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Economics of Waqf

Economists looking at the waqf system would be perplexed by the fact that a myriad of essential services such as health, education, municipal, etc., have historically been provided at no cost whatsoever to the government. Therefore, ceteris paribus, the waqf system can contribute significantly towards that ultimate goal of so many modern economists: massive reduction in government expenditure, which leads to a smaller budget deficit, which in turn lowers the need for government borrowing thus curbing the “crowding-out effect” and leads to a reduction in the rate of interest, consequently reining in a basic impediment to private investment and growth.

The waqf could fulfil these above-mentioned functions by voluntary donations made by the well to do. Thus, privately accumulated capital is voluntarily endowed to finance all sorts of social services to the society. At this point another extremely important function of the waqf becomes apparent: not only does it help reduce government expenditure and consequently the rate of interest and pave the way for growth, it also achieves another modern economic goal; a better distribution of income in the economy. For, this improvement in the distribution of income would be achieved essentially through voluntary donations. In this process taxation is definitively assigned a secondary role.

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There are further implications: a lower tax burden means an enhancement in the consumers’ and producers’ surpluses and a diminution in the “dead-weight cost of the tax”. Consequently, lower taxes would have a positive impact on aggregate production while at the same time reducing costs. Prices to the consumers would come down and pave the way for non-inflationary growth (Wanniski, 1975: 49-50; The Economist, September 20th, 1997: 20).

Moreover, the waqf definitely 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 the waqfs constitute public goods, the consumption of which is non-rivalrous and the provision thereof non-excludable.

As is well known, the standard economic theory envisages that since, as rational individuals, consumers of public goods tend to free ride, they fail to contribute to the costs of creating these goods. Consequently, where rational behaviour prevails, public goods would be under produced in conventional economies (Bates, 1995: 30).

As far as the Islamic world is concerned, there is much evidence to the contrary, i.e., to the ubiquitousness of the public goods supplied by the waqfs. Therefore, it seems more appropriate to talk about an excess supply of public goods rather than their scarcity. In an Islamic economy this excess supply, not scarcity, may emerge as the basic problem. It should be emphasised at this point that this observation is not confined to past history but is valid for all times. Indeed, there is no justification for the assumption that modern Muslims would be less interested in charity then their forefathers. Given the right conditions, modern Muslims have demonstrated that they are just as keen as their forefathers to establish waqfs. The latest evidence from Turkey concerning the dynamic expansion in the number of newly established waqfs confirms this.

All the social and economic contributions of the waqf system mentioned above, are based upon the crucial assumption that the waqfs are managed by prudent and efficient trustees. History, unfortunately, provides evidence that this was not often the case. Archives, indeed, are full of documents indicating the corruption of waqf officials. In short, there is a serious agency problem associated with the waqf system. This constitutes one of the greatest challenges to modern Islamic economists interested in revitalising this system.

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 the 1990s 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 30,000 various self-employed retailers and small-scale producers using the waqf premises and the tens of thousands of individuals employed by the new waqfs established according to the secular Turkish Civil Law (Bilici, 1992 and 1993), it is clear that the overall contribution of the waqf system to employment has fallen significantly. This is in sharp contrast with the West where the non-profit sector, which includes trusts and foundations, Western equivalents of waqfs, accounted for an average of 13% of the net new jobs added between 1980 and 1990 in France, Germany and the United States. In the United States the non-profit sector accounts for 6.9% of total employment (Salamon and Anheier, 1996: xviii).

The decline in the contribution of the waqf system to employment 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 attack the waqf system.

It might be appropriate to start with a few questions:

  1. Why does the state feel the need to centralise and even to destroy the waqf system? This question assumes great importance if the waqfs are to avoid the wrath of the state in the future.

  2. Since even the state had to obey some rules, what were the legal premises behind the state’s interference?

  3. Was the process of centralization and the pursuant destruction linear or cyclical?


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