Technical Notes Waqf Core Principles

BACKGROUND AND
DEVELOPMENT
Prof. DR. Raditya Sukmana
Head of Islamic Economic Department,
Faculty of Economics and Business, Universitas
Airlangga, Indonesia
Background 1
• Waqf is part of the Islamic economics which is important for socio
economic development
• It was proved to be important engine growth for the Islamic countries
in the past
• Due to certain factors, waqf was down for quite some times but it gains
more attention in recent years
• Currently, waqf asset in the form empty land, small mosque on top of
waqf land etc are abundant in numbers
• Those lands needs to be utilized for productive purposes whenever
possible
Background 2
• The characteristics of waqf which the asset should remain intact
necessitates extra proper governance
• Waqf asset has to be secured/prevented at all times
• For other sector such as banking, there exist universal acceptable
governance standard to ensure depositor’s funds are safe and
financial intermediation function is properly worked
• The Bank for International Settlement (BIS) which produce Basel Core
Principle (BCP) is for governing the banking and International
Financial Service Board (IFSB) is for governing the Islamic banking
Background 3
• Do we have standardization which is universally accepted for waqf?
So far NO.
• Or at least do we have standard setting body (universally accepted)
for waqf governance? So far No
• Badan Wakaf Indonesia (Indonesian waqf regulator) and Bank
Indonesia initiated to have waqf governance standard
• This is called Waqf Core Principle (WCP) which was eventually
launched in Bali during World Bank-IMF Annual Meeting 2018
Development
• WCP is the guidelines for the waqf industry to ensure the smoothness
of waqf operation
• More over, this guidelines also important for the regulator for the
waqf policies
• We do not reinvesting the wheel, this WCP adopt what has been the
universally acceptable governance for banking namely BCP with some
adjustment
• We adopt the principles in BCP which is still relevant for waqf
governance (for ex: The role of regulator) and we omit those which do
not relevant
Development

• The future of awqaf institutions will be largely determined by the ability of waqf
management in dealing with various rapid changes that occur unexpectedly
• It requires all the elements a higher skill of risk management; otherwise, the
awqaf sector will not be developed at its fullest capacity.
• of risk management for awqaf sector can benefit from the current development of
risk management of the other financial sectors i.e banking sector and financial
market.
Development
• many awqaf institutions which operate within the Islamic countries are
still in the shape of simplicity.
• regulatory framework developed for awqaf sector should be able to
accommodate both the traditional as well as the sophisticated operations.
• sustained awqaf sector development requires the implementation of sound
risk management to ensure that the values of the assets are always kept
within the tolerable risks involved in the operations,
• the availability of technical documents which are able to translate sound
supervisory concept into operational risk management practices is very
essential.
Technical Notes on Waqf Principles
•Objectives
1. The Technical Notes of the Waqf Core Principles are formulated to address some specific
objectives as follows:
i. to provide a technical explanation on the Waqf Core Principles in the area of risk
management system so that all the risks involved in the Waqf activities can be effectively
identified, measured, mitigated, and monitored.
ii. to provide a technical guidance to the supervisors in determining supervisory measures to
minimize possible agency problems. The agency problem can be in the form of fraudulent
practices performed by the asset managers (moral hazard) and poor entry and exit policy
(adverse selection problem).
List of Risks within Waqf Institution
I Mobilization
Ri s k I nvol ve d
11.Col l e cti on ma na ge me nt ri s k
4.Re puta ti on ri s k
8.Sha ri a h compl i a nce ri s k
II Management
Ri s k I nvol ve d
1.Counte rpa rty ri s k
2. country tra ns fe r ri s k
3.Ma rke t ri s k
5.Wa qf a s s e t l os s ri s k
6.Re ve nue Profi t a nd l os s Ri s k
7.ope ra s i ona l ri s k
8.Sha ri a h compl i a nce ri s k
10.Li qui di ty ri s k
III Distribution
Ri s k I nvol ve d
8.Sha ri a h compl i a nce ri s k
9. Di s tri buti on Ri s k
Investment
Ri s k I nvol ve d
1.Counte rpa rty ri s k
2. country tra ns fe r ri s k
3.Ma rke t ri s k
Commercial 5.Wa qf a s s e t l os s ri s k
Ri s k I nvol ve d 6.Re ve nue Profi t a nd l os s Ri s k
1.Counte rpa rty ri s k 7.ope ra s i ona l ri s k
2. country tra ns fe r ri s k 8.Sha ri a h compl i a nce ri s k
3.Ma rke t ri s k 10.Li qui di ty ri s k
5.Wa qf a s s e t l os s ri s k
6.Re ve nue Profi t a nd l os s Ri s k Non Investment
7.ope ra s i ona l ri s k Ri s k i nvol ve d
8.Sha ri a h compl i a nce ri s k 8.Sha ri a h compl i a nce ri s k
10.Li qui di ty ri s k (te mpora ry ca s h wa qf onl y) 5.Wa qf a s s e t l os s ri s k
7.ope ra s i ona l ri s k
Social 6.Re ve nue Profi t a nd l os s Ri s k
Ri s k I nvol ve d 1.Counte rpa rty ri s k
8.Sha ri a h compl i a nce ri s k 2. country tra ns fe r ri s k
5.Wa qf a s s e t l os s ri s k
7.ope ra s i ona l ri s k
2. country tra ns fe r ri s k
Notes
• Mobilization: raise Waqf Asset
• Management : manage the waqf Asset
• Distribution : Distribute the profit from waqf
• Commercial
• Investment : Cash Waqf Financing
• Non Investment : productive waqf asset (hotel, office etc)
• Social : waqf asset for social (non profitmosque, schools etc)
Example: Mobilization (Reputation risk)
Identification
Reputation relates with the ability of human resource (in this case nazhir) to perform its task. When company
mistakenly announce public information, it may adversely influence the people perception which eventually jeopardize
the reputation of the institution (nazhir).
Measurement
it can be measured qualitatively and quantitatively by getting feedback from the people (perception)
Mitigation
The establishment of public relation division to ensure the smoothness of the communication and make quick response
to anticipate the adverse information available.
Monitoring
Monitoring on all information pertaining to the waqf managed by nazhir. It follows with the recording important notes
for the future improvement.
Example: Management (Counter-party Risk)
Identification
Various risks have to be identified when nazhir eventually appoint fund manager to manage the funds. Low return obtained from
investing the cash waqf can also be the risk. another risk is the fund manager utilizing cash waqf into the high risk investment type
which may create losses to the cash waqf corpus
Measurement
Quantitative default analysis is adopted or when counter party make investment in islamic stock market, then alpha, confidence interval
need to be decided and tolerable losses need to be taken into consideration.
Mitigation
In order to mitigate the risk, nazhir should consider to appoint more than one fund manager with different expertise. For example, fund
manager A specialize in make investment in Islamic capital Market and fund manager B specialize in make investment in join venture
(buy bad company, restructure, recap, reorganize until become good company and sell it with profit.
Monitoring
Criteria to choose certain counter party shall be monitored, evaluated for the purpose of future improvement. After evaluation, decision
can be made to keep appoint the same fund manager or look for other alternative.
Example: Distribution (Distribution risk)
(i) Identification
• This is the risk raised on the disbursement to the beneficieries. unlike zakah whereby the disbursement has to
be only to 8 ashnaf hence disbursement risk is high, waqf profit disbursement is not regulated specifically
stated in Al Qur’an or hadist, hence risk is not that high as compare to zakah. However, priority shall be
identified within Standard Operating Procedure.
(i) Measurement
• Qualitative measure especially from negative impact on those communities which are not receiveing benefits
(i) Mitigation
• Regular evaluation to come up with the most priority to be given support
(i) Monitoring
• Monitoring specifically on the all possible effect once disburesement has been done
Thank You
Email : Raditya-s@feb.unair.ac.id
Mobile number : +62 878 5421 6776