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IJSE
44,8
1018
Received 5 August 2015
Revised 7 March 2016
Accepted 25 March 2016
International Journal of Social
Economics
Vol. 44 No. 8, 2017
pp. 1018-1031
© Emerald Publishing Limited
0306-8293
DOI 10.1108/IJSE-06-2015-0176
Taking stock of the waqf-based
Islamic microfinance model
Rose Abdullah
Faculty of Economics and Islamic Finance,
Universiti Islam Sultan Sharif Ali, Bandar Seri Begawan,
Brunei Darussalam, and
Abdul Ghafar Ismail
School of Economics, Universiti Kebangsaan Malaysia, Bangi, Malaysia
Abstract
Purpose – The purpose of this paper is to explore two main aspects of waqf: the characteristics of waqf
property and the management of waqf. This paper also discusses the governance of waqf management as a
source of funds for Islamic microfinance institutions (MFIs).
Design/methodology/approach – This research uses content analysis method to examine various
literatures that discuss the concept and management of waqf.
Findings – The characteristics of cash waqf such as permanence, irrevocability and perpetuity differentiate
waqf from other type of donations. Therefore, cash waqf-based Islamic microfinance needs to be sustainable.
Good corporate governance is vital to ensure the sustainability. As the donors of cash waqf do not aim to
make financial profit, waqf-based Islamic MFIs will be able to provide low-cost capital to the poor
entrepreneurs. Furthermore, to ensure the perpetuity of the waqf, it is suggested that only revenue from the
waqf property should be used for microfinance fund.
Social implications – The cash waqf-based Islamic microfinance will help the micro entrepreneurs to get
low-cost capital without collateral. At the same time, public can donate any amount they afford to contribute
to cash waqf.
Originality/value – The creation of a cash waqf-based Islamic MFI must observe the issues of agency
conflicts and the right of stakeholders to a transparent management. This paper emphasizes the importance
of good governance in managing the waqf property as a source of fund for Islamic MFIs.
Keywords Islamic microfinance, Sustainable development, Social welfare economics
Paper type Conceptual paper
1. Introduction
Several definitions[1] of waqf by the earlier jurists and the contemporary scholars exist. First,
Imam Shafi’i and Hanbali state that waqf is an irrevocable gift of a physical property (‘ain) for
the benefit of a donor’s family or someone else or something, in perpetuity, as a charity
promised and executed normally during the life-time of the donor, which cannot be transferred,
given as a gift, or transmitted thereafter (Mohammad et al., 2006). Second, as given by Monzer
Kahf (n.d.), the word waqf, as also agreed by many scholars such as Ahmed (2007) and Mohsin
(2009), is used in Islam as holding certain property and preserving it for confined benefits or
certain philanthropic acts and prohibiting any use or disposition of it other than the specific
objectives given. Third, Cizakca (2011) defines waqf as “privately owned property, corpus,
is endowed for a charitable purpose in perpetuity and the revenue generated is spent for that
purpose.” Fourth, the online Middle-East Encyclopedia gives the definition of waqf as
“a Muslim religious endowment or the public body that manages the endowment in some cases,
‘the waqf.’ It may be land or a trust investment or any other kind of property.”
It literally means that waqf or “religious endowment” is recognized by Islamic law as a
religious, pious or charitable donation. Once the property is endowed, the ownership is
transferred to Allah on a permanent basis. This would allow the properties to be perpetually
used beyond ad hoc charity to make permanent provisions for supporting welfare activities.
Since the property is dedicated to a cause, only the income from it is available for current
expenditure in that cause.
 These characteristics may seem to have the potential to provide low-cost funding for a Waqf-based
microfinance institution (MFI). Therefore, the purpose of this paper is to suggest that the Islamic
waqf funds be channeled as share capital in Islamic MFIs. The current issue faced by MFIs microfinance
is that they rely too much on debt that may be costly to them and, hence, they cannot be
sustained. However, by having more share capital, they may create agency conflict among model
shareholders because the shareholders might see MFIs as profit maximizing institutions.
In addition, the contemporary scholars such as Cizakca (2011), Monzer Kahf (n.d.), 1019
Ahmed (2002) and Anas Zarqa (n.d.) also suggest that waqf should be used as a new tool in
the field of current economic development. However, our study deviates from these studies
in two perspectives. First perspective is the setting up of waqf-based MFIs which may be
part of the agenda of financial inclusion for the productive poor and needy, and help the
latter in generating their income. Second, the waqf-based MFIs might settle the issues of
agency conflict and stakeholders’ interests.
The remainder of this paper is divided as follows. Section 2 discusses the basic structure
of waqf: its basis and its rules. It is followed by the development of waqf from two aspects in
Section 3: the aspect of corpus or the property endowed and the aspect of management.
Section 4 discusses the formation of waqf-based MFI. The paper ends with conclusion.

2. An insight into the fundamentals of waqf

Most scholars agree that the creation of waqf requires certain conditions. Since there is no
clear reference to waqf in the Al-Qur’an, scholars have relied on hadith and actions of the
companions of Rasulullah SAW. This allows a certain measure of flexibility in deriving its
laws. Therefore, although scholars have agreed on the basis, basic rules and characteristics
of waqf, there are still many unresolved issues surrounding these subjects. These issues will
be highlighted in this section.

Legitimacy of waqf
The epistemology of waqf could be derived from several verses of Al-Quran and Al-hadith.
Scholars such as Mohsin (2009), Monzer Kahf (n.d.) and Cizakca (2011) also argue on the
same grounds. Al-Quran verse 3:92 of Surah Ali-Imran clearly indicates the necessity of
spending wealth on good causes, and that spending from what we love is rewarded.
Al-Quran verses 62:10 of Surah al-Juma’ah and 2:245 of Surah Al-Baqarah encourage
spending on charity and emphasize the rewards for good spending that will be multiplied.
In Al-hadith, the following is narrated by Muslim:
Abu Huraira reported Allah’s Messenger (PBUH) as saying: When a man dies, his acts come to an
end, but three, recurring charity, or knowledge (by which people) benefit, or a pious son, who prays
for him (the deceased) (Narrated by Muslim)[2].
Following is narrated in another hadith:
Ibn Umar reported: Umar acquired a land at Khaibar. He came to Allah’s Apostle (may peace be
upon him) and sought his advice in regard to it. He said: Allah’s Messenger, I have acquired land in
Khaibar. I have never acquired property more valuable for me than this, so what do you command
me to do with it? There upon he (Allah’s Apostle) said: If you like, you may keep the corpus intact
and give its produce as Sadaqa. So ‘Umar gave it as Sadaqa declaring that property must not be
sold or inherited or given away as gift. And Umar devoted it to the poor, to the nearest kin, and to
the emancipation of slaves, aired in the way of Allah and guests. There is no sin for one, who
administers it if he eats something from it in a reasonable manner or if he feeds his friends and does
not hoard up goods (for himself). He (the narrator) said: I narrated this hadith to Muhammad, but as
I reached the (words) “without hoarding (for himself) out of it.” he (Muhammad) said: “Without
storing the property with a view to becoming rich.” Ibn ‘Aun said: He who read this book
(pertaining to Waqf) informed me that in it (the words are) “without storing the property with a
view to becoming rich”[3].
IJSE In the first hadith, waqf is mentioned as a special kind of donation. The persons who donate
44,8 it will get the rewards on the continuous basis, even after their death. The later hadith
concludes that the Prophet SAW gave an advice to Saidina Umar to hold the land in Khaibar
and give away the fruits. It shows that instead of giving the corpus away, the Prophet
advised that the corpus be tied up in perpetuity and that the usufructs be given away as
charity. It can be concluded that both Al-Qur’an and Al-hadith provide guidance on the core
1020 elements of waqf which comprise fixed corpus and usufructs.

Multi-dimensional aspects of waqf

Based on the finding that usufructs can be given away as charity, several authors such as
Mohsin (2009) and Monzer Kahf (n.d.) make an effort to reclassify the waqf into three
categories, which are as follows. Waqf khairy (public waqf): an endowment to support the
general good and welfare of community, such as building mosques[4], schools, hospitals,
orphanage-houses and guest-houses, and providing basic infrastructure, enclosing lands for
cemeteries, digging wells, etc. Al-Waqf al-dhurri, al-ahli, ‘ala’-wlad (family waqf): the
endowment to children, grandchildren, relatives or other persons specified. The waqf is
given over for public use when the beneficiaries specified are no longer alive. Al-waqf
al-mushtarak: waqf created by a person to support both the public and his family.
In addition, Mohsin (2009) also mentions that the corpus could be in different forms – Irsod
endowment: not from legal owner but wealth which has been officially gazetted by an
authority or the state to be used for the construction of mosques, schools, orphanages and
public cemeteries; waqf of share certificates: the share certificates that have been designated
for endowment by their legal owners; shares of waqf: shares that are traded in a shari’ah
compliant manner whose profits are then designated for waqf; combined waqf (waqf
Musytarak): combination of several types of waqf including one that is formed through
binding protocol (istibdal) and waqf share certificates; waqf Musya’: waqf of private
possessions that are collectively owned by more than one party and that cannot be divided.
It can be concluded that the waqf has multi-dimensional aspects. The utilization can be
for the benefits of economic agents: individual (such as family and non-family members),
government (economic and social purposes, such as helping the poor and needy) and
enterprise (e.g. share certificates). The corpus can also be in different forms but the
perpetuity should be intact.

Utilization of waqf revenues

The corpus may generate usufructs that could be in the form of revenue. However, in the early
days until the early twentieth century, as mentioned in Kahf (n.d.), waqf revenue was most
frequently used for the administration of mosques including paying the salaries of the imam
(prayer leader), teachers of Islamic studies and preachers. The second largest use of waqf
revenues is for education in general. For example, in Jerusalem, there were 64 schools based on
waqf properties at the beginning of the twentieth century especially during the rule of the
Ayubites and Mamalik Governors, including the University al-Azhar in Cairo, Egypt (972).
Since the late twentieth century, the beneficiaries of waqf are the poor, needy, orphans,
persons in prisons, etc. Other uses of waqf include health services.

Characteristics of waqf property (Mauquf)

There are two important elements in waqf, i.e., corpus (hereafter, waqf property) and
usufructs. The waqf property “moves” from the owner to beneficiaries. The movement of
waqf becomes valid, if it fulfills several conditions.
First, the owner of the waqf must be ‘aqil, baligh (adult) and a free man/woman, capable of
transferring his ownership to the ownership of Allah – he/she owns the property either by
having bought it or through his/her inheritance of the property. In other words, the donor Waqf-based
must legally own the declared wealth or property, and it must be able to benefit the Islamic
community as well as be transferable. Second, the waqf property can either be a movable or an microfinance
immovable property. Third, the owner has to appoint a mutawalli (trustee), either appointing
himself or another specified person to manage the waqf. Successors and beneficiaries should model
be specified by the owner in his waqf deed (Al-Mughniyah, 2007; Mohsin, 2009).
Fourth, all schools of thought except al-Maliki agree that waqf must be permanent and 1021
continue indefinitely without a stipulated time. Al-Maliki is of the opinion that temporary
waqf for leasing or ijarah is acceptable (Al-Mughniyah, 2007). Special waqf must have a
clearly and legally stated purpose and function. Wealth designated for waqf is enforced
automatically and cannot be rescinded, changed in purpose and function or be bound to
other rules and injunctions, except through the execution of waqf istibdal.
Here, permanent means that the waqf property must be perpetual, irrevocable and
inalienable.
Perpetuity of the property is not only by the nature of the property but also by legal
status and by its accounting treatment (Kahf, 1999). Only property like land has
characteristics of perpetuity by nature. Therefore, historically, Muslim jurists have favored
real property as the most suitable for endowment as waqf because it is most durable and
conforms to the perpetual nature of waqf. This view restricts the waqf development, as it
means that only the rich would be able to make a waqf donation. There is scope as well as
need for ijtihad in this regard. Thus, recently in Saudi Arabia, an important waqf
established by the Muslim World League (that of Sanabil al-Khayr) is an investment fund
not confined to real property (Zarqa, n.d.). Therefore, property such as common stock of
perpetual companies can be considered as perpetuity supported by law. Accounting
procedures may keep the property into perpetuity through application of the principle of
provision for capital consumption or provision for amortization.
However, all jurists approve the temporality of waqf if it comes from the nature of certain
assets such as buildings, trees, horses, books, swords, slaves, etc. They are considered as
waqf for the lifetime of the asset itself. This means, in such kinds of property, perpetuity is
given a non-perpetual meaning (Kahf, 1999). However, temporality decreed by the will of the
founder is not permitted by the majority of jurists (with the exception of Malikis, who accept
the waqf of usufruct). Kahf (1999) also mentioned that one important characteristic of waqf
is the repetitiveness of benefits that come out from waqf properties, which make waqf
different from ordinary donations.
The perpetuity principle of waqf leads to another restriction, which is the irrevocability of
the property. It means that the founder cannot revoke the dedication of the property that has
already been declared as waqf; perpetuity of the waqf, once it is created, is protected – no
confiscation of waqf property can take place either by government or individuals. Property
must have permanent usability and use of the property must be governed by Islamic law.
The principle of perpetuity is protected by rules that prohibit it from being sold or its objective
from being changed. The inalienability clause means that after a valid declaration is made, the
subject matter of the waqf no longer belongs to the donor (waqif) and it cannot be alienated or
transferred either by the waqif or the mutawalli, nor their heirs. It is transferred to Allah; a form
of frozen asset. It cannot be the subject of any sale, disposition, mortgage, gift, inheritance, etc.
This permanence covers the founder’s stipulations including purpose, distribution of revenue,
management, supervisory authority, etc. (Kahf, n.d.). Waqf is effective, binding and irrevocable
as soon as the declaration is made by the donor without any need for the delivery of possession
to the beneficiary. This opinion is accepted by the majority of jurists in the four schools of
Islamic law (Al-Mughniyah, 2007).
The majority of Muslim jurists agree on the perpetuity of waqf. Real estate (e.g. land) is
the ideal subject matter of waqf, according to al-Tarmizi, and this is upheld by the
IJSE consensus of ulama. Movable property, such as goods and animals, is not permitted
44,8 by some jurists as the subject matter of waqf. To these jurists, waqf property must be
perpetual, except in such cases as is permitted by text or sound reasoning. For instance,
waqf in the form of horses is acceptable according to the text of the hadith, and waqf in the
form of trees and buildings is approved by Hanafis and Shafi’is, because of their annexation
to land. This group of jurists does not allow cash and food waqf. In the Shafi’i and
1022 Hanafi schools, whenever the term waqf is used, permanence is presumed. Subsequent
jurists have interpreted this rule so as to prohibit temporal declaration of waqf, stating that
the object of waqf should be capable of perpetual existence, except in some special cases
(Al-Mughniyah, 2007).
It is clear that perpetuity of dedication is intended but the perpetuity of the object is
subject to interpretation. However, scholars have agreed that waqf property can be
exchanged in the case of good reason, but it must be exchanged against another property of
equivalent value subject to the approval of a local court. The new property immediately
becomes waqf for the same purpose and to the same beneficiaries of the former property.
Therefore, perpetuity means the waqf properties should not decrease (Kahf, n.d.).
The conditions, the objective and the use of waqf and the revenue stipulated and specified
by the founder must be fulfilled. This may not be changed by management or supervisory
courts as long as conditions and objectives are compatible with shari’ah.
The opinions of fuqaha and contemporary scholars on the perpetuity characteristic of
waqf property are from the point of view of the physicality of the property, the use of the
property, the intention of the founder and the beneficiaries of the waqf property as
discussed above.
The rigidity of the concept in the modern context has caused negative effects on the
productive utilization of waqf properties. Interestingly, Sheikh Anas Zarqa as quoted by
Kahf (1999) expressed his opinion that everything in waqf is subject to ijtihad and there is
no single ruling in it that has gained unanimity except that the waqf purpose must be
benevolent (birr).

3. The evolution of waqf development

Although there are still some unresolved issues with regards to permanent and movable
property, we are keen on waqf revitalization and agree with scholars’ opinion on the wider
aspects of properties to be endowed and waqf management. These aspects will be discussed
further in this section.

Property to be endowed (al-mawquf)

Traditionally, the waqf property has been in the form of land and real estate. As land
represents a great expense for individuals who wish to contribute to waqf, it limits donors to
only the very rich. Therefore, in order to enable more individuals to contribute and thereby
develop waqf so that they may play a more important role in the economy, the waqf
property should be wider in scope and type.
Muslim jurists have different views regarding the validity and lawfulness of moveable
waqf properties such as money, animal and crops. This is due to the lack of quality of
permanence in the properties concerned. However, the majority of Muslim jurists approve
the validity and legality of these items as waqf properties. Scholars from the Hanafi school
of thought state that all movable properties may be dedicated as waqf including the waqf of
dirham and dinar, i.e. waqf al-nuqud (cash waqf) and jewelry. The same opinion has been
issued by Imam Malik bin Anas. The fatwa issued by the World Fiqh Council (Majma’
al-Fiqh) in Musqat, Sultanate of Oman, March 6-11, 2004, also approved the creation of cash
waqf in any shari’ah compliant mode of investment, such as mudarabah, murabahah,
istisna, etc. The return is to be utilized according to the wish of the founder (Mohsin, 2009).
 Furthermore, many contemporary scholars, such as Mohsin (2009), Ahmed (2011), Waqf-based
Zarqa (n.d.), Rasyid (2011), Cizakca (2011) and Ibrahim et al. (2013), propose the revival of Islamic
cash waqf which was practiced during the time of Islamic Empire and which continued until microfinance
the Ottoman period. Modern ways of creating new waqf models include waqf through
securitization; for example, Waqf al-Intifaa (a time-share bond). model
To date, cash waqf has been accepted in many countries and collection has been done
through various approaches such as the waqf shares model[5] and the direct cash waqf 1023
model[6]. An example is the model of cash waqf collected under the waqf shares model in
Malaysia by the Islamic Da’wah Foundation Malaysia (YADIM) in 2006, to finance the
construction of YADIM’s da’wah training center. The Malaysian Islamic Economic
Development Foundation (YPEIM) has also applied the waqf shares concept through its
Amal Jarriah Infrastructure Development program. In Indonesia, the Indonesia Waqaf
Board as a trustee launched a cash waqf scheme known as the Indonesian Waqaf Fund.
In Sudan, the Ministry of Religious Affairs formed a Waqaf Corporation in 1990. In Kuwait,
the International Islamic Charitable Organization implemented the waqf shares model by
collecting cash waqf to finance specific programs including the Empowerment Waqaf
Scheme. In the UK, Islamic Relief has established the Waqaf Future Fund as a trustee to
create cash waqf schemes based on the waqf shares model. Besides the waqf shares model,
there is direct cash waqf whereby donors can deposit their contributions directly to a
regulatory body’s bank account as practiced in several middle-east countries (Mohsin, 2009).
The flexible nature of cash waqf can contribute to the economy in terms of enhancing
different sectors as individuals can contribute even with minimal amounts of money. It is
flexible in the sense that it can be transformed according to the wishes of the donors or
waqif. The cash can be used to finance education, health care, accommodation for the poor
and needy, provide infrastructure for agriculture and other public facilities as well as create
commercial activities in order to generate income for the purpose of supplying indirect waqf
to finance the maintenance of direct waqf properties.
Besides that, cash waqf is also needed for the creation of interest-free financial
institutions to render services to the poor and needy. Ahmed (2011) highlighted the fact that
the practice of cash waqf dates back to as early as the first century of Hijrah.
Cash waqf initially had two forms. First, cash was made into waqf to be used for free
lending to beneficiaries and second, cash was invested and its net return was assigned to
beneficiaries of the waqf.
Cash waqf was used in microfinancing during the Ottoman period (Cizakca, 2011).
Cizakca (2011) further gave an example of the Vehbi Koc Foundation (established in
Istanbul in 1969) as a big conglomerate, which endowed an amount of cash designated for
cash waqf rather than endowment of real estate. The reason was that real estate waqf might
be vulnerable to economic conjuncture and natural disasters. On the other hand, the Diyanet
Vakfi as quoted by Cizakca (2011) constitutes an example of a waqf creating a multitude of
companies or providing equity finance to already established companies.

Managing waqf funds

Waqf property must be managed by an individual or an organization which is called the
mutawalli. This administrator is responsible for managing waqf property to the best interest
of the beneficiaries as intended by the waqif, to preserve the property and to generate the
revenues of the waqf property. Monzer Kahf (n.d.) suggested that the administrator can be
paid from the revenue of the waqf property or if not mentioned in the document of the waqf,
he can seek assignment of compensation from the court[7].
The first organization that managed waqf, as mentioned in Kahf (1999), was created
during the times of Prophet SAW. Also, Caliph ‘Uthman bin ‘Affan gave as waqf the well of
“Ruma” which supplied drinking water to Madina City free of charge. The well was
IJSE managed by the community with no government interference. It shows that waqf property
44,8 was neither managed by an individual owner with a profit-making motive nor an authority
denominated by government. Furthermore, the establishment of waqf was a clear method of
creating a third economic sector.
However, as stated in Kahf (n.d.), during the Ottoman Empire, a ministry of waqf was
established and laws of waqf were enacted. The most important law of waqf was
1024 established on November 29, 1863M (19/6/1280H). Most Muslim countries had either a
ministry of waqf or a department of waqf within the religious affairs ministry. This pattern
was continued during the colonial period of the nineteenth century. However, after
independence of most Islamic countries, many waqf properties, for example, in Syria, Egypt,
Turkey, Tunis and Algeria, were added to the public domain of the government and
distributed through land reforms. During this period, Awqaf were mostly used to refer to
mosques and are not seen as related to productive and developmental content.
However, contemporary scholars such as Monzer Kahf (1999), Ahmed (2007) and
Mohsin (2009) do not agree with the management of waqf by the state due to the dangers of
corruption and inefficiency. The development of waqf will not be successful if the image of
corruption still exists. Therefore, any new creation of cash waqf needs trust from the
founders and the management should be honest, transparent and efficient. Mohsin (2009)
further argues that government plays roles to register and regulate the overall waqf in the
whole country while management of the waqf properties should be in the hands of a non-
government body.
From the above discussion, it can be concluded that the management of Awqaf
properties must be in the hands of a third party. It is very important to ensure the separation
of operators and the regulators so that good governance can be monitored and practiced.
Therefore, the management of waqf must be in the hands of an institution and should not
be in the hands of an individual. The separation of the power of the owners and the
management creates agency relationship and the issue of ownership right. This will be
discussed in the following sub section.

Creation of an institution of waqf

It is obvious that before the property is endowed, it belongs to the donor or waqif. Once the
property is endowed, the ownership is released from the donor. Jurists are of different
opinions regarding the ownership of waqf property after endowment. According to Maliki’s
view, the ownership still belongs to the waqif but he cannot freely use it anymore.
Hanafi’s opinion is that the property has no owner anymore. This is supported by many
followers of Shafi’i. Hanbali scholars, on the other hand, have said that ownership of the
property is transferred to the beneficiaries (Al-Mughniyah, 2007).
In the modern era, management of waqf is being institutionalized, and agencies play a
major role in managing properties. Therefore, cash waqf financial institutions should be
supervised by a body that can oversee, examine and monitor administration in terms of
collection, investment and distribution. This body can intervene if there is any
mismanagement of the cash waqf. The unresolved issue here is who is the owner of this
waqf property managed by the institution? What is the relationship between the donor and
the agency? Even though the ownership of waqf property has been released from the
original owner/waqif to the mutawalli, the latter party now has a responsibility to manage
the property according to the intention of the waqif.
The answers for the previous questions could be discussed in the context of agency
conflict and stakeholders’ interest. The relationship between the donors and institution can
be described by the agency theory which is commonly used to explain governance in the
context of a principal-agent relationship in a profit-oriented organization. An agency
relationship arises whenever one or more individuals, called principals, hire one or more
other individuals, called agents, to perform some service and then delegate decision-making Waqf-based
authority to these agents. This theory explains their differences in behavior or decisions by Islamic
noting that the two parties often have different goals and, independent of their respective microfinance
goals, may have different attitudes toward risk. The basic assumption of the agency
theory is that both principal and agent try to maximize their return (Malonis, 2000). model
Evidence of self-interested managerial behavior includes the consumption of corporate
resources in the form of perquisites and the avoidance of optimal risk positions, whereby 1025
risk-averse managers bypass the profitable opportunities in which the firm’s shareholders
would prefer to invest.
The agency theory suggests that a potential agency conflict arises whenever the
manager of a firm owns less than 100 percent of the firm’s common stock. In the majority of
large publicly traded corporations, agency conflicts are potentially quite significant
because the firm’s managers generally own only a small percentage of the common
stock (Malonis, 2000).
In the context of waqf, if the waqf property is managed by the donor himself/herself,
management will undertake actions as wished by the donor. However, when it is handed
over to another party, there is a possibility of conflict between the wishes of the donor and
the interests of the mutawalli. In institutional waqf with many donors as structured for cash
waqf or shares waqf and waqf shares, each donor will have only a small portion of the
shares. Each donor also has limited power to observe the managerial actions.
Managers can be encouraged to act in the stockholders’ best interests through incentives,
constraints and punishments. These methods, however, are effective only if shareholders
can observe all of the actions taken by managers. A moral hazard problem, whereby agents
take unobserved actions in their own self-interests, originates because it is unfeasible for
shareholders to monitor all managerial actions. To reduce the moral hazard problem,
stockholders must incur agency costs (Malonis, 2000). The principal or stockholders can
design a remuneration plan for the agent so that the agent would act advantageously for the
principal (Furubotn and Richter, 2005).
However, the donors of waqf generally are not interested in the dollar profit or return
because they are not going to take any return from their endowed property. Their concerns
are the sustainability of the corpus of the waqf and the return they expect are in the form of
Allah’s reward. Therefore, the stakeholder theory may be more appropriate in explaining
the relationship of the donors and the waqf institution.
Ihsan and Adnan (n.d.) quoted Hyndman and McDonnel (2009) who raised the criticism
that the agency theory is not appropriate for non-profit organizations, specifically in the
charitable sector. This is because contributors and managers do not expect any return from
their donations and efforts in managing the organization. They suggested that
understanding the accountability of various stakeholders is more relevant. Therefore, the
stakeholder theory is used to understand the accountability of various or multilateral
stakeholders, as in the case of waqf institutions.
In explaining the waqf institutions in the context of the stakeholder theory, we use the
definition of stakeholder given by Freeman (1984) as quoted by Ihsan and Adnan (n.d.).
They define stakeholders as “any group or individual who can effect or is affected by the
achievement of the organization’s objectives.” It can be concluded that the multilateral
stakeholders of a waqf institution are waqif, the waqf board, beneficiaries, regulators and
the community at large.
In addition, both Ihsan and Adnan (n.d.) used a waqf accountability model to explain
dual accountability in waqf: primary accountability of managers/mutawalli, waqif, the waqf
board and regulators to Allah and mutawalli accountability to various stakeholders.
The accountability requires mutawalli to prepare clear reports to show the shari’ah
compliance of the activities and management of the waqf properties. Cajee (2011) proposes
IJSE shari’ah advisory services to be provided to ensure the shari’ah compliance of the waqf
44,8 management as well as shari’ah auditing services. Accountability in terms of reporting
quantitative and qualitative returns are to include fiscal accountability to make sure that the
money has been spent as agreed and according to the appropriate rules, process
accountability to ensure proper procedures have been followed, program accountability to
monitor achievement of objectives and priority accountability as intended by the waqif.
1026
4. Waqf-based Islamic microfinance
Microfinance has been identified as a key instrument for poverty alleviation (Kahf, 1999;
Ahmed, 2002, 2007, 2011; Bhuiyan et al., 2012). Microfinance is important to the poor
and to those who are excluded from mainstream financial services. It is important to note
that microfinance has several characteristics: it provides small short-term loans
(Shahinpoor, 2009)[8]; group peer pressure is usually used as the collateral instead of
tangible assets; it is relatively easy, providing quick approval of loans with very little
paperwork (Fruman and Goldberg, 1997); the interest rate is higher than the market interest
rate (to cover the transaction costs and ensure that MFIs are sustainable); the loans have
high repayment rates; and outreach is high due to convenient locations of the MFIs.
The question arises about how to produce the best practices of microfinance which can
be sustained in the long term. Brandsma and Chaouali (1998), Obaidullah (2008) and Smolo
and Ismail (2011) have suggested the following best practices of microfinance as guiding
principles: covering costs – in order for MFIs to be sustainable, they must be able to cover
their costs of lending; achieving a certain scale – MFIs should reach a certain scale which is
measured by the number of clients and active loans; avoiding subsidies – borrowers should
realize that the microcredit is borrowed money and they have an obligation to pay it back.
MFIs cannot depend on government or private organizations to continuously subsidize
them. Therefore, MFIs should be financially independent; promoting outreach and demand-
driven service delivery – MFIs should increase their services and provide access to credit for
the growing number of low-income families. While there is no real or financial asset
collateral, peer pressure is used as an alternative form of collateral to motivate borrowers to
repay their loans on time; maintaining a clear focus – MFIs should have a clear focus and
should not mix their services with other social services such as schooling and health care.
Given the characteristics and key principles of microfinance “best-practices,” what would
be the business model of MFIs in which waqf could be used as a source of funding for
Islamic microfinance? We may suggest an MFI that has the following elements: a charity-
based donor-dependent approach; a market-based for-profits approach; or it should be
interest free.
The waqf-based microfinance has all the above elements. It can support the creation of
interest-free MFIs to render services to the poor and needy. The waqf property could
generate income and profit which can ensure a continuous reward for the donors. Hence,
a sustainable MFI is possible.
The idea of creating waqf-based MFIs is supported by many contemporary scholars.
The waqf-based microfinance, as suggested by Ahmed (2007), can manifest in the form of
corporate entities as a trustee management organization which can provide various trust
management-related services for fees/compensation. The reason for using corporate entities
is that corporations can ensure continuity and permanence (in the case of death or disability
of the originator/settlor). It can also ensure professional and expert management of assets,
objectivity and administration without any bias.
However, the involvement of waqf-based microfinance in business-related activities may
expose their balance sheet to risks. Ellias et al. (2015) emphasized the importance of risk
mitigation by investing the cash waqf in low-risk investment portfolio. Researchers such as
Ahmed (2007) and Hamdan et al. (2013) proposed the importance of accounting procedures
and reports to mitigate the risks faced by non-profit-making institutions. Earlier study by Waqf-based
Ahmed (2007) suggested in more detail the precautionary measures that should be taken. Islamic
The examples of precautionary measures suggested by him include the following: microfinance
mitigating credit risk, resolving the moral hazard problem and observing economic
uncertainty, and operational and risk management issues. It should be treated in the same model
way as other financial institutions. The risk of decay of the endowment must be reduced by
choosing a proportion of low-risk assets in such a way that the returns on these assets can 1027
cover the expected loss from microfinancing activities. He also suggested some approaches
to waqf-based microfinance management, including how to resolve sustainability problems,
different approaches of raising funds for Islamic MFIs and various fund utilizations.
It is important to note that the formation of waqf-based microfinance must be carefully
designed, monitored, and supported by law, governance regulations and a strong
accounting system. This is to avoid any conflicts possible as discussed in the agency theory
and the stakeholder theory.
When waqf is institutionalized, the institution plays a role as trustee with legal entity on
its own. It becomes an independent entity separate from the manager who runs the
management of the institution. The original owners/donors trust the institution to manage
the property and have no right on it other than making sure the use of the property or
the revenue from the property is as intended by them. The institution becomes the trustee
agency to the donors/waqif. The next issue is how to ensure that the trustee party will
manage the property according to the interest of the original owner who endowed it.
In creating cash waqf-based microfinance, in addition to its investment, it must be in
conformity with the shari’ah. To safeguard the capital of the cash waqf, it should be
invested in safe investment. As the profit of the waqf is not a waqf, different rules can
be applied to govern the profit generated. This will enable waqf-based microfinance to
provide benevolent loan (al-qard hasan) to assist the needy.
The waqf-based microfinance may use the guidance provided by the International Fiqh
Academy Resolution No. 140 (15/6) (as discussed in Mohsin (2009)), which states among
other things that the conditions for cash waqf-based microfinance are that it should use the
safest modes of shariah-compliant investment and keep away from the high-risk investment
modes (in the first stages), and that there must be an annual disclosure of the investment
activities to the founders. This resolution gave the right to the founders to know how their
cash waqf was invested and distributed through an annual financial statement. However, do
the donors have any power to take action if the agent does not meet their duty?
As an institution, the waqf-based microfinance could be registered under company act.
This will expose it to the risk of being sued and liquidated. Therefore, donors (the heirs after
the donor is deceased) as shareholders must have the right to appoint the agent (mutawalli)
in the annual general meeting. The principals/shareholders/donors should be furnished with
all the important required information about the performance and activities of this
microfinance. Even though the Islamic jurists are of opinion that the corpus or property
endowed no longer belong to the original owners/donors, it is not owned by the mutawalli
either. Between donors and mutawalli, the donors have more right on the property. This is
because they are the original owners and the property must be used in the way the donors
intended it to be used.
Consequently, governance procedure of waqf-based microfinance must be clear and
comprehensive. This brings us to the same view as Citi Foundation (2010) that defines
governance as the process of overall direction, effectiveness, supervision and accountability
of an organization. This process involves a system of checks and balances and works
toward a set of objectives based on accountability. Governance evolves as the institutions
evolve and requires leadership and commitment, especially from stakeholders, and depends
on the ability of the board of directors to guide the process.
IJSE The following discussion should lead us to a concrete solution on the governance
44,8 structure of waqf-based MFI that is able to solve the conflict.
Basically, the principles of governance, as discussed in Fundacion Microfinanzas
BBVA (2011), should include the protection of shareholder rights, guarantee the fairness of
decision making at governance levels, limit the abuse of power, establish a framework of
responsibility for administrators and senior executives, have respect for human dignity and
1028 rights (such as equal opportunities and respect for diversity), promote integrity, loyalty
and honesty, as well as comply with laws and regulations to prevent unlawful activities and
conflict of interest. To ensure good governance in administration, there must be an annual
general meeting of the institution’s highest governing body where shareholders can exercise
their vote and communicate with each other. The organization must establish internal
regulations that set the criteria for organizing and running the annual general meeting.
Good governance should emphasize the importance of the board of directors as a governing
body. Good governance in management must have a complete separation between
administration and management duties so that each body carries out its duties with
the highest efficiency. Therefore, the organization must have a general manager as the
institution’s legal representative, appointed by the board of directors, who reports to the
board chairman. The board of directors should be responsible for general strategy, control
and supervision and must not interfere in general management activities. However,
important decisions or measures taken by the management body must be approved by the
board of directors.
The growing importance of microfinance corporate governance led to the fourth annual
Convergences 2015 Forum in May 2011, which launched the “Paris Appeal for Responsible
Microfinance.” To address the excessive commercialization of microfinance and other
issues, the Paris Appeal reaffirms the role of microfinance as a tool in the service of
development and inclusive finance. It aims at bringing back ethical values and a social
orientation as sub-topics that should inspire all stakeholders in the sector and offer to ensure
self-regulation initiatives and rules that converge toward a solid foundation of principles.
These rules will help to define responsible microfinance and restore confidence among the
public. All the corporate governance procedures suggested for MFI can be adopted by waqf-
based Islamic MFIs.
However, the importance of good governance in creating a sustainable waqf-based
Islamic MFI requires extra attention. As the law of many countries requires waqf to
be registered and managed by a government body, the researchers would suggest the
operation of waqf-based Islamic MFI to be managed by an operator separate from the
regulatory body. The regulatory body plays important roles in monitoring and ensuring
that the intentions of the donors always be served. The operator as mutawalli is responsible
for management in such a way that the institution would be sustainable.
The waqf-based Islamic MFI which is governed by a board of directors will report to the
regulator of waqf and observe the microfinance regulation. Good governance may be
accomplished by issuance of audited report by an independent auditor. Furthermore, the
audited report must be accessible to all stakeholders, especially the donors and regulators.

5. Conclusion
Waqf is different from other kinds of charity such as gift or donations in which the corpus is
retained and only the revenue of it will be used to help the poor and needy, and for welfare.
This will enable the donor to get continuous rewards as long as the corpus can still generate
benefit from it revenues. Therefore, waqf has high potential to become more popular as a
source of funding for Islamic microfinance.
Since many contemporary Muslim scholars have criticized the intervention of
government in the management of waqf, it is suggested that waqf-based Islamic
microfinance be institutionalized under a corporate organization. However, the creation of Waqf-based
a cash waqf-based Islamic MFI must observe the issues of agency conflicts and the right Islamic
of stakeholders to a transparent management. The perpetuity of properties should be microfinance
protected by law. The trustee agency should have a contract with the donors. This is to
make sure the manager of the institution will manage the property and use the revenue for model
the purposes intended by the donors.
Governance procedures must be clear and followed by all parties concerned. There are 1029
models of corporate governance best practices that can be adopted. These address the
issues of transparency, accountability, checks and balances, rotation of key executives and
staff, internal controls, etc. (Cajee, 2011).
However, there is still an important issue to be resolved: the rights and responsibilities of
the corporation from a legal point of view. Once the waqf-based Islamic MFI is registered as
a corporation, it becomes one entity under the law. As a corporation, it can sue and can be
sued. It also can be liquidated. A special provision of act must be created to protect the
corporation so that its values of perpetuity, irrevocability and inalienability can be retained.

Notes
1. We argue that waqf is an economic matter based on the premise of the definition of waqf;
see Ismail and Possumah (2014).
2. Sahih Muslim (n.d.a).
3. Sahih Muslim (n.d.b).
4. Monzer Kahf (n.d.) classifies this waqf as religious waqf. Others, he classify as philanthropy waqf.
5. Waqf shares model – shares and stocks that have been designated for endowment by legal owner.
6. Cash waqf model – either direct cash as waqf or by shares called shares of waqf. Shares of waqf
are shares which are shari’ah-acceptably traded and its profits are then designated for waqf.
7. The judicial system is the authority of reference with regard to all matters and disputes related to
waqf and registration and records of waqf.
8. Because it is utilized to grow crops or to start microenterprises.

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Corresponding author
Rose Abdullah can be contacted at: mawarmaju@yahoo.com

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