WAQF-LINKED-SUKUK VS. SUKUK-LINKED-WAQF: AN IN-DEPTH ASSESSMENT

Author: Mohamed Hamza Ghaouri

Waqf institution has played a crucial role throughout Muslim civilization. However, Waqf institutions are facing challenges especially in raising deploying Waqf funds effectively. Recently, there was a growing debate on merging Waqf with Sukuk to improve the management of Waqf assets and increasing the social benefit it implicates. Combining Waqf as a social instrument of Islamic finance and Sukuk as a capital market instrument of Islamic finance will attract the market to involve more in the development of the society. Accordingly, with its wide experience in the Islamic social finance in general and Waqf particular, Finterra has mobilised Waqf funds through different arrangements using blockchain technology to promote social well-being. Finterra is currently looking for even more partners to explore the integration of these powerful instruments to offer a larger variety of investment opportunities.

The integration of Waqf and Sukuk (Sukuk-Waqf) can be seen as the perfect sustainable financing instrument offered by Islam to help support public spending by the people and for the people (Oubdi and Raghibi 2018). There are two types of Sukuk-Waqf, Sukuk-linked-Waqf and Waqf-linked-Sukuk. The concept of Sukuk linked Waqf consists of financing a Waqf asset in order to increase its productivity. The underlying asset of Sukuk linked Waqf is a Waqf asset. The funds collected through Sukuk are used to build a project on the Waqf land. Therefore, the issuance of Sukuk can be viewed as funding the development of Waqf properties as an underlying asset. The issuance of Sukuk linked Waqf becomes an innovative instrument to maintain and develop Waqf assets. With many Waqf assets, Sukuk issuance can therefore be regarded to finance the development of Waqf properties or using them to be underlying asset. However, in Indonesia, the government is having problems to implement this concept. The main reason is that the Waqf land which is the underlying is not owned by the government so that it collides with regulations.

Waqf linked Sukuk, on the other hand, is a Cash-Waqf integrated with Sukuk (CWLS). The collected Waqf funds will be invested in Sukuk instruments. The resulting returns will be returned to Mawquf ‘Alaih to develop and maintain educational and health facilities, to establish community empowerment projects and other Shariah-compliant activities. At maturity, the funds will be returned to the Waqif. As a temporary endowment, the presence of Waqf linked Sukuk is beneficial in expanding the market share of Islamic finance and increasing public participation in development finance (Musari 2019).

CWLS provides an effective and efficient collaboration in Waqf assets which serve as low-cost assets, since no acquisition cost is required, and would save a lot of government financial resources whilst keeping the same level of benefits to the public. The low-income society will enjoy more facilities in many ways. The collected funds may also be intended for social assistance, such as disaster relief efforts in areas hit by earthquakes, or public infrastructure projects.

On the 10^th of March 2020, the Government of Indonesia issued its first Cash Waqf Linked Sukuk (CWLS) or Islamic bond linked to endowments with the total value of more than IDR 50 billion (the equivalent of approximately US$ 3.5 million). The proceeds from CWLS to be used for health facilities and health-care for poor-people in a hospital in Banten Province. The tenor is 5 (five) years with a return of 5% per year.

In this model, the Waqf providers will donate some cash money through a Waqf Manager (nazir), either permanently or temporarily, to be used for social purposes. The Waqf Manager then invests such cash Waqf in the Sovereign Sukuk issued specifically for public projects, such as the building of roads, public markets, hospitals, schools, etc. The Government will build public facilities using the cash money from the Waqf. The Waqif Manager will receive a return during the tenor of the Sovereign Sukuk; and on the maturity date of the Sovereign Sukuk, the Waqf Manager will receive the principal amount back. If the CWLS is a temporary one, the Waqf provider (Waqif) will receive the principal amount back; if the CWLS is permanent, the principal amount can be used by the Waqf Manager for other social projects.

The issuance of Sukuk linked Waqf became an innovative instrument to maintain and develop the Waqf assets or Waqf fund. On the other hand, Waqf linked Sukuk may trigger a snowball effect in developing Waqf assets. By adopting this model, governments would get more financial resources to push the development of the Waqf sector faster. It provides an effective and efficient collaboration in Waqf assets which serve as low-cost assets. Finally, both Sukuk-Waqf models diverge in the ultimate aim of benefiting the Ummah. So which structure is better for socio-economic development?

References

Musari, Khairunnisa. 2019. “The Evolution of Waqf and Sukuk toward Sukuk-Waqf in Modern Islamic Economy.” International Journal of ‘Umranic Studies  2(1):45–54.

Oubdi, Lahsen, and Abdessamad Raghibi. 2018. “Sukuk-Waqf: The Islamic Solution for Public Finance Deficit.” Munich Personal RePEc Archive (85629).

https://www.karimsyah.com/newsletter/cash-waqf-linked-sukuk