their value, or dividing the
purchased property on original waqf s according to their value.
All the above is possible if one accepts the views of Hanafies, provided the
donor allow exchange and change of the waqf property or it is so due to necessity
which is also the view of Hanbalies, and an opinion in the Malikies and Shafi‘ies
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with an exception of mosque.
WAQF SHARES
Waqf shares or Saham wakaf is the best product so far suitable to the development
of waqf property. Though originated in Malaysia, the practice is accepted in some
Arab countries. The basic idea is that to accept cash as waqf from public and
convert it to a share in a fixed asset.
Nothing should be said about this except that compare to cash waqf, this method
ultimately tie waqf donation to fixed asset and henceforth is divide of liquidation.
In other words its usefulness is limited to the development or purchase of a new
property alone. A minor observation can be made that its practice and the
procedure for it may have slowed down its success. There are the requirements
of sighah and therefore going to the Majlis to execute such a waqf. Should there
be no such a requirements, it is presumed, more individuals could have contributed
to. There is need to promote this novel idea through various ways and with an
easy way of performance.
CASH AND USUFRUCT WAQFS
No matter how much one tries to minimise the costs of development by adopting
various strategies for obtaining development finance, the fact remains that
financing through market players is expensive in times and requires cut from
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revenue generating waqf. As the majority of waqf properties are fixed assets,
partial financing of development project may not be through hikr or istibdal or
even saham waqf. It is this reason another avenue of finance is necessary to be
considered. A cash waqf should be accepted in Malaysia, and therefore joining
the long list of countries who recognised cash waqfs.
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Recognition of cash waqf is not new. Imam Zufar has allowed cash without
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attaching any condition. The majority of Malikis allowed cash and foodstuff
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as waqf though some held to be makruh. The Hanbalis are deemed to have
not allowed cash but according to Ibn Taymiyah the various rulings on the invalidity
of cash waqf are based on the opinions of al-Khiraqi and those who followed him.
There is no opinion of Imam Ahmad on the point, and hence according to Ibn
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Taymiyah cash may be a valid subject of waqf. At present countries, which
validate cash, waqf are Egypt, Iraq, Syria, Iran, Turkey, India, Pakistan, Burma,
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and Singapore.
Furthermore, some Hanbali jurists especially Ibn Taymiyah allowed mosques to
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be sold and exchanged if that is beneficial to the community. Some Shafi’i
jurists allowed the dedication of dog for purposes of waqf. This according to al104
Subki is permissible because of its use and benefit (manfa’ah). Thus, according
to al-Subki, manfa’ah or benefit might be the object of waqf, and therefore as
long something can be used recurrently and a benefit can be received, that can
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be the subject matter of waqf. Accordingly, for something to be given as waqf
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it must be capable of recurring benefit, not necessarily perpetual.
This writer has proposed somewhere else that a new approach is needed to the
concept of waqf properties. Under the said proposal all revenue-generating
properties are valued and such a value is considered the capital of the waqf.
Even though the new approach still recognises the existence of fixed assets, the
proceeds of waqf, both revenue and purchase price in case of istibdal, are deemed
unnecessar y to be converted into fixed assets. This is proposed because
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contemporary waqf needs cash as much as it needs fixed assets.
Assuming
the ulama agree with this proposal, i.e. the recognition of cash and usufruct
waqf as well using cash proceeds from other waqfs, the waqf institution can
have liquid resources whereby it would be able, initially, to finance part of
development costs on their own. In a long term it is hoped that the institution of
waqf would not only be self-sufficient but also can establish its own investment
funds that can participate actively in the Malaysian Islamic capital market. On an
ambitious note, the institution of waqf can establish a waqf bank, attracting
investment deposits form public including corporate investors, and at the same
investing waqf capital in a more Islamic and socially responsible manner.
CONCLUSION
The fundamental point to be highlighted here is that all the above modes except
self-financing, need to be operated by a corporation distinct from the Majlis Agama.
The majlis would lease the land to the said corporation for period of 99 years.
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The corporation will owe the Majlis a market price of the land minus the ratio of
annual rentals. The corporation can also develop the land in either of the above
mentioned modes Under this arrangement the limited liability company would
be a single asset and single project company (holding a single piece of land).
This company will be in charge of the project. Where the banks and other financial
institution refuse to enter into a joint venture, the development company can
raise finance putting the leased asset as a security. If accepted by financer the
rights of the financer would be secured for the life span of the lease (i.e. 99
years). This is the same as the government alienation of leasehold titles and
there is no reason why the market value of the waqf land in this sense is not
equal to normal lands. For the life span of the development project the Majlis
would be a shareholder and hence entitled to a share in the revenues of the
project according to the invested amount. Since the corporation will be a
leaseholder it would be able sublease the property further and there would be no
legal restrictions on such a transaction.
The Majlis (waqf institution) can invest the lump sum credited to the corporation
on the development of the same land by being a partner in the project. With this
the disadvantages of Hikr that it does not benefit waqf substantially will be avoided.
At the same time, since the land is leased on the basis of Hikr, the ownership of
waqf land by other parties does not arise. Under law the building will follow the
land even though it is registered in some other name. In Fiqh, it is an accepted
rule that once land is leased building belongs to the leaseholder and the land to
its title-holder. Hence the waqf institution and others would be partners. Both
would share the equity as well as entitlement to the dividends.
Having regard to the current market trends, only partial financing may be obtained
from financial institutions_ at 60- 90 per cent. Some Islamic institutions do offer
100 per cent finance, but since Islamic banks unfortunately use conventional
benchmarking for their charges and fees, this may result in high charges especially
when the term is for a longer period of time. This would not be in the interest of
the beneficiaries of the waqf. A prudent practice will be to take short or medium
term finance of the lower percentage and tr y to get the balance through
securitization, something that is cheaper and easy to pay.
Partnership and joint ventures, it is observed, may result in a higher yield to the
investors in case the formula is strictly followed. It is thought that such transactions
should be taken only in combination with others, and that the management fees
should be at a ratio, which justifies the work and profit of the Waqf Corporation.
This, it is hoped, may prevent excessive outflow of funds. This is because shares
remain existing until sold and transferred. As long they are not transferred, they
will be entitled to dividends.
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