Cash Waqfs in the Ottoman Economy

In a society where health, education and welfare were entirely financed by gifts and endowments, the cash waqfs were essential for the survival of the Ottoman social fabric. Moreover, they also provided major injections of capital to the economy of the cities where they functioned. The Ottoman courts approved cash endowments as early as the beginning of the fifteenth century and by the end of the sixteenth, they had become extremely popular all over Anatolia and the European provinces of the empire. Cash waqfs were established by well-to-do individuals who allocated a certain amount of money for pious purposes. The amount endowed had to be privately owned and the capital of the waqf was "transferred" to borrowers who after a certain period, usually a year, returned to the waqf the principal plus a certain "extra" amount, which was then spent for all sorts of pious or social purposes. These vague terms "transferred" and "extra" have been used deliberately here. For, whether the capital of the endowment was lent as credit to the borrowers and the return was, in fact, nothing but the ordinary interest, constitutes a debate (Mandaville, 1979; Çizakça, 1993).

A summary of this debate, without going into the details, would be appropriate here. First of all, Imam Zufar’s suggestion back in the eighth century that the corpus of the cash waqf should be invested through mudaraba and the return be used for the original purpose of the waqf did not find application in historical reality. In a separate study based upon a sample of 1563 Bursa cash waqfs and their respective profit/capital ratios covering the period 1667-1805, Çizakça, (1993b) found out that only four of these waqfs resorted to profit and loss sharing partnerships (mudaraba or musharaka/inan) while the rest produced remarkably constant returns fluctuating within a narrow margin of 9 to 12%. This can be considered as sufficient proof that the Ottoman cash waqfs lent money with a nearly constant return.

The question now is whether this arrangement should be called ordinary interest or was it something else? To start with, Ottomans themselves never called it interest, riba. The term they used was the so-called istiglal, which has been described as follows:

“istiglal … was outwardly construed as a sale: The borrower handed over to the lender a piece of real estate, supposedly as a sale, but actually in a pawn. If the borrower redeemed his debt after a year, the asset reverted back to him. In the mean time, the lender leased the asset to the borrower (so that the borrower could go on using it) and the “rent” which was often exactly 10% of the loan, was nothing but interest. In short, we have here a simple interest bearing loan with a piece of real estate as security (Gerber, 1988: 128).

Although, this arrangement may be dismissed simply as a cumbersome method of lending with interest, it is important that from the perspective of Islamic jurisprudence, it was a fully sanctioned instrument. From economic perspective, however, since it provided fixed return to the capital lent, it was nothing but interest. To distinguish istiglal from the ordinary rate of interest where the former acts in the economy just like the latter but is permitted by Islamic jurisprudence, we shall call it “economic interest”. Rejection of Imam Zufar’s suggestion and the insistence of the trustees to lend the corpus of the cash waqfs through “economic interest” had far reaching consequences.

We will now focus on this problem. Looking at the problem from the perspective of capital accumulation, it can be envisaged that an entrepreneur could borrow money from an endowment with a modest rate of “economic interest”. In short, a cash waqf could function in reality just like a bank, with one difference; whereas a bank accumulates funds from a multitude of savers and then transfers these to entrepreneurs and earns its profits through the different rates it utilises (lending rate minus the borrowing rate constitutes the bank’s profits), a cash waqf would actually distribute the lifelong accumulation of a single individual, endowment capital, to borrowers and thus, in fact, function as an instrument of capital distribution. Moreover, whereas the bank has to pay a fixed rate of interest to the savers (borrowing rate), an endowment pays nothing for the fund it transfers to the borrowers. Put differently, the cost of capital for an endowment would be zero! Thus, the entire rate of return could be considered as profit, which would be spent for social and pious purposes.

It can be further assumed that since an endowment utilised the savings of a single individual, rather than the savings of thousands of people, it would have relatively less capital at its disposal. So, the possibility of capital pooling among the endowments, i.e., supply side capital pooling, assumes great importance. Capital pooling on the demand side, i.e., an entrepreneur borrowing from a multitude of endowments, is also, obviously, quite important. Implications of these assumptions should be fully understood. What is in question here is whether cash waqfs could fulfil the function of Western banks for Islamic societies. Supply side capital pooling implies that substantial capital could be put at the service of the entrepreneurs by a group of waqfs and demand side capital pooling implies that a single entrepreneur could borrow from a multitude of waqfs to maximise the available funds at his disposal for a single project.

The specific example presented above has revealed that endowments, indeed, applied a process of capital pooling among themselves. This took the following form: founders of smaller waqfs stipulated that a part of the annual return of their waqfs be set aside to be submitted to the larger waqfs. Thus, supply side capital pooling was confirmed. On the demand side, however, totally unexpected results were encountered. First of all, although the average credit per capita borrowed had increased by 43% between 1749-85 in Bursa, the amounts borrowed were quite modest; 53 gru , on average, in 1749 and 76 gru in 1785. This was the first indication that the borrowers were not entrepreneurs but consumers. The total number of these borrowers was calculated as 6,648 for the year 1767, another indication that capital was not accumulated at the hands of a few enterprising individuals but was diffused throughout the city's population of about 65-70,000. But then this conclusion had to be subjected to a test, for it was possible that the data may have been repetitive. In other words, we do not know if these approximately 6,000 borrowers were 6,000 distinct individuals or if a particular group of people kept borrowing from a multitude of endowments in a given year, i.e., actually practiced demand side capital pooling. This was a difficult question to answer. The problem was aggravated by the fact that the Ottomans did not use family names. So, other clues such as occupation and residence had to be utilised. In any case, aided by the computer, it was established that only 7.5 per thousand of the borrowers had borrowed funds from two different endowments in the year 1767.

Further research into this small group of capital pooling borrowers revealed that these were the trustees who were borrowing from the very endowments that they were managing themselves! This view is supported by another study, which showed that, in a city famous for its silk industry, another profession that would most likely have utilised the cash waqf sources, i.e., the silk sector, hardly did so. In fact, the ratio Silk Credits/Total Credits never exceeded 3% during the period 1749-85 (Çizakça, 1993). The funds that these trustees borrowed, moreover, were not spent for establishing or enlarging businesses but for lending further at a higher rate of interest to the money dealers, sarrafs in Istanbul. In short, a secondary capital market had emerged in the Ottoman economy with the cash waqfs providing the cheaper money and the sarrafs re-lending it at a higher rate of interest to the merchants and tax-farmers.

To conclude, research has revealed that cash waqfs, which originally appeared as a promising and unique Ottoman institution of capital accumulation, actually functioned as an institution of capital distribution. Capital pooling was certainly practised among the endowments but the borrowers were mostly small consumers and the endowments’ funds were not utilised to finance important business ventures. A tiny minority of borrowers who did practice capital pooling did so in order to lend the waqf funds at a higher rate of return to the sarrafs of Istanbul thus in this process creating a secondary capital market.

At this point we must ask several “why” questions. Why, indeed, did the Ottoman cash waqfs not function like the Western banks and contribute to the process of capital accumulation in the economy rather than limiting themselves primarily to the redistribution of capital? Why, in other words, did they finance merely consumption rather than entrepreneurial investment?

The answer lies in the method of lending and takes us back to Imam Zufer who had suggested that the waqfs’ funds should be transferred to the borrowers as the capital of a mudaraba partnership. In other words, Imam Zufer had envisaged a mudaraba partnership between the cash waqf and the borrower; the former being the principal of this partnership, and the latter the agent. We have, moreover, stated above that the trustees had refused to apply Imam Zufar’s suggestion. While this author is not aware of any historical source explaining this refusal, it can be deduced that the trustees must have been concerned about the risks of a mudaraba partnership (in many cases, the trustees were instructed by the waqf founders themselves to lend at a specific rate). In any case, probably concerned about such risks, they applied not the recommended and completely legal mudaraba but the far more dubious istiglal which was a legal device concealing a usurious transaction. While istiglal conformed to the letter of the law, it violated its spirit by dangerously approaching the ordinary rate of interest.

Since istiglal involved the submission of a substantial collateral in the form of a house, the borrower was severely limited. Consequently, we should not be surprised if the entrepreneurs could not resort to demand side capital accumulation i.e., in response to the relatively small amounts of capital possessed by the cash waqfs, request funds from a multitude of waqfs to accumulate capital. To do so, would have meant that they would have had to provide several houses as collateral, as many houses as the cash waqfs they wished to resort to! It was because of this risk averseness on the part of the waqf founders or the trustees that the cash waqfs were limited to the role of capital distribution and could not contribute to the process of capital accumulation.

Now that we have established that the cash waqfs could not provide funds to the economy for entrepreneurial investment, we may wonder about the extent of other funds they provided to the economy. First of all, it has been noted above that a two-tier capital market appears to have emerged in the Ottoman economy, with some of the trustees borrowing from their own waqfs funds at relatively low rates and then re-lending these funds at higher rates to the sarrafs in Istanbul. Further research about the trustees has revealed that they were becoming ever more important as borrowers. Obviously, it must have been a relatively simple matter for them to borrow from the cash waqfs that they were controlling themselves. Since, most probably, they did not have to submit their houses as collateral as everybody else had to, they were in a unique position to borrow from a multitude of cash waqfs. Moreover, the rate at which they borrowed was substantially lower than the prevailing market rate. Consequently, they must have earned substantial amounts by exploiting the difference between the two rates of “interest” existing in the capital market.

All of the above supports the argument that cash waqfs were responsible for a large-scale injection of capital into the economy. We will now attempt to quantify this statement for the city of Bursa. Our analysis was based upon a sample of 25% and covered the period 1749-1785. Of the three Inspection Registers considered, the one from the year 1767 was the most complete and therefore contained the most data. If we take 1767 as the year for which we have the most complete information and multiply the data for that year by four, we obtain a very rough estimation of the total number of borrowers and reach the conclusion that, in a given year during the eighteenth century, more than 6,000 persons were provided with credit by the cash waqf system in the city of Bursa.

As for the total amount borrowed by these people, which we have calculated in the same manner, we reach the figure of almost half a million gru . Comparing this figure with the tax-farm registers, it has been shown that the capital injected into the economy of Bursa was nearly ten times greater than the amount withdrawn by the state through the tax-farm of silk cloth press (Çizakça, 1995: 336). But we must not lose sight of the redistributive power of the cash waqfs. The cash injected here was not a lump sum amount given as credit to a select group. On the contrary, this amount saved by the privileged few was voluntarily redistributed. Thus, injection and redistribution occurred simultaneously.


Source: Murat Cizakca, A History of Philanthropic Foundations: The Islamic World From the Seventh Century to the Present. Republished with permission.
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