Paper Title:    Cash Waqf Risk Management and Perpetuity Restriction Conundrum

Author:          Azniza Hartini, Azrai A. Ambrose & Fadhilah A. Asuhaimi

Publisher:      ISRA International Journal of Islamic Finance, 13(2), 162 – 176.

This paper discusses the issue of risk vis-à-vis the perpetuity restriction principle inherent in Waqf (Islamic endowment). The authors contend that as a result of Ijtihad, particularly Istihsan bi-al-urf (juristic preference on the basis of custom), endowing cash as Waqf is now accepted in the Muslim world. Resolution No. 140 (16/6) of the International Council of Fiqh Academy states that cash can be endowed as Waqf for it has the capability of keeping the principal intact and providing benefits.

Authors explain that in Waqf jurisprudence, irrevocability asserts that once an asset is professed as Waqf, it will remain as Waqf for infinity, so its status cannot be revoked. Perpetuity entails that the same asset shall remain intact, be non-perishable and last for eternity. Inalienability requires that the same asset cannot be sold, passed down as inheritance or be gifted to others.

In cash Waqf, to ensure that the corpus of Waqf in the form of cash remains intact, risk management is important. From the finance perspective, there may be inclination to invest the proceeds to increase the pool of funds just like insurance and Takaful companies.

For effective risk management, one obvious choice is to not invest the proceeds where there is chance of loss. But, even when Qard-e-Hasan is provided, there is chance that it is not paid back.

Authors think that cash Waqf risk management is discussed most comprehensively in Resolution No. 140 (15/6) of the International Islamic Fiqh Academy. The strategies include performing feasibility studies, avoiding high-risk investments, diversifying investments and ensuring transparency in cash Waqf investment.

The authors list various alternatives for effective risk management. One alternative is to include a fund manager who would professionally handle investments. However, no fund manager can guarantee that there cannot be losses. On the other hand, another alternative is to keep reserves. But, the reserves can also be depleted when the portfolio is in serious stress.

A related alternative is that not all cash is invested. Hence, the value-at-risk would not be high enough to put the entire or significant part of the pool of funds at risk. In this proposal as well, the buffer fund originates from the cash Waqf pool of funds. Thus, any significant deterioration in the value would affect the corpus of Waqf.

The last alternative discussed by authors is that some third-party like Government or the trustee provides guarantee. Nonetheless, this will undermine the philosophy of risk-sharing in Islamic investments. It may also introduce moral hazard, a point which noted authors did not mention.

For banks, there are extensive guidelines available by Basel Committee, Islamic Financial Services Board and prudential regulations given by central banks in respective countries. It is also vital to have risk management guidelines for cash Waqf.

In recent times, Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) has come up with Shari’ah and Governance standard for Waqf. The authors may have analysed that as well in addition to the local laws and acts that they went through.

The authors are correct in pointing out the need for more formal guidelines from the regulators regarding risk management in cash Waqf; else Waqf institutions will only be relying on their internal controls and compliance.

If there are performance based incentives for fund managers, analysts and investment officers, then they may be inclined to undertake greater risk in search for greater returns. However, this may inflate the levels of risk. Hence, it is necessary to study these issues related to governance and risk management.