The awqaf ecosystem displays considerable variation across countries and regions. While awqaf is originally meant to be in the voluntary sector, the current situation shows diverse roles for stakeholders in the public, private and voluntary sectors. Notwithstanding this diversity, the fact remains that the sector must be regulated, though the regulatory principles should be flexible enough to be relevant for alternative structures. Further, regulators should have a good understanding of the unique risk factors faced by awqaf and waqf-based organizations.
Some experts cite credit risk as a major risk factor for a waqf, similar to other Islamic financial institutions. This is, perhaps, an example of faulty analysis. Credit risk for a financial institution arises in the face of recurring loan transactions. It should be fairly obvious that a waqf has many distinct features making it different from lending-type financial institutions. Therefore, unless the waqf under focus is engaged in lending operations, credit risk may not significantly contribute to overall risk for the waqf-institution. Historically speaking, credit risk was a key risk factor in case of the Ottoman waqf-based financial institutions (it is another matter, these FIs were engaged in riba-based lending). Notwithstanding a lot of hype in recent times, we are yet to witness the birth of a Waqf-Bank.
Market risk/ Rate-of-return risk:
Investment function in case of waqf is compulsory. All awqaf assets must be invested. They must be invested in a prudent manner. Nevertheless, the awqaf portfolios are vulnerable to adverse market movements or volatility in the rates of returns. There is a divergence of views among fuqaha on the degree of market risk or business risk that a waqf portfolio should be exposed to. For instance, the Indonesia waqf law in present form requires investment of cash waqf in risk-free fixed-term deposits with Islamic FIs only, while many NGOs would prefer to build a microfinance portfolio with cash waqf by investing in start-up equity of first generation young and micro-entrepreneurs. As a mitigation strategy, determination of an optimal investment policy and its disclosure is important. Risk arising out of unexpected movements in markets or rate-of-returns may be mitigated by requiring creation of investment reserve fund from out of periodic returns or provisioning against investment diminution.
Awqaf face reputation risk, which becomes significant when they repeatedly seek to raise additional waqf resources and create new awqaf. A waqf like any other charity-based organization must enjoy high credibility in the market to be able to raise resources in a sustained manner. This risk is relevant even when a waqf plans its expansion through merger of existing waqf assets.
This risk contributes to reputation risk, though it may be less severe in case of waqf-funded operations than zakat-funded ones, given the inviolable position of Shariah regarding the nature of beneficiaries with the latter. Zakat laws are understandably, more demanding than waqf laws. And though there is great sanctity attached to the wishes of the endower or waqif as articulated in the waqf deed, a legal document, waqf laws often lack “teeth” needed to enforce the legal provisions. Violations, abuse of waqf assets, misappropriations are commonplace. Fortunately, however, we are moving towards reforms in waqf laws that would demand compliance in terms of key Shariah requirements, e.g. respecting the waqif’s intentions, inalienability and irrevocability related features of waqf etc. This will lead to growing importance of Shariah-legal risk that will call for measures, such as, Shariah audit and governance frameworks to be put in place as a mitigation strategy. What may render this risk difficult to manage is the observed divergence of views among experts on certain key aspects of waqf. For example, temporary (but irreversible) awqaf are considered to fall outside the definition of awqaf for many jurists, but are finding increasing acceptance, given their huge potential in raising resources, since cash contributions for a temporary but fixed period (being in the nature of cash waqf) would now be zakat-exempt. The fiqhi position on this has been studied recently by ISRA and observed to be sound. Another example is that of Kuwaiti waqf law that permits even revocability of waqf. Similarly, this law has many progressive features that are less acceptable to fuqaha from other parts of the globe.
Related to Shariah-legal risk is the possibility of commingling of all forms of charity funds including zakat and waqf. Given the need to adhere to conform to the Quranic prescription regarding eight classes of eligible beneficiaries of zakat funds, some experts advocate in favor of disallowing zakat organizations completely from engaging in waqf mobilization and management. However, in most countries the secular law-created NGOs collect and manage all forms of charity funds including zakat and waqf. The risk related to commingling can be mitigated by ensuring the Shariah-mandated separation of zakat proceeds from other forms of charity flows through proper accounting and other means (e.g. creation of escrow accounts).
Risk of waqf-corpus depletion:
This is a unique risk with awqaf that contributes significantly to Shariah-noncompliance and reputation risk. Such risk may arise, when the management in the face of fixed commitments towards beneficiaries (or high costs of its operations) and inadequate returns from its investment routinely borrows (as qard-al-hasan) from waqf-corpus. It is a major risk factor, justified by the fact that some known global players are widely known to engage in such behavior. Related both to market/ investment risk and operational risk, this factor stands on its own if the management fails to stick to a time-frame to pay back loans to the waqf-corpus. This risk may be mitigated by having clear policies with respect to use of waqf-corpus, perhaps completely negating the possibility or permitting as a temporary recourse only. There is merit in considering the creation of asset development/ replenishment reserve fund from out of awqaf proceeds. This will serve various useful purposes, e.g. better preservation of waqf assets, smoothening of waqf revenues as well as benefit flows to the beneficiaries.
Risk of improper benefit sharing:
The risk of inadequate or improper sharing of waqf benefits among beneficiaries needs to be put sharply under focus instead of being clubbed together with Shariah-noncompliance or reputation risk. The so-called “business face” of awqaf often dilutes its ultimate objective of passing on benefits to designated beneficiaries by focusing too much on the generation of returns (and consequent flows to providers of private capital used for development of waqf assets). The growing reliance on capital market, issue of awqaf-sukuk to develop assets, creation of private waqf investment entities tend to shift the focus away from the designated and intended benefits and beneficiaries. A cursory review of documents/ literature on emerging trends in the awqaf sector bears this out. This risk may be mitigated by having clear and measurable KPIs for the waqf management, not just in terms of returns generated, but more significantly, in terms of social goals achieved. A clear provision in the regulations articulating the need to pass on intended benefits is an imperative.
It is a Shariah-legal requirement that the waqf management (nadzir/ mutawalli) must take adequate care of the waqf assets, invest/utilize them properly and do everything as expected from a trustee-manager, e.g. refrain from sale, mortgage, willful negligence causing destruction or diminution of value. The possibility of such events may be captured as operational risk. Such risk may be mitigated by having an incentive structure that aligns the interests of nadzir/ mutawalli with that of the beneficiaries in carrying out management of the waqf assets. A proportional sharing of surplus with the permissible proportion being known to all parties, may be considered a good mechanism. For instance, the existing Indonesian law mentions a precise figure of ten percent as remuneration for the nadzir/ mutawalli. It may be noted that there is no Shariah-related sanctity about this number (unlike perhaps 12.5 percent figure for zakat management agency or amilin). The ten percent share for the manager may be perceived to be too high or too low depending upon the size of awqaf assets. A progressively falling sharing rate structure as determined by the waqf-regulator may be a better option.
A related risk factor affecting operational efficiency of awqaf is about volunteerism. Awqaf organizations are usually characterized by heavy dependence on volunteers. This unique aspect of waqf governance calls for its recognition and waqf regulatory principles should provide for efficient and effective institutionalization of voluntarism.
Another kind of operational risk factor is typical of off-shore awqaf. Some experts advocate denial of permissibility to such awqaf on the basis of apprehensions regarding shell-organizations. However, a more prudent strategy should be to study the basis of such apprehensions and address them explicitly through regulations. A case in point is the newly designed structure for Labuan off-shore international awqaf organization that merits serious consideration.
To sum up, risk factors associated with awqaf or waqf-based organizations are unique. A waqf is very different from a bank or financial institution that buys (borrows) and sells (lends) funds. Its unique risk factors must be understood and articulated accurately before we rush to bring in the much needed regulatory reforms that are of course, overdue.