Waqf: Its basic operational structure
The waqf, its basic operational structure, development and contribution
As its name suggests, this article deals with the modus operandi, evolution and economic contribution of waqfs, one of the foremost institutional contributions of Muslims to humanity. It is hoped that after reading this article, Muslims will be inspired to modernise and then re-apply this institution in their own countries.
In Islam, accumulation of wealth and its redistribution are closely related. Once wealth is accumulated, Muslims are ordained to redistribute their wealth voluntarily. Income redistribution by resorting to taxation is not the preferred method; instead, helping the poor voluntarily, primarily through the waqfs, is definitively preferred (Cizakca, 2011). Charitable or philanthropic foundations are known in the Islamic world as waqf or habs. For westerners, not familiar with Islamic institutions, the traditional waqf can also be described, notwithstanding some differences, as a non-profit trust.
‘When a person dies, all his/her acts come to an end, but three: recurring (ongoing) charity, or knowledge from which people benefit, or a pious offspring, who prays for him/her’ (Muslim, 1992)
Recommended and encouraged by Prophet Muhammad (PBUH), waqfs eventually became very popular. Indeed, Islamic economic history indicates that waqf, not zekat, was the most important institution for redistribution of wealth (Hodgson, 1974, II: 124). We have substantial historical evidence for this. For instance, during the 18th century, total revenue of waqfs in the Ottoman Empire equalled one-third to half of the total state revenues (Yediyildiz, 2003). Although some pre-Islamic civilisations were aware of waqf-like structures, for instance, the Roman fideicommissum, Islamic waqfs differed substantially from their predecessors.
The origins of Islamic waqfs as we know them today are traced back to a statement by Prophet Muhammad (PBUH) known as Thawab ba’d al Wafah (reward after death). Abu Hurairah reported Allah’s messenger as saying: ‘When a person dies, all his/her acts come to an end, but three: recurring (ongoing) charity, or knowledge from which people benefit, or a pious offspring, who prays for him/her'(Muslim, 1992)
Thus, a Muslim can continue earning rewards even after death. Waqf is the best instrument for facilitating this. Indeed, a waqf established as a kulliyah, a complete system, can combine all these three acts mentioned by the Prophet (PBUH): a mosque stands at the centre of a waqf-kulliyah and whenever the faithful pray in it, the founder of the waqf is considered to have provided ongoing charity. A waqf-kulliyah can also provide free food for the poor, another very clear on-going charity. In the school/university of the waqf, knowledge is produced and disseminated. Finally, the management of the waqf can be entrusted to the pious offspring, who would be paid a salary for his work and would be expected to pray for the soul of the founder.
It is also of interest that the root of the Arabic word Kulliyah, kll, was borrowed by the English language in the form of cll and evolved into the English word: college. Remarkably, a classical Oxbridge college, just like an Islamic waqf-kulliyah, provides a complete living environment for scholars and their students.
The modus operandi of a waqf is as follows: a privately owned property (in some countries also public funds), is endowed for a charitable, even philanthropic, purpose and the revenue, which the property generates, is allocated for this purpose in perpetuity.
Ottoman waqfs were either managed directly by their founders or by the trustees appointed by them. During the 18th century, 67% of the Ottoman waqfs were managed by the trustees appointed by founders. The rest were appointed by courts after the appointed trustees had expired (Yediyildiz, 2003). This contrasts with modern Malaysia, where the sole trustee of all waqfs is the State Islamic Religious Council in every state. But this is an idiosyncratic case since in the rest of the Islamic world waqfs are managed by their own trustees appointed according to the criteria established by the founders. Waqfs are managed by centralised institutions only if their founders and trustees have passed away.
Waqfs, so structured, stand out as one of the great achievements of Islamic civilisation. All over the vast Islamic world, from the Atlantic to the Pacific, magnificent works of architecture as well as services vitally important to the society such as education, health and many others have been organised, financed and maintained for centuries through this system.
Historians have established that the Islamic waqf law was borrowed by Europeans, particularly the English during the crusades, when they “visited” the Middle East and become acquainted with Islamic culture.
An excellent example is Merton College of Oxford University established in 1264 (Gaudiosi, 1988). It is generally accepted that Merton College represents a threshold in the evolution of European universities. The Merton Foundation became a respected model in England and was emulated by the founding of Peterhouse, Cambridge University. Prof Gaudiosi has argued that the endowment deed of Merton College was in such conformity with the Islamic waqf law that it would have been approved in the Islamic world by any learned judge. In the USA also, the top universities are either structured as waqfs (trusts) or they all have their own university endowments.
Returning back to the Islamic world, we note that according to the Hanafite law, when a privately owned property is endowed and is made the corpus of a waqf, it becomes Allah’s property. This has made it rather difficult, but not entirely prevented, bankrupt and corrupt governments to confiscate waqf assets. Being relatively immune from confiscations, many waqfs with sound and sufficient endowments have survived for considerably longer than half a millennium and some even for more than a millennium (Crecelius, 1995).
Notwithstanding their longevity, the history of waqfs is a turbulent one. For centuries, the fate of this institution was closely linked to the fates of the states under which they functioned. Failing states and desperate revenue seeking rulers had always a lust for the rich, waqf-controlled assets. This provocation could have been curbed somewhat had waqfs paid taxes to the state. But there were no uniform rules on this, while the Central Asian waqfs paid taxes depending upon their fiscal status before their establishment, neither the Malikite waqfs of Muslim Spain nor the Hanafite Ottoman cash waqfs of Bursa paid any taxes (Cizakca, 2000). Consequently, throughout Islamic history waqf-state relations have remained difficult. While on the one hand, the sultans established some of the greatest waqfs, on the other, the state often violated property rights of the waqfs, particularly if they were not legally sound.
Nowhere in this long history, however, did the waqfs experience the universal and deliberate destruction that was inflicted upon them during the 19th and 20th centuries, a fact which can be attributed directly to western imperialism or to the process of westernisation. Usurpation of waqf properties started under western pressure and continued under the indigenous modernists even after Islamic countries gained independence. Consequently, in most of the Islamic world today, waqfs are dilapidated. A new law to reform the waqfs is needed. Such a draft law has been prepared for Malaysia by INCEIF. Another draft law for other Islamic countries has been prepared by IDB/IRTI/KPF.
There are several categorisations of waqfs. If the revenue generated is spent entirely on charity/philanthropy, such a waqf would be known as waqf khayri. If the revenue is spent for the family members of the founder, this would be waqf ahli or khas. Islamic law permits family waqfs. Although such waqfs were abolished by modernists in much of the Islamic world during the 19th-20th centuries, they are now being, once again, legalised (Cizakca, 2014, pp. 427-438). There were also many waqfs which combined these two characteristics.
The exact nature of the corpus leads to still another categorisation: the real estate or cash waqfs (awqaf al-nuqud). In the 20th century, cash waqfs have evolved into the waqfs of stocks. These are waqfs established with the stocks of incorporated joint-stock companies (Cizakca, 2000).
Waqfs and development
Traditional real estate waqfs functioned in a simple manner. They were either endowed in urban areas, where their endowment (corpus) would be in the form of residential buildings, shops, bath-houses or other rent yielding urban property, or in rural areas in which case their corpus would be in the form of cultivable land. In rural areas, the waqf land would be managed through sharecropping, muzara’a, with a certain share of the produce going to the land owning waqf and the rest to the cultivators. Muzara’a is the application of the classical mudaraba partnership in agriculture. In history, most arable lands in the Islamic world owned by waqfs were cultivated this way. In this arrangement, waqf provides the land and the produce can be shared between the waqf and the cultivator according to mutual agreement.
Hukr and muqata’a
Hukr constitutes another method to develop waqf properties. This is basically long term leasing of waqf owned land. The developer rents the waqf’s land. The rent is determined by ujr misl, i.e. the level of rent paid for similar properties in the vicinity. Providing the developer does not fail to pay this rent, the building that he erects is considered his property. In hukr there is double ownership. While the raqaba (dominium eminens) of the land belongs to the waqf, the usufruct belongs to the developer. The developer obtains this right to use the property he builds on waqf land, in return for the rent he pays. The building is his for as long as he pays the rent. The developer could even bequeath its usufruct to his heirs, providing they continue to pay the rent.
Hukr is a long term lease act (ijarah tavilah). It originated with the Hanbelite school and became accepted by all schools. Hanefite law normally limits leasing land to three years. But hukr constitutes an exception. The Lebanese law of real estate calls hukr, muqata’a, and defines it as a form of rent, which gives the tenant the right to build anything on the land of the waqf (Akgunduz, 1988, p. 392).
Some scholars have argued that in history, hukr or muqata’a was only resorted to when the waqf property on the land was destroyed and the waqf did not have the means to repair it and istibdal was also not possible. Under these conditions, the permission to resort to hukr or muqata’a had to be obtained either from a court or the ruler.
The muqata’a waqf was also used for urbanisation. When a city was conquered by a Muslim army, commanders quickly took over urban property with potential for development. They then transformed it into waqf and then using the muqata’a waqf system allowed new immigrants to build upon it. Since hukr or muqata’a is long term rent, the ability of the waqf to increase the rent was very important. The first condition was that the rent paid by the developer cannot be less than the prevailing rents for similar properties. Courts did not take into consideration any increase in the value of land caused by the building erected by the developer. They did, however, consider any increase in value caused by the overall development of the district.
Waqf muqata’a enabled a waqf to utilise its asset (land) that had become useless. When tenants built upon it, the waqf gained new and valuable assets. When the tenants’ descendants expired, assets reverted back to the waqf. On the downside, such long term leases diluted the property rights of the waqf. Indeed, if the lease contract did not clearly state the condition of ujr misl, rent quickly became insignificant. Moreover, if the prevailing currency was devalued, rent lost its value even more.
Frequent fires or devastating earthquakes constituted a serious danger for urban real estate waqfs. When that happened, and the corpus of the waqf was destroyed, the waqf simply failed to function. The solution found was the ijaratayn, or double rent. Ijaratayn (double rent) is defined by the current waqf law of Turkey as follows: Waqf assets leased without a fixed terminal date on the condition that a lump-sum payment (rent) nearly equal to the value of the asset is made upfront, in addition to the payment of annual rent. Nowadays, with modern Islamic finance providing takaful, this particular form has become redundant.
If a waqf lost its income and its buildings were in need of repairs, the trustee could also borrow money. Such waqfs were known as marsad. In this case, the waqf, not the trustee, would be considered the debtor (this proves that waqf had judicial personality – an issue that had been rejected by some orientalist authors). With money thus obtained, waqf buildings were repaired and were then leased to the lender. The rent was then regularly deducted from the debt of the waqf. In our times, this is known as musharaka mutanakisa.
The problem with either marsad or musharaka mutanakisa is that if the rent was not sufficiently high, and the term was long, new repairs came to be needed again and the waqf failed to escape indebtedness.
Classical Islamic law demands that a property to be endowed as a waqf must be privately owned. But, in time, lands belonging to the state were also endowed. This happened when the rulers allocated state lands to certain persons, who then donated these as waqf. Direct allocations by the rulers were also common. These were made in the form of waqf to ensure perpetuity. Two conditions were relevant: permission by the ruler and that the raqaba (dominium eminens) remained with the state while the usufruct belonged to the waqf in perpetuity.
The classical methods just mentioned constitute the origins of the surviving contemporary forms. The current law of waqfs in Turkey permits leasing waqf assets for restoration and repairs. Tenants are to pay a certain annual rent and are to keep the asset in their possession for a certain time. Details are decided in public auctions. The tenant chosen then returns the asset to the waqf at the end of the period in question. The maximum period allowed is 49 years and is granted in return for restoring the asset.
Two other popular forms are used by land owners in Turkey, which may be relevant for waqfs elsewhere: BOT and unit-sharing. The former – build-operate-transfer – is well-known and needs no further explanation.
Unit-sharing, on the other hand, involves the land owner and the developer agreeing to share the total number of units that the developer promises to build on waqf land. Usually, depending on the location of the land, a ratio of 50/50 or 40/60 is used. But whatever the ratio chosen, this is a risky process in view of the possibility that the developer may fail to complete building the units.
Thus, Islamic law is very flexible and provides many feasible alternatives to develop waqf owned assets. Moreover, these alternatives are not just in theory. Islamic economic history informs us that they were successfully put into practice in the past. This is confirmed by the survival of waqf assets over many centuries in excellent condition in some parts of the Islamic world. There are many lessons to be learnt from these historical predecessors when modernising waqfs today.
Waqfs from the macro-economic perspective
In order to fully understand the harm inflicted by the colonial and modernist policies directed against waqfs, the contribution of the waqf system to the economy must be well understood.
The waqf system has, throughout history provided a myriad of essential services such as health, education, municipal services, etc., to Islamic societies – to Muslims as well as non-Muslims. The system therefore contributes significantly towards that ultimate goal of so many modern economists i.e. with the waqfs providing the bulk of the financial needs of the service sector, there would be a substantial reduction in government expenditure. The reduction in government expenditure, on the other hand, would lead to a smaller budget deficit, which in turn, would lower the need for government borrowing.
This is precisely what the Chancellor of Germany, Angela Merkel, is trying to do in Europe today. She is forcing all member states to reduce government borrowing by not allowing the ECB to buy government bonds. In fact, she is simply telling them not to borrow! Waqf enters into the picture precisely here: it reduces the need for a government to borrow. Hence its modernity and relevance today is truly astounding!
Furthermore, a reduction in government borrowing would curb the crowding-out effect and lead to a reduction in the rate of interest, thereby curbing a basic impediment to private investment and growth.
Obviously, reducing the rate of interest, preferably to zero, would also be the ultimate goal of an Islamic government. To the extent that the waqf system contributes to the reduction/elimination of interest, it becomes an important tool for Islamic macro-economics. The waqf could fulfil these 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 the prevailing interest and pave the way for growth while fulfilling an Islamic requirement, it also achieves another modern economic goal: a better distribution of income in the economy. Moreover, this improvement in the distribution of income would be achieved essentially through voluntary donations and the need for taxation is reduced. Thus, the relatively low tax burden of an Islamic economy must be considered within a broader context that includes the waqf system. Indeed, the tax burden in an Islamic economy can be low because the bulk of the essential services should be provided by the waqfs. Tax revenues are earmarked primarily for defence. This is not just theory. Ottoman budget studies have confirmed that indeed this was the case (Barkan, 1954).
There are further implications as well: lower taxes would have a positive impact on aggregate production while at the same time reduce costs. Prices would come down and pave the way for non-inflationary growth.
Thus those Islamic economists who argue for increasing taxation despite the Qur`anic injunctions, are missing the point. The Qur`an, mentioning just a small number of modest taxes, is actually giving us a message that the government should be small – a very modern concept! Thus, instead of trying to impose taxes that are not in the Qur`an, they should focus on reforming the waqf system because a well-functioning waqf system would allow the economy to function with minimum taxation. The Ottoman experience of channelling all tax revenues for defence and financing all essential services through waqfs confirms that this is possible.
One of the most important of these services is education. Education serves both growth and equity. Throughout history it was the waqf system which provided education and health in Islamic countries. These two are the most important components of human capital and this is the secret of the successes of countries such as Japan, Taiwan and South Korea, all without natural resources.
There is no doubt that centralisation and the damage inflicted upon the waqf system has been detrimental to the development of these services in the Islamic world. It is clear that the state provided education and health services have not been a match for the waqf provided one. At the very least, the waqf system is needed to supplement the state provided education and health sectors. Presently, in the aftermath of the 1967 reforms, there are 166 universities in Turkey. Of these 62 are waqf universities. In Istanbul, there are 42 universities. Of these, 33 are waqf universities. And Turkey, like Japan, South Korea and Taiwan, is also a country without natural resources. Yet it has been achieving high rates of sustained growth. Much of this is thanks to its relatively healthy and well-educated workforce. This is, to a large extent, an outcome of the 1967 waqf reform.
The positive impact of the waqfs on employment should also be acknowledged. Partly as a consequence, Western countries have now reversed their traditional hostilities to trusts/foundations. The French government, which used to be the most anti-waqf government throughout history, now subsidises 60% of the expenditure of French foundations. The result, all over the west, was a significant increase in employment. The non-profit sector accounted for an average of 13% of the net jobs added between 1980-1990 in France, Germany and the United States. In the U.S., the non-profit sector accounts for 6.9% of total employment. It has been reported that currently a massive “revolution” is taking place in the US philanthropy. Clearly, in addition to all the advantages mentioned above, the revival of the system would contribute to the solution to the problem of employment in the Islamic world as well.
Waqfs may also play a significant role in the democratisation of Islamic countries. This is because waqfs constituted for centuries civil society institutions par excellence for the Islamic world. Indeed, established with private capital, which was often pooled, they were decentralised, autonomous decision making units involved in local problems. It is quite possible that the incapacitating policies imposed on the waqf system for the last 200 years have deprived the Islamic world of its most potent democratic force.
Thus, lack of democracy is not, as some believe, an outcome of Islam as a religion, but a consequence of the last two centuries of institutional and economic history.
An earlier version of this paper was presented on 21 January 2014 in Kuala Lumpur: Roundtable Discussion on Development of Waqf Properties in Malaysia, INCEIF-IDB/IRTI Workshop. The author would like to thank the participants of this roundtable for their comments.
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Prof Dr Murat Cizakca received his PhD degree from the University of Pennsylvania in 1978 in economic history. Author of three books (in English) and more than 100 articles, he focuses on the history and evolution of Islamic financial/economic institutions and their modernisation. He is the former fellow of the Institute of Advanced Studies (Wissenschaftskolleg) in Berlin, Germany and a current fellow of the Institut d’etudes avancées de Nantes, France. He is also a member of the Executive Scientific Committee of the Istituto di F. Datini in Prato, Italy. He teaches currently at INCEIF University in Kuala Lumpur, Malaysia and is an adjunct professor at the Faculty of Law, Economics and Finance at the University of Luxembourg.
On the differences between the Islamic waqf and the Western trust see, Alias and Çizakça, 2014.
The Roman fideicommissum primarily served to preserve the family property for generations through successive trusts. Thus it corresponds, more or less, to the Islamic family waqfs. But an Islamic waqf had much greater applicability as will be explained below. On the fideicommissum see; (Buckland, 1931).
Western historians argue that “college” comes from the Roman “collegium”. But “collegium” was a very general concept and applied to any association with legal personality, whereas kulliyah was a far more specific institution corresponding to a complete living environment of a self-sufficient community of scholars and students financed by a waqf.
Historians do not usually distinguish between “charitable” and “philanthropic” but economists do. Accordingly, charity is given to the poor to help them for their immediate needs such as provision of food. Philanthropy, by contrast, aims at eradicating a problem altogether by enabling people to solve their own problems with hard work, such as providing scholarships to poor students, who with hard work escape poverty. For full details on this see; (Acs, 2013).
Islamic Development Bank/Islamic Research and Training Institute/Kuwait Public Foundation.
Istibdal, refers to the process of changing one waqf asset for another.
Although nowadays, in the era of post sub-prime crisis, this argument may seem superfluous, it should be remembered that before the recent quantitative easing policies, the prevailing rate of interest used to be much higher impeding seriously the process of growth.
Currently the Turkish waqf sector is stagnating and new reforms are urgently needed.
Lester Salamon, 2014.