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Waqf & Its Implications for the Modern Economy (Part 1)

By Murat Cizakca | November 01, 2014

In this series of articles on IslamicBanker.com, renowned economist Murat Çizakça explores Waqf - one of the greatest institutions in Islamic history and how it can be revitalised.

Pious foundations are known in the Islamic world as awqaf, boniyad or habs. Whereas the latter two terms are used primarily in Iran and North Africa respectively, the former is known, with slight variations, in the rest of the Islamic world. The word waqf and its plural form awqaf are derived from the Arabic root verb waqafa, which means causing a thing to stop and stand still. The second meaning is simply pious (charitable) foundations [1].

However defined, this institution, whereby a privately owned property, corpus, is endowed for a charitable purpose in perpetuity and the revenue generated is spent for that purpose, stands out as one of the major achievements of Islamic civilisation. All over the vast Islamic world, from the Atlantic to the Pacific, magnificent works of architecture as well as myriad of services vitally important for the society have been financed and maintained for centuries through this system. The resilience of the system is, indeed, remarkable. It has been shown that many awqaf had survived for considerably longer than half a millennium and some even for more than a millennium [2].

A Turbulent History

Despite these overwhelming achievements, the history of awqaf is a turbulent one. For centuries the fate of this institution was closely linked to the fates of the states under which they functioned. Consequently, they experienced dramatic ups and downs. The period of establishment and growth was often followed by one of decline and neglect and with a new state emerging, a renewal and prosperity once against prevailed.

Nowhere in this long history of fluctuations, however, did the awqaf experience the universal and deliberate destruction that was inflicted upon them during the 19th and 20th centuries, a fact which pinpoints, of course, to western imperialism as the culprit. Yet, the greatest destruction took place not in a region colonized by the great powers, but in Turkey, an Islamic country that was not colonized. Since an explanation of this paradox has already been provided elsewhere, we will now turn our attention to economic issues. [3]

The Importance of Waqf

It would be appropriate at this point, to point out briefly the relevance of the waqf system for modern Islamic economics. Indeed, economists looking at the waqf system would be perplexed by the fact that a myriad of essential services such as health, education, municipal, etc., were provided in history at no cost whatsoever to the government. Therefore, assuming that the efficiency problems are solved, the waqf system can significantly contribute towards that ultimate goal of every modern economist; massive reduction in government expenditure, which leads to a reduction in the budget deficit, which lowers the need for government borrowing thus curbing the ‘crowding-out effect” and leads to a reduction in the rate of interest consequently reining a basic impediment for private investment and growth.

From the point of view of Islamic economics, the most important item in the above mentioned agenda is, obviously, the reduction in the rate of interest. The waqf can, indeed, lower the interest rate by providing the most essential social services without any cost to the government. This important contribution of the waqf system towards the gradual elimination of riba is not yet recognized by the Islamic economists [4]. It will be proposed here that it should be. Put differently, a re-establishment and revitalization of the waqf system should be considered as a vital step in the struggle to eliminate riba. It can be argued that, since it prohibits it by law, Islam demands an immediate and not such a gradual elimination of the interest. This is certainly true and yet utopia. No country has ever succeeded in eliminating interest abruptly by law. There is evidence that even classical Islam could not entirely get rid of interest. In modern times, even the recent Islamization of the banking system has not helped: to the extent that Islamic bank insists on murabahah rather than mudarabah or musharakah, interest merely concealed but not eliminated. In view of the above, it will be proposed here that the gradual elimination or reduction of interest through the waqf system should be given serious consideration.

The waqf could fulfill these functions by voluntary donations made by the well to do. Thus, privately accumulated capital may be voluntarily endowed to finance all sorts of social services to the society. At this point another extremely important function of the awqaf becomes apparent: not only does it help reduce government expenditure and consequently the rate of interest, it also achieves another modern economic goal; a better distribution of income in the economy.

Moreover the waqf definitively solves the problem of the under-supply of public goods, so often observed in conventional economies. This point needs to be elaborated. In this context we must first of all note that the services offered by many constitute public goods, the consumption of which is non-rivalries (several people can consume the same good without diminishing its value) and the provision thereof is non-excludable (a people cannot be prevented from consuming the good).

As is well known, the standard economic theory envisages that since, as rational individuals, consumers of public goods would tend to free ride, they would fail to contribute to the costs of creating these goods. Consequently, under the conditions of rational behavior, public goods would tend to be under-produced in conventional economies [5].

As far as the Islamic World is concerned, there is so much evidence to the contrary, i.e., to the ubiquitousness of the public goods supplied by the awqaf that it would be more appropriate to talk about an excess supply of public goods rather than their scarcity. It will be hypothesized here that in an Islamic economy this excess supply, not scarcity, may emerge as the basic problem. It should be emphasized at this point that this observation is not limited to historical dimension but is valid for all times. Indeed, there is no justification for the assumption that the modern Muslims would be less pious than their forefathers. This is attested by the fact that, given right conditions, modern Muslims would be just as keen as their forefathers to establish awqaf [6].

Lessons from the Ottoman Empire

All of this has very important ramifications for the present state of Islamic economics. Nearly all of the best known Islamic economists have assigned a crucial role to the state in a future Islamic economy and advocated that the state should redistribute income in favour of the poor, should interfere in the markets when necessary, ensure the provision of basic necessities, and even, according to one economist, initiate massive land reforms [7].

Latest research in Ottoman economic history has revealed that in Ottoman Empire, one of the greatest of Islamic empires, the state did nearly everything that these economists have proposed – with disastrous consequences [8]. The state did assign top priority to the redistribution of income at the cost of undermining capital accumulation. Interfered in the markets, taxed excessively, far exceeding the zakah, applied a ceiling to profits, controlled all the basic factors of production and physical capital, exerted a firm control over the factor prices, even applied a massive policy of food provisioning to the masses and ended up consciously impeding the private sector and encouraging the state sector, creating what has been called the “proto-pseudo-socialist Ottoman system” [9]. Unsurprisingly, this “proto-pseudo-socialist Ottoman system”, has the dubious honour of succumbing, even before the Soviet Union, to the more efficient western capitalism.

In view of above, it will be proposed here that in an Islamic economy of the future, redistribution of capital should not be allowed to overwhelm capital accumulation. Moreover, the former, i.e., redistribution, should be left basically to the individual Muslims themselves. Put differently, redistribution of wealth should be achieved primarily by the zakah and the waqf system. This author is of the opinion that there is powerful support to his proposal in the holy Qur’an, itself. For, there is wisdom, not properly understood by many Islamic economists, behind the fact that zakah is the only tax specifically mentioned in the Qur’an.

Qur’an and Size of the State

Most of the debate among the concerned scholars has been centred on whether the state is permitted to collect taxes in addition to zakah and how to legitimize such collections. All the scholars seem to take it for granted that the state needs extra revenue [10]. The possibility that the Qur’an, by specifically mentioning only the zakah, may have conveyed a deliberate message to limit the size of the state, has occurred to no one [11].

This single tax (and a modest one at that) implies modest revenue, which implies, ceteris paribus, a small state. The modernity of the Qur’an in this age of universal efforts to downsize the overgrown state sectors everywhere is, indeed, striking. The message of the Qur’an is quite clear; in a future ideal Islamic economy the size of the state sector should be limited to what it collects through the zakah. This also implies that the state will basically limit itself to defence with all the other services being financed by the only other instrument mentioned in the Qur’an; the sadaqa, alms. The importance of the waqf system lies precisely here; for it is the very institution which transforms alms into a myriad of services in perpetuity [12].

The waqf system contributed significantly to another major economic problem: employment. The ratio of persons employed by the waqf system to those employed directly by the state fluctuated in Turkey as follows: at the turn of the century 8.23%, in 1931 12.68% and in 1990’s 0.76%. Consequently the waqf system appears to have ceased being a major source of employment in the Turkish Republic. Although these figures do not include the thousands of various self employed retailers and small scale producers using the waqf premises and the tens of thousands of individuals employed by the new waqf funds established according to the secular Turkish Civil Law, it is still abundantly clear that the overall contribution of the waqf system to employment has fallen significantly [13].

The decline in the contribution of the waqf system to the employment situation reflects the overall decline of the system in Turkey prior to the 1967 Act. This decline was a direct outcome of a deliberate state policy. To understand this dramatic phenomenon, we must first of all analyse the forces which prompted the state to attach the waqf system [14]. Part 2 of the Waqf Series will explore these issues further.

References:

[1] Since the word waqf has become part of the English language, it is not italicised in this article. As its plural awqaf is used because it is equally common in English language and is easier to pronounce than waqfs.

[2] Daniel Crecelius, “Introduction”, Journal of Economic and Social History of the Orient, Vol.38, Part 3, p.260

[3] Çizakça. op. cit., passim.

[4] The most recent survey of Islamic economics is totally unaware of the importance or even the existence of endowments. See Mohamed Aslam Haneef, (1995). The linkage with riba was also not raised in the proceedings of the Jeddah conference of Islamic economists on awqaf. See IRTI, (1987), Management and Development of Awqaf Properties, Jeddah: IRTI/IDB.

[5] Robert H. Bates, (1995), “An Assessment of the New Institutionalism”, in J. Harriss, et. al. (eds.), p.30

[6] Latest evidence from Turkey concerning the dynamic expansion in the number of newly established awqaf confirms this.

[7] Mohamed Aslam Haneef (1995).

[8] Çizakça (1996).

[9] Ibid., pp.208-210.

[10] For an exception see Monzer Kahf (1995), pp. 105-127, where the conditions under which the state may impose additional taxation are clearly specified.

[11] See Abulhasan M. Sadeq (ed.), (1992).

[12] On the near identity of awqaf and sadaqa see the fatwa of the Shaykh al-Mazandarani in Çizakça, Chapter 3.

[13] This statement is incorrect for the period 1930’s to 1970’s. Recent research has revealed a significant recovery in the Turkish awqaf system after the 1980’s. See F. Bilici “Acteurs de Development des Relations entre la turquie et le Monde turc: Les Vakifs”, L’emergence du Monde Turco-persan, (Paris: A.F.E.M.O.T.I, Cahiers d’etudes sur la Mediterranée orientale et le Mone Turco-Iranien, 1992), No.14 and id. “Sociabilite et expression politique Islamistes en Turquie les nouveoux Vakifs”, Revue Francaise de Science Politique, Vol.43, No.3, 1993, pp.412-434.

[14] The attack by the state was not limited to Turkey alone but occurred nearly everywhere. For detailed information, the reader is referred to Çizakça.


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9 Comments

Jahangir Hussain 4 years ago
Managing Director, One Twenty Grove Consultancy

Interesting read indeed! Looking forward to understanding this important and in some ways neglected topic further Inshallah. (edited)


Alvaro HIDALGO 4 years ago
MD, WattJet

Great article Murat.
Do you know any bibliography on the use of waqf for community infrastructure (i.e transfer the ownership of water infrastructure to a community/village )?

I look forward to the second part of the article (edited)


Professor, Islamic Finance, N/A

Hello Alvaro,

Assuming that the water works belong to the state, then we are talking about establishing a waqf with state funds. This is possible and can work very well as the Volkswagenstiftung in Germany demonstrates, on the condition that the waqf so established enjoys complete independence from the very state that has established it.

For more info on waqfs you can download my book\ A History of Philanthropic Foundations, from www.academia/edu.

Best wishes,

Murat Cizakca (edited)


MD, WattJet

Thanks for the feedback Murat.
I contemplate a different scenario.
I am focused in economic development beyond large cities in emerging countries and in these, states have limited capacity to carry investment in infrastructure in rural locations.

As a result, many communities are isolated, with no electricity and/or mobile coverage (of capital importance nowadays with mobile banking).

I understand that private initiative has an opportunity to invest in rural electrification, water supply and access to mobile communications.

This impact investment is based thus in the following

a) Creates a profitable business that generates recurrent cash-flow to maintain activity and remunerate capital
b) Puts in place a development tool that generates in turn higher revenue (electricity allows to work more hours), reduces the cost of transactions and provides access to finance (thanks to mobile banking) and makes possible to put in place other services (education, health care -through remote diagnosis-, irrigation, etc)

A very important tool to instrument the private investment is the use of the Social Franchise Enterprise model (You can find both a paper and a slide cast here http://www.youtube.com/watch?v=HI3RJpgsN...

The link between the above and Waqf is that the care of infrastructure in remote locations requires an onsite supervision and it is very difficult for the private sector to put in place any solution without bringing-in the community itself.

I understand that Waqf solves this problem.
Indeed, private companies can carry the initial investment, put in place a local franchise to deal and manage the operation and secure the integrity and security of the infrastructure by donating to the community this infrastructure once it has been paid back.

With this structure, the community will be interested to keep the infrastructure safe since, after the agreed period, its ownership will be reverted to them.

In this sense, Waqf would work as a sort of concession (like many highways etc) that reverts back to the state after certain years but instead, in this case the operation is carried directly between the private company and the community itself.

The community hosts and receives the infrastructure to make their lives better and at the end of the payback period, they will take upon its ownership too.

Hence, any bibliography to help me on the instrumentation of this scheme would be of much help

Alvaro HIDALGO ( www.yiitidi.com ) (edited)


Program Consultant, IQRA University

Dr.Murat Cizakca in respect of you and being one of your million student who had the course from you in Islamic Economic at IIIBIE Turkish Federated State of Kibris and after a long time I had an opportunity to read your article after a very long time. The art of your writing which I can visualise the subject or a topic and that is the reason what you taught us in 1984 is still clear to me. I am sorry I was a bit weak to this part of Economic which now clear to me. All the respect for my teacher.
Yousuf Ibnul Hasan
Senior Faculty & Program Consultant
Islamic Banking & Applied Finance
IQRA University, Karachi, Pakistan (edited)


Professor, Islamic Finance, N/A

Dear Yousuf,

How nice of you to write ! I certainly remember you from Cyprus and am delighted that you are doing so well in Pakistan and that you`ve joined the ranks of the scholarly community. If I have had any influence on your career, that makes me feel to have had a worthwhile life.

Best wishes,

Murat Cizakca (edited)


Murat Cizakca 4 years ago
Professor, Islamic Finance, N/A

Hello Alvaro, again.

Normally, waqfs are established by wealthy individuals to provide essential services to the community for altruistic purposes. You, on the other hand, are talking about private companies donating facilities to the community after they have been paid back. So, you are merely entrusting the after payment management to the waqf established for that purpose. I would propose that the waqf for the after payment management can best be established by the original company itself in a non-profit scheme, with any profits going to maintenance plus services.

As for some evidence on community waqfs, Miriam Hoexter wrote a whole book on Algerian community waqfs in the 18th century.

Hope this helps,

Best wishes,

Murat Cizakca (edited)


MD, WattJet

It does help a lot Murat and I will go through the book.

In my limited understanding of the Waqft, the solution you propose achieves the donation/charity component.

However, one of the objectives sought is also to enhance the feeling of ownership and involvement of small communities. Indeed, if the Nonprofit is organized then its proceeds will go back to the people, but the community will perceive it as a windfall.

On the contrary, water/electricity installations in small communities are something very visible that pass in front of every house and, in a way, they are an extension of their home that renders a much appreciated service -especially if they are new and they were in demand-.

The alternative I am looking for (via Waqf or other instrument) is to foster the community's sense of ownership/belonging so that, in some way, they are prompted to look after and care for the facilities in the knowledge that it is theirs and that, on top of it, it can generate a profit that may be further used by the community.

In any case, thank you so much again for your feedback (edited)


Nadir Burnashev 4 years ago
N/A

Assalam aleikum, Dr Murat,

Thank you for excellent article on the waqf. I wonder how waqf funds would be structured from the legal standpoint nowadays. For example, can they be structured as private equity funds under English law with the management company being de-facto waqf administration?

Thank you foe reply.

With best regards from Kazakhstan

Nadir Burnashev (edited)