Financial Instruments and Cash Waqf: Bridging Islamic Finance with Sustainable Development Goals 3031043367, 9783031043369

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Ahmed Tahiri-Jouti

Financial Instruments and Cash Waqf Bridging Islamic Finance with Sustainable Development Goals

Financial Instruments and Cash Waqf

Ahmed Tahiri-Jouti

Financial Instruments and Cash Waqf Bridging Islamic Finance with Sustainable Development Goals

Ahmed Tahiri-Jouti Casablanca, Morocco

ISBN 978-3-031-04336-9 ISBN 978-3-031-04337-6 (eBook) https://doi.org/10.1007/978-3-031-04337-6 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

1

Introduction Reference

1 6

Part I The Alignment Between Islamic Social Finance and Sustainable Development Goals 2

3

Sustainable Development Goals and the Shari’ah Economic Purposes Chapter Introduction The Sustainable Development Goals: Main Concepts and Classifications The Main Shari’ah Economic Purposes The Alignment Between Shar¯ıah Economic Purposes and Sustainable Development Goals Chapter Conclusion References The Islamic Social Finance: From Instruments to Institutions Chapter Introduction Islamic Social Finance: Main Concepts and Underlying Principles Islamic Social Finance Institutions Chapter Conclusion References

9 9 10 16 23 31 32 33 33 34 41 57 58 v

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CONTENTS

Impact Investing Involving Islamic Finance and Islamic Social Finance Chapter Introduction Islamic Finance and Islamic Social Finance: Paths of Collaboration SDG Impact Management in the Context of Islamic Financial Institutions and Islamic Social Finance Instruments Chapter Conclusion References

61 61 62

67 73 73

Part II Cash Waqf Based Financial Instruments Meeting Sustainable Development Goals 5

6

7

8

Cash Waqf Investment Accounts Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion References

77 77 78 85 93 94

Cash Waqf Liquid Guarantees Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion

95 95 96 100 105

Cash Waqf Based Microfinance Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion Reference

107 107 108 113 117 118

Takaful Funds Meeting Cash Waqf Requirements and Sustainable Development Goals Chapter Introduction The Financial Structure of the Product

119 119 120

CONTENTS

9

10

11

12

The Implementation Methodology Chapter Conclusion

125 132

Islamic Social Based Crowd Funding Platforms Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion Reference

133 133 134 138 143 144

Cash Waqf Mutual Funds Meeting Sustainable Development Goals Introduction The Financial Structure of the Product The Implementation Methodology Conclusion

145 145 147 152 159

Cash Waqf S.uk¯ uk Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion

161 161 163 168 172

Cash Waqf Venture Capital Funds Meeting Sustainable Development Goals Chapter Introduction The Financial Structure of the Product The Implementation Methodology Chapter Conclusion

175 175 177 181 185

Part III 13

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From Instruments to Ecosystems

The National Ecosystem of Cash Waqf Meeting Sustainable Development Goals Chapter Introduction The Main Features of the National Cash waqf Ecosystem Meeting Sustainable Development Goals

189 189 190

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CONTENTS

The Methodology to Set Up the National Cash waqf Ecosystem Meeting Sustainable Development Goals Chapter Conclusion 14

Waqf Offshore Centers and Cross-Border Waqf Operations Chapter Introduction Waqf Operations in an Offshore Center The Methodology to Implement a Waqf Offshore Center Signing Partnerships with Other Jurisdictions and Financial Offshore Centers to Generate More Deals Drafting a Global Investment and Waqf Donation Map Chapter Conclusion References

198 205 207 207 208 215 221 223 225 226

Summary

227

References

233

Index

237

List of Figures

Fig. 2.1 Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 4.1 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 6.1 Fig. 6.2

Fig. 6.3

The categories of Sustainable Development Goals based on their focus (Source Author’s own) From conventional finance to nonprofit finance (Source Author’s own) The Islamic social finance scope (Source Author’s own) Zakat collection regime in Moslem countries (Source Authors own) The SDG impact standards (Source SDG Impact standards) The general scheme of the cash waqf based investment accounts meeting SDGs (Source Author’s own) The main features of financial products and services to launch (Source Author’s own) Options of investment accounts’ allocation (Source Author’s own) Categories of cash waqf investment accounts (Source Author’s own) General scheme for cash waqf liquid guarantees meeting Sustainable Development Goals (Source Author’s own) Implementation methodology for implementing Liquid guarantees meeting SDGs and cash waqf requirements (Source Author’s own) Categories of guarantees backed by the cash waqf investment fund (Source Author’s own)

17 34 35 41 67 81 88 90 91 98

101 103

ix

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LIST OF FIGURES

Fig. 7.1 Fig. 7.2

Fig. 8.1 Fig. 8.2

Fig. 8.3 Fig. 8.4 Fig. 9.1

Fig. 9.2 Fig. 9.3 Fig. 10.1 Fig. 10.2 Fig. 11.1 Fig. 11.2 Fig. 12.1 Fig. 12.2 Fig. 13.1 Fig. 13.2 Fig. 13.3 Fig. 13.4 Fig. 13.5

General scheme for cash waqf based Microfinance institutions (Source Author’s own) Implementation methodology for implementing Microfinance instruments meeting SDGs and cash waqf requirements (Source Author’s own) General scheme for Takaful funds meetings SDG and waqf requirements (Source Author’s own) Implementation methodology for implementing Takaful funds meeting SDGs and waqf requirements (Source Author’s own) Surplus donation mechanisms options (Source Author’s own) Supervision and management options for waqf authorities (Source Author’s own) General structure of the Islamic social based crowdfunding platforms meeting Sustainable Development Goals (Source Author’s own) Implementation methodology of Islamic social finance crowdfunding platforms (Source Author’s own) Waqf loans’ categories matrix (Source Author’s own) The implementation methodology of cash waqf mutual funds (Source Author’s own) Different categories of Mutual funds (Source Author’s own) Financial scheme of the cash waqf s.uk¯ uk meeting SDGS (Source Author’s own) The implementation methodology for cash waqf sukuk (Source Author’s own) Financial scheme of cash waqf venture capital funds (Source Author’s own) Implementation methodology of cash waqf Venture capital fund (Source Author’s own) Matrix of investors in the national ecosystem (Source Author’s own) Classifying the different categories of investors based on their impact (Source Author’s own) Financial assistance and support throughout the lifecycle of businesses (Source Author’s own) Global cash waqf ecosystem achieving Sustainable Development Goals (Source Author’s own) The Five steps methodology to implement a national cash waqf ecosystem (Source Author’s own)

110

114 123

126 128 129

136 139 141 153 157 165 169 179 182 192 192 196 200 204

LIST OF FIGURES

Fig. 14.1 Fig. 14.2

Structure of the LIWF (Source The Labuan International Financial Center website) Methodology to implement a waqf offshore center (Source Author’s own)

xi

212 216

List of Tables

Table 2.1 Table 2.2

Table 2.3 Table 2.4 Table 3.1 Table 3.2 Table 5.1 Table 13.1

List of UN Sustainable Development Goals Sustainable Development Goals from a Shari’ah perspective (economic inclusion and increasing the production) Sustainable Development Goals from a Shar¯ıah perspective (equitable distribution of wealth) Sustainable Development Goals and the environment protection National Zakat institutions with obligatory contributions National zakat institutions with voluntary contributions Examples of Sustainable Development Goals and targets to achieve Categories of sub-ecosystems and classification parameters

13

25 28 30 42 45 87 202

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CHAPTER 1

Introduction

Since 1950, the planet has entered into the anthropogenic age that refers to a geological epoch where the influence of human behavior on Earth’s atmosphere can change the flow of the planet’s natural systems and threaten the quality of life of the humankind. The start of this era coincided with the Great acceleration characterized by the global warming phenomenon and its natural consequences such as the rise of sea levels, the extreme weather events and all the social and economic related impacts. According to scientists, this global warming phenomenon is the direct consequence of the increase of greenhouse gases that is also causing the oceans’ acidification. In addition to this, the great acceleration was achieved through a wild economic model that increased the wealth of the richest people and decreased the wealth of the poorest people (Credit Suisse Global Wealth Report 2020). Such increasing gap would have social drift and long economic and political instability across the globe. As a response to all these turbulences, the United Nations elaborated the 2030 Agenda for sustainable development and at its heart are the 17 Sustainable Development Goals for an urgent action by all countries in a global partnership.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_1

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In this context, all the governments, organizations and communities are invited to contribute to the efforts of achieving the Sustainable Development Goals for a safer future for the planet including land and oceans and for the next generations of humans. From its perspective, the Islamic economic model provides a different perspective and a particular paradigm for the organization of the economic system in terms of access to the natural resources, the production rules and the fair distribution of wealth among the society members. The Quranic and prophetic guidelines promote the principle of free access to natural resources for all of the members of the society in order to increase the common wealth of the nation but also to ensure the fair distribution of wealth. Moreover, the prophetic tradition emphasized on the necessity to empower people to be real contributors to the economic dynamic of the nation. On the one hand, the prophetic tradition contributed significantly to the foundation of a productivity-oriented mindset through concepts such as ‘The Upper Hand’ and ‘The Business Mindset.’ ‘The Upper Hand’ mindset consists of promoting the spirit of giving rather than receiving. ‘The Business mindset’ consists of encouraging people to develop their capabilities in terms of initiative and entrepreneurship. On the other hand, the Islamic economic model through different institutions facilitates the access to well-being such as healthcare, education and various forms of social support to empower people. Such mechanism encourages people to take more risks when it comes to business or any other economic activity and this, in itself, can foster the economic development. Indeed, the Islamic economic model covers the mindset dimension to encourage innovation, innovativeness and the entrepreneurship spirit. In addition to this, Islam pays particular attention to the environment protection and development such as water, plants and animals. From another perspective, the Islamic economic model is based on an institutional dimension that covers both the nonprofit and for profit activities. When it comes to the for profit activity, the Islamic economic model encourages the individual initiatives while the Government intervention shall be limited to the economically sensitive sectors and to the supervision of the Markets in a way that ensures the free and fair competition between the different players and stakeholders.

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INTRODUCTION

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For the nonprofit activity, the Islamic economic model has two main institutions that are zakat and waqf. Both institutions are based on donations and contributions (obligatory in the case of zakat and voluntary for waqf) that play a social and economic role. Zakat fights against hoarding, encourages investment and accelerates the consumption cycles while safeguarding the purchase power of people. Waqf encourages investments, improves the social infrastructure and maintains the public properties. It is a very effective tool to collect funds, invest them in impactful financial instruments and allocate the income to specific social purposes. Both institutions have been contributing to the prosperity of the nation throughout the different dynasties and periods. Nevertheless, in modern times, zakat and waqf institutions require deep reforms in order to accompany the new needs and be part of the modern economies. Therefore, the United Nations Sustainable Development Goals are perfectly aligned with the Islamic economic model objectives and purposes. From another perspective, the Islamic economic model includes Islamic finance that is expected to be a serious alternative to the conventional finance and to contribute to the achievement of the economic objectives of Islam. In practice, Islamic finance is duplicating the conventional finance model and many scholars are pointing out the gap between theory and practice. In my book ‘The Fourth Market Theory and the paths to differentiation in the Islamic finance industry,’ I tried to explain the reasons explaining this gap mainly through the Fourth Market Theory and the Neutrality trap phenomenon and to identify the major paths of differentiation. One of these paths is building or contributing to sustainable Islamic social finance ecosystems. Based on that, a partnership between Islamic social finance and Islamic finance would have a positive impact on both sides for the following reasons: • Islamic social finance institutions (mainly zakat and waqf) can multiply their collection through Islamic financial institutions’ distribution channels. • Waqf administrations can diversify their investment assets by including cash waqf and investing in the Islamic financial instruments.

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• Islamic financial institutions can reduce the gap between practice and the Islamic economy theory by bringing more impact to the community through financial instruments that comply with Shari’ah principles, contribute to the development of the community and accompany waqf and zakat institutions in collecting more funds and creating more impact. Indeed, through this partnership, Islamic financial institutions would improve their business model and their image while Islamic social finance institutions would upgrade and modernize their operating model. Moreover, this partnership would target Sustainable Development Goals as a contribution to the collective efforts of the community. This contribution takes the form of investment in projects that achieve (a) Sustainable Development Goal(s) and of donations paid to charities targeting the same goals. To discuss all these ideas in detail, the book contains 13 chapters divided into three different parts. The first part discusses the alignment between the Shari’ah economic purposes and the Sustainable Development Goals (Chapter 2), the Islamic social finance concept, its instruments and institutions (Chapter 3) and the intersection between Islamic finance and Islamic social finance while presenting the methodology to implement SDG impact management and measurement processes (Chapter 4). The second part is composed of eight chapters. Each chapter presents a product structure that is based on cash waqf and is targeting Sustainable Development Goals. Some of these product structures involve zakat collection. The product structures presented in this second part are: • The cash waqf investments accounts meeting Sustainable Development Goals requirements (Chapter 5): This structure aims at providing the necessary funds to Islamic banks in order to support a specific economic sector meeting Sustainable Development Goals. The income generated would be paid to charities meeting the same or different goals. • The cash waqf liquid guarantees meeting Sustainable Development Goals (Chapter 6): This structure aims at creating a cash waqf investment fund that is also a guarantee fund. This guarantee fund provides the necessary support to small businesses and startups

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•

•

•

•

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INTRODUCTION

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to obtain the necessary financing for their activities with lower cost. The fund is selecting financial instruments meeting Sustainable Development Goals and the income generated is re-invested. The cash waqf-based Microfinance meeting Sustainable Development Goals (Chapter 7): This product structure consists of collaborating with an Islamic financial institution to collect cash waqf investment accounts which income would cover the operating expenses and cash waqf current accounts to grant free loans to the Microfinance institution. Takaful funds meeting cash waqf requirements and Sustainable Development Goals (Chapter 8): The product structure consists of creating a cash waqf investment fund based on the donations of the Takaful fund participants (surplus paid to the cash waqf fund instead of the Takaful fund participants). The cash waqf fund is invested in financial instruments in line with Shari’ah and the Sustainable Development Goals. The income generated would be donated to the Micro-Takaful fund to reduce the contributions of participants or to cover the management fees of the Takaful operator. This structure would enhance financial inclusion. Islamic social-based crowd funding platforms meeting Sustainable Development Goals (Chapter 9): The product structure consists of collecting cash waqf funds to grant free loans to project holders. Moreover, the crowd funding platform is also collecting zakat contributions to pay for the project holders in difficulty and safeguard the cash waqf fund. Cash waqf Mutual funds meeting Sustainable Development Goals (Chapter 10): The structure consists of creating Mutual funds investing in financial instruments meeting Sustainable Development Goals. The income generated would be paid to charities. Cash waqf S.uk¯uk meeting Sustainable Development Goals (Chapter 11): The product structure consists of issuing s.uk¯uk to raise the necessary funding for projects meeting Sustainable Development Goals in line with shari’ah principles. The income generated would be paid to charities. Cash waqf Venture Capital funds meeting Sustainable Development Goals (Chapter 12): The product structure consists of creating Venture capital funds to invest in startups and small businesses meeting Sustainable Development Goals. The income generated can serve to support charities or specific social purposes.

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These suggestions are not comprehensive. Indeed, other schemes can be conceived and implemented. The third part of the book presents the methodology to gather all these schemes in a national cash waqf ecosystem that is targeting Sustainable Development Goals (Chapter 13). The aim of this ecosystem is to increase the impact of the various initiatives and instruments. In addition to this, the third part of the book presents the concept of waqf offshore centers and the methodology to conceive and implement them (Chapter 14). The aim of these waqf offshore centers is to connect national cash waqf ecosystems and individuals with investment opportunities bringing more impact.

Reference Credit Suisse Global Wealth Report. (2020), p. 29. Downloaded from https:// www.credit-suisse.com/about-us/en/reports-research/global-wealth-report. html.

PART I

The Alignment Between Islamic Social Finance and Sustainable Development Goals

This part addresses three topics: • The Shari’ah economic purposes and the alignment with sustainable developmentgoals (Chapter 2). • The Islamic social finance concepts, instruments and institutions as well as the necessary reforms to conduct in order to increase the impact of these institutions (Chapter 3). • The need for both Islamic finance institutions and Islamic social finance institutions to collaborate in sustainability ecosystems (Chapter 4).

CHAPTER 2

Sustainable Development Goals and the Shari’ah Economic Purposes

This chapter aims at: • Presenting the United Nations Sustainable Development Goals. • Presenting the Shari’ah purposes of the Islamic economic model. • Explaining that the SDGs and the Shari’ah economic purposes are aligned. • Explaining that the Islamic economic model has effective solutions to contribute to the achievement of Sustainable Development Goals.

Chapter Introduction The seventeen United Nations Sustainable Development Goals promote the access to natural resources (No poverty, zero hunger, decent work) and to well-being (Quality education, good health, clean water and sanitation, clean energy). They promote the gender equality, human rights and freedom (gender equality, reduced inequalities, peace, justice and strong institutions) and protect the environment (life below water, life on land, climate change). From another perspective, more than just principles and duties for individuals, Shari’ah defines the contours of an economic model that has clear objectives and purposes. Moreover, this economic model has its own

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_2

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instruments and tools to ensure the smooth application of its principles and guidelines. Indeed, the Islamic economic model aims at increasing the production and the wealth of the nation through the fair access to natural resources and the equitable distribution of wealth to strengthen the middle class. To do so, the Islamic model focuses on individuals to be more productive, implements institutions to ensure the wide circulation of wealth and defines the intervention of the Government in the economy. At first sight, there is a clear alignment between the Sustainable Development Goals and the Islamic economic model. Moreover, the latter has its own instruments and approach to contribute to the achievement of these goals. This chapter defines the main Shari’ah economic purposes, enumerates the Sustainable Development Goals and identifies the intersection between the Islamic economic purposes and the United Nations goals. Indeed, this chapter discusses the specific tools and instruments suggested by the Islamic economic model to contribute to the achievement of the Sustainable Development Goals.

The Sustainable Development Goals: Main Concepts and Classifications The Sustainable Development Goals (SDGs) are a new, universal set of goals, targets and indicators that the United Nations member states will be expected to use to frame their agendas and policies over the next 15 years (Ford 2015). This section will present briefly the framework of the United Nations Sustainable Development Goals and the main classifications. The Main Concepts Related to the SDGs • History of the United Nations Sustainable Development Goals From a historical perspective, the Sustainable Development Goals do not constitute the first initiative of global mobilization to achieve a set of important social priorities worldwide (Sachs 2012). Indeed, from 2000 to 2015, the Millennium Development Goals (MDGs) were the global

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framework to promote awareness, political accountability, improved metrics, social feedback and public pressures. The achievement of the Millennium Development Goals varied across goals, countries and regions. Nevertheless, there was a shortfall in the achievement of the MDGs due mainly to a set of operational failures such as the promises made by rich countries to poor ones for official development assistance. For these reasons and many others, the United Nations recommended the adoption of a new set of development goals commonly known by Sustainable Development Goals covering the period 2015–2030. The main differences between Sustainable Development Goals and Millennium Development Goals are as follows: • The Millennium Development Goals covered a set of eight goals including measurable objectives with implementation deadlines. The Sustainable Development Goals cover a set of seventeen goals with specific targets and indicators. • The Millennium Development Goals are oriented mainly to poor countries with promises made by rich countries to ensure technical assistance. The Sustainable Development Goals pose goals and challenges to all countries and how together they can target the global well-being (Sachs 2012). In 2015, the United Nations member states adopted the 2030 agenda for sustainable development with at its heart 17 Sustainable Development Goals (SDGs) that frames a global partnership between all countries (developed and developing) in order to ensure peace and prosperity for people and the planet. At the United Nations Conference on sustainable development (Rio+20) held in Rio de Janeiro in June 2012, the member states decided to launch a process to develop a set of SDGs to build upon the experience of the MDGs (Millennium Development Goals) and to establish the UN High-level Political forum on sustainable development. In 2013, the general assembly set up an Open working group to develop a proposal on the SDGs and in January 2015, the general assembly adopted the 2030 Agenda for Sustainable Development with 17 SDGs.

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• Sustainable Development Goals in brief The 2030 Agenda for sustainable development presents a comprehensive action plan for people, planet and prosperity. It aims at reinforcing the universal peace at a larger scale. The agenda defines 17 Sustainable Development Goals and 169 targets. They are built on the Millennium Development Goals and try to complete what the MDGs failed to achieve. They are covering the three dimensions of sustainable development including the economic, the social and the environmental dimensions. Moreover, the Sustainable Development Goals cover critical areas for humankind and the planet1 : • People: The SDGs aim at ending poverty and hunger in all their forms. They also aim at providing equality, dignity and a healthy environment for everyone. • Planet: The SDGs aim at protecting the planet from degradation through sustainable consumption and production, responsible management of natural resources and taking urgent action on climate change. The main objective is to support the needs of the present and future generations. • Prosperity: The SDGs target a balanced and harmonious economic, social and technological progress with nature. • Peace: The SDGs aim at building peaceful, just and inclusive societies free from fear and violence. Indeed, peace constitutes the main prerequisite to ensure the achievement of Sustainable Development Goals. • Partnership: Achieving SDGs would require the mobilization and the revitalization of global partnerships for sustainable development. These partnerships are based on a solidarity mindset where all countries, all stakeholders and all people are working together and closely to satisfy the needs of the most vulnerable people and the poorest among them. The following table presents the 17 Sustainable Development Goals and related information (Table 2.1). 1 For more details: https://sdgs.un.org/2030agenda.

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Table 2.1 List of UN Sustainable Development Goals The SDG Goal 1: No poverty Goal 2: Zero hunger

The main title

End poverty in all its forms End hunger, achieve food security and improved nutrition and promote sustainable agriculture Goal 3: Good health and Ensure healthy lives and well-being promote well-being for all at all ages Goal 4: Quality education Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Goal 5: Gender equality Achieve gender equality and empower all women and girls Goal 6: Clean water and Ensure availability and sanitation sustainable management water and sanitation for all Goal 7: Affordable and clean Ensure access to affordable, energy reliable, sustainable and modern energy for all Goal 8: Decent work and Promote sustained, inclusive economic growth and sustainable economic growth, full and productive employment and decent work for all Goal 9: Industry, innovation Build resilient infrastructure, and infrastructure promote inclusive and sustainable industrialization and foster innovation Goal 10: Reduced inequalities Reduce inequality within and among countries Goal 11: Sustainable cities Make cities and human and communities settlements inclusive, safe, resilient and sustainable Goal 12: Responsible Ensure sustainable consumption and production consumption and production patterns Goal 13: Climate action Take urgent action to combat climate change and its impacts

The number of targets 7 targets 8 targets

13 targets

10 targets

9 targets 8 targets

5 targets

12 targets

8 targets

10 targets 10 targets

11 targets

5 targets

(continued)

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Table 2.1 (continued) The SDG

The main title

The number of targets

Goal 14: Life below water

Conserve and sustainably use the oceans, seas and marine resources for sustainable development Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Strengthen the means of implementation and revitalize the global partnership for sustainable development

10 targets

Goal 15: Life on land

Goal 16: Peace, justice and strong institutions

Goal 17: Partnerships for the goals

12 targets

12 targets

19 targets

Source United Nations (for more details: https://sdgs.un.org/goals)

The Classification of Sustainable Development Goals The 17 Sustainable Development Goals presented in the table above can be classified into four main categories: SDGs promoting the well-being of people, SDGs promoting a friendly environment for people, SDGs promoting the rights of people and fair access to natural resources and finally the SDGs promoting the natural equilibrium and balance. • Category 1: Sustainable Development Goals promoting the Wellbeing of people This category of Sustainable Development Goals aims at improving the life of people and providing them with the necessary resources and skills to contribute to the prosperity of societies. Indeed, for people to be productive and active, poverty and hunger shall be eradicated.

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Moreover, they have to access to basic services such as clean water, sanitation and clean energy. Finally, being in good health can facilitate the learning process. Therefore, a high quality education and good healthcare systems can improve the life of people but also enhance the prosperity of humankind for the future generations. These goals are: • • • • • •

Goal Goal Goal Goal Goal Goal

1: 2: 3: 4: 6: 7:

No poverty Zero hunger Good health and Well-being Quality education Clean water and sanitation Affordable and clean energy

• Category 2: Sustainable Development Goals promoting equality and fairness among people This category of Sustainable Development Goals aims at ensuring the equality between the different society components including the Gender equality. This ‘equality’ target would reinforce the economic competitiveness since every member of the society would have the same rights. Moreover, reinforcing the institutions to establish peace and justice is also very important to ensure equality and a cohesive society oriented towards excellence and innovation. These goals are: • • • •

Goal Goal Goal Goal

5: Gender equality 10: Reduced inequalities 16: Peace, justice and strong institutions 17: Partnership of the goals.

• Category 3: Sustainable Development Goals promoting a friendly environment for people This category of Sustainable Development Goals aims at providing people with a work environment where they can flourish and contribute to innovation, sustainability and responsible consumption and production. If category 1 of SDGs focuses on basic services to improve people’s quality

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of life in order to be productive and active in their societies, category 2 focuses on the work environment in order to make it a friendly space where it is possible for people to contribute to the progress of societies and economies. These goals are: • • • •

Goal Goal Goal Goal

8: Decent work and Economic growth 9: Industry, innovation and infrastructure 11: Sustainable cities and communities 12: Responsible consumption and production.

• Category 4: Sustainable Development Goals promoting the nature equilibrium The fourth category of Sustainable Development Goals is oriented to the nature balance and equilibrium. It is composed of action plans to mitigate the climate change consequences and to safeguard life below water and on land. These goals are: • Goal 13: Climate action • Goal 14: Life below water • Goal 15: Life on land. The following figure presents the summary of the four categories of Sustainable Development Goals (Fig. 2.1).

The Main Shari’ah Economic Purposes In this section, the focus would be on the Shari’ah purposes of the Islamic economic model (and not all the Shari’ah purposes) as discussed by scholars and economists. The aim is to understand the way the Islamic institutions can contribute to solving the economic issues and provide the necessary financial support to the environmental and social initiatives in line with the United Nations SDGs.

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Fig. 2.1 The categories of Sustainable Development Goals based on their focus (Source Author’s own)

Increasing the Production of the Nation In the Islamic economic model, increasing the production of the nation is in itself a purpose that can be achieved through different mechanisms such as facilitating the access to natural resources to all the members of the society, encouraging the development of capabilities and defining the rules related to the allocation of natural resources to the production. • Facilitating the access to the natural resources The fair distribution of wealth among Moslem starts with the free access to natural resources and production tools. Based on the ‘reviving idle resources’ principle, Baqir Sadr stipulated that the government is the sole and legitimate owner of natural resources. Individuals can obtain special

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privileges to use these resources only if they have the necessary capabilities to develop them (Fahlevi 2019). Such approach is based on the following principles: • The ownership of a natural resource is not absolute. It requires the development efforts. This principle applies to agricultural, industrial and any other project that can create wealth for the Islamic society. In modern times, the government can allocate lands to innovative and productive projects for symbolic prices. This provision would lower the cost of investment and contribute to the increase and diversification of the production capacity. • If the beneficiary fails to develop the project as convened or leaves the resource idle, the government can take it back and re-allocate it to someone else. This provision would fight against speculation and hoarding and would maintain the production capacity of the nation. • Rules underlying the allocation of natural resources to the production Shari’ah aims at maximizing the production by favoring individuals and entities that have the necessary capabilities to make the best use of natural resources. In addition to this rule, Shari’ah stipulates the rules related to the allocation of natural resources to production operations. Indeed, Shari’ah identified the illicit activities, the economic crimes and the need to protect the environment as the main rules to observe. • Illicit activities Shari’ah defines certain activities as non-compliant and eliminates them from the economic cycle for the damage caused by the consumption of the produced goods or the waste of resources on activities that are useless and harmful to the Islamic society, such as Wine and drugs, Gambling, production of forbidden goods (pork for example).

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• Need to protect the environment Shari’ah advocates economic development and growth to strengthen the Islamic nation while preserving the interests of future generations and protecting the environment and its various components. Shari’ah places men as superior beings to whom all other creatures are submitted within a balanced framework. Dr. Amina Mohammad NASIR (1995) states that the environment of Earth includes water, the earth’s crust and the materials that cover it, the flora and fauna, man himself, the heat received from the sun without mentioning the factors that influence the environment such as the rotation of Earth around the sun and the attraction of the moon. All these elements joined concurred, through an eminently complex game of reciprocal interactions, to make our planet an ideal environment for living. Vegetation and forests are very important natural resources for the survival of the human race but also for its comfort. In a hadith reported by al BOUKHARI, the Prophet SAWS said that Whenever a Muslim plants a tree or sows a seed, he will have as his whatever is eaten from the product of that plant by a bird, a man or a quadruped.2

Another Hadith of the Prophet SAWS emphasizes on the importance of this aspect: If the Hour (of Judgment) comes and any of you has a cutting with him, if he can plant it before he gets up, let him do so.3

From another perspective, the global equilibrium is due to well-connected food chains. Thus, any imbalance in these food chains can affect an entire race of animals, causing deeper environmental damages, which can directly or indirectly affect the human kind. Therefore, men must satisfy their needs by maintaining these environmental balances, for their well-being and the well-being of future

2 Al-Bukhârî (2/817), hadith n° 2195. 3 Ahmad (3/191), hadith n° 13004.

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generations. The Qur’an is full of verses that emphasize on the importance of the animal species and its features and insists on the necessity to protect them (Dinia 2009). Moreover, the Quran tells us many truths about anthills, bees, etc. concluding that these creatures are nations comparable to the human nation. Finally, water occupies 70% of the earth’s surface and is an essential element of life on earth. Nevertheless, it is unsuitable for irrigation, domestic and industrial use. Obviously, Islam, which was revealed in a desert area, has prohibited any form of wastefulness by inciting Muslims to optimize its different uses. Equitable Distribution of Wealth and Streng thening of the Middle Class • Rules underlying the trade and exchange In order to ensure the fair trade, exchange of commodities and smooth circulation of wealth, Islam forbids Rib¯a, garar ˙ and many other types of transactions (such as monopolistic maneuvers, An-najash, mouz¯abana, etc.) that can generate conflicts between the different stakeholders. The prophetic tradition identifies numerous practices that are forbidden such as: • Al moun¯abada or Al moul¯amassa is a sale that consists in obliging the customer to¯buy goods just because he has touched them. Indeed, it is a sale of goods without prior examination. • Al mouh.aqala is the sale of wheat in its ears against winnowed wheat. • Al mouhad.ara is the sale of agricultural products before their suitability¯ for consumption is evident. • Al mouz¯abana is the sale of products not yet fit for consumption against consumable products or the purchase and sale of products whose quantity is not well determined. • An-najash is the practice of overbidding, which is when a person overbids just to raise the price for other potential buyers while he has no intention of buying the goods.

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• Bayal h.as.at (sale of stones) according to which a man would sell a piece of land to another man without the latter knowing its real surface. In fact, both parties throw a stone and the boundaries of the land are delimited by the place where this stone falls. It is worth noting that this is a non-comprehensive list of forbidden practices from the Shari’ah perspective. Since its creation, the Islamic state has set up the Hisba institution (Ibn taymia 2010) that plays the role of guarantor of the respect of the economic principles of Islam by eliminating the prohibitions such as Rib¯a, gobn ˙ and monopoly. • Islamic mechanisms for solidarity and social cohesion The social solidarity scheme allows people who have not been able to participate in the economic activity of the Islamic state to have a share of the wealth created. It is also considered as a second chance for some categories and a form of solidarity for others. Indeed, Islam has two institutions that play the role of social solidarity that are the zakat and the waqf institutions. It is worth noting that these two institutions represent the main tools of the social solidarity in the Islamic economy but other forms can be integrated to achieve more impact. The Islamic Economic Model Main Features Based on the previous aspects, the Islamic economic model has the following features: • An economy promoting a non-stationary mindset The major rule applied to Islamic financial products and services is algunm-bil˙ gurm. ˙ The application of this rule is expected to be sufficient to bring real impact. Nevertheless, customers and prospects are not ready for products and structures such as investment accounts, s.uk¯uk and other instruments where the profit rates are not guaranteed nor fixed. Therefore, Islamic banks and financial institutions are applying different mechanisms to make profit rates almost guaranteed and in some

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cases, they are using formulas with fixed return to be in line with the customers’ requirements. Indeed, in parallel with launching Islamic financial products, it is important to disseminate the culture and the mindset of al-gunm-bil˙ gurm. ˙ Obviously, this ‘al-gunm-bil˙ gurm’ ˙ term is not only a principle that shall underlie the financial products and structures, but it is also a mindset and a culture. First, the prophetic tradition recommends the practice of trade.4 This is a call to promote the entrepreneurship mindset among people and a way to both develop the productivity of the nation and disseminate the ‘al-gunm-bil˙ gurm’ ˙ culture. Adopting this mindset, employees would prefer variable wages rather than fixed ones. In fact, they would be selling their work instead of their capacity to work and bear the downside but also share the upside of the activity. • An economy encouraging the risk taking behavior to achieve more growth It goes without saying that entrepreneurship is risky and all the new small businesses have high probabilities of failure. Therefore, encouraging people to practice trade and start their own businesses can have negative impacts on the economy in the absence of a stabilizing mechanism that would safeguard the purchasing power of people in the case of failure. Indeed, a businessperson can face situations where he is over-indebted or he is incurring significant losses. In both cases, zakat can be granted to compensate the losses or to pay the debts while ensuring an income to his family. If the businessperson makes profit, he is supposed to contribute to the zakat fund. This contribution would be paid to other beneficiaries, safeguard their purchasing power and contribute to the stabilization of the market prices. Such contribution is similar to an insurance premium for him so that if there is an economic downturn, he would benefit from zakat if he fulfills the eligibility criteria.

4 ‘You have to practice trade, it represents nine tenths of the benefit,’ narrated by al-sabki in t.abaq¯at al-šafiiya and as-suy¯uty in al-jami-as-sag¯ ˙ ır.

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From another perspective, waqf can reinforce the economic stability of the country and encourage the entrepreneurial mindset. Indeed, waqf can provide funding to new projects and in case of failure, it can ensure social services to the beneficiaries safeguarding their purchasing power. • An inclusive economy with a fair distribution of wealth From a theoretical perspective, the Islamic economy ensures equity and fairness when it comes to accessing to natural resources, production tools and wealth distribution. The main criterion to have the right to access the natural resources is the talent and the capacity to exploit them in a profitable and sustainable manner. Therefore, the capacity building and trainings shall be inclusive and be accessible to all of the members of the society. When it comes to wealth distribution, all the people that fulfill the eligibility criteria can benefit from zakat and waqf donations without any limit or differentiation. Overall, the Islamic economy is a declination of ‘al-gunm-bil˙ gurm’ ˙ principle that promotes the entrepreneurship mindset and encourages models based on sharing risks but also profits. At first sight, the Islamic economic model seems to be riskier. Nevertheless, it sets up specialized institutions that safeguard the purchasing power of eligible people. Moreover, this model relies on talented people. Therefore, it has to ensure the free access to welfare services to develop their talents such as quality education and healthcare services. Finally, the Islamic economic model is based on economic inclusion that consists of connecting all the people to the formal economy opportunities.

The Alignment Between Shar¯iah Economic Purposes and Sustainable Development Goals The difference between Shar¯ıah economic purposes and Sustainable Development Goals is similar to the difference between a purpose and a goal. Indeed, goals are more specific than purposes; they are measurable and have deadlines as well as specific targets. Purposes are the reason someone aims at achieving a particular goal. A purpose is the fundamental need of a human being that gives a meaning to their actions. Indeed, there is always a purpose behind all goals.

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This section would focus on the alignment between Shar¯ıah purposes and Sustainable Development Goals as well as the solutions that the Islamic economic model can provide to achieve these goals. Economic Inclusion and Increasing the Production of the Nation When analyzing the Shar¯ıah economic purposes as presented in this chapter, the Islamic model seems to focus on the economic inclusion principle that refers to equality of opportunity for all members of society to participate in the economic life of their country as employees, entrepreneurs, consumers and citizens (Bettcher and Teodora 2015). Indeed, all the people from the different segments of society would have suitable opportunities to be part of the formal economic system and share the benefit. Otherwise, they would move to the informal economy or to the criminal economy due to economic exclusion (Tahiri Jouti 2021a). From the Islamic perspective, economic inclusion starts with the fair access to natural resources, the responsible production and consumption of resources and the development of the people’s capabilities. All these mechanisms aim at increasing the production of the nation and achieve higher growth rates to fight against all forms of poverty and social vulnerability. Indeed, these purposes are perfectly in line with the following Sustainable Development Goals (Table 2.2). Equitable Distribution of Wealth and Reducing Inequalities For this Shari’ah economic purpose, the Islamic economic model defines the major rules to ensure fair trade and exchange of commodities, the institutions/instruments such as waqf and zakat that ensure the cohesion between the society members and provide them with the necessary services related to their well-being (Table 2.3). Environment Protection and Building Sustainable Communities Islam came out in a desert region where providing clean water, food and basic resources is a daily challenge. Therefore, the prophetic tradition pays particular attention to safeguarding and protecting the environment while taking into account the interests of the next generations (Table 2.4).

(continued)

The Islamic economic model encourages the production and the productivity of the nation. First, it facilitates the access to natural resources including land for people having appropriate capabilities. Moreover, the Islamic economic model fights against the idleness of resources. All these purposes aim at providing the nation with the necessary production to fight against hunger among others5

The Islamic economic model defines rules to ensure the fair access to natural resources based on people’s capabilities to exploit these resources

Alignment

seeds, and then a bird, or a person or an animal eats from it, but is regarded as a charitable gift for him.” Sahih Bukhari Volume 3, Book 39, Hadith Number 513.

5 Narrated By Anas bin Malik: Allah’s Apostle said, “There is none amongst the Muslims who plants a tree or sows

Target 2.4 By 2030, ensure sustainable food production systems and implement resilient agricultural practices that increase productivity and production, that help maintain ecosystems, that strengthen capacity for adaptation to climate change, extreme weather, drought, flooding and other disasters and that progressively improve land and soil quality

Target 1.4 By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including Microfinance Target 2.3 By 2030, double the agricultural productivity and incomes of small-scale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment

SDG 1: No poverty

SDG 2: Zero hunger

Main targets

SDGs

Table 2.2 Sustainable Development Goals from a Shari’ah perspective (economic inclusion and increasing the production)

2 SUSTAINABLE DEVELOPMENT GOALS …

25

‘My son! Sit with the learned men and keep close to them. Allah gives life to the hearts with the light of wisdom as Allah gives life to the dead earth with the abundant rain of the sky.’ Malik’s Muwatta Book 59, Hadith 1.

6 Yahya related to me from Malik that he heard that Luqman al-Hakim made his will and counselled his son, saying,

The Islamic economic model fights against the idleness of resources in order to achieve economic growth. Moreover, it recommends to employers to provide the decent work conditions

The Islamic economic model favors the development of people’s capabilities in a way that promotes the economic activity and innovation Therefore, providing Quality education and giving equal access for all women and men to quality technical, vocational and tertiary education would help achieving this purpose at a large scale6

Target 4.1 By 2030, ensure that all girls and boys complete free, equitable and quality primary and secondary education leading to relevant and effective learning outcomes Target 4.2 By 2030, ensure that all girls and boys have access to quality early childhood development, care and pre-primary education so that they are ready for primary education Target 4.3 By 2030, ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university Target 4.4 By 2030, substantially increase the number of youth and adults who have relevant skills, including technical and vocational skills, for employment, decent jobs and entrepreneurship Target 8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

SDG 4: Quality Education

SDG 8: Decent work and economic growth

Alignment

Main targets

(continued)

SDGs

Table 2.2

26 A. TAHIRI-JOUTI

Source The author’s own

SDG 12: Responsible production and consumption

The Islamic economic model from its Shari’ah-based perspective defines the rules underlying the allocation of natural resources to production operations

Fairness and equality constitute the main principles guiding the Islamic economic model. Indeed, the Qur’an promotes the principle of a strong middle class

The Islamic economic model in its basic principles encourages the initiatives and trade. Therefore, the entire infrastructure that would facilitate the economic activity is part of this purpose

Target 9.1 Develop quality, reliable, sustainable and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all Target 9.b Support domestic technology development, research and innovation in developing countries, including by ensuring a conducive policy environment for, inter alia, industrial diversification and value addition to commodities Target 10.2 By 2030, empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status Target 10.3 Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies and practices and promoting appropriate legislation, policies and action in this regard Target 12.2 By 2030, achieve the sustainable management and efficient use of natural resources

SDG 9: Industry, innovation and infrastructure

SDG 10: Reduced inequalities

Alignment

Main targets

SDGs

2 SUSTAINABLE DEVELOPMENT GOALS …

27

Target 1.1 By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day Target 1.3 Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable Target 2.1 By 2030, end hunger and ensure access by all people, in particular the poor and people in vulnerable situations, including infants, to safe, nutritious and sufficient food all year round Target 2.b Correct and prevent trade restrictions and distortions in world agricultural markets, including through the parallel elimination of all forms of agricultural export subsidies and all export measures with equivalent effect, in accordance with the mandate of the Doha Development Round

SDG 1: No poverty

SDG 2: Zero Hunger

The mechanisms promoted by the Islamic economic model such as waqf and zakat pay a particular attention to empower people and eradicate poverty and hunger7 Moreover, many waqf foundations were made for hospitals in the Moslem countries to ensure free medication for all the members of the society (including rich people)

Alignment

free) the one in captivity (by paying his ransom).” Sahih Bukhari Volume 7, Book 65, Hadith Number 286.

7 Narrated By Abu Musa Al-Ash’ari: The Prophet said, “Give food to the hungry, pay a visit to the sick and release (set

Main targets

Sustainable Development Goals from a Shar¯ıah perspective (equitable distribution of wealth)

SDGs

Table 2.3

28 A. TAHIRI-JOUTI

Target 3.8 Achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality and affordable essential medicines and vaccines for all

SDG 3: Good Health and well-being

Source The author’s own

Main targets

SDGs

Alignment

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Table 2.4 Sustainable Development Goals and the environment protection SDGs

Main targets

Alignment

SDG 6: Clean water and sanitation

Target 6.3 By 2030, improve water quality by reducing pollution, eliminating dumping and minimizing release of hazardous chemicals and materials, halving the proportion of untreated wastewater and substantially increasing recycling and safe reuse globally Target 6.6 By 2020, protect and restore water-related ecosystems, including mountains, forests, wetlands, rivers, aquifers and lakes Target 14.1 By 2025, prevent and significantly reduce marine pollution of all kinds, in particular from land-based activities, including marine debris and nutrient pollution Target 15.1 By 2020, ensure the conservation, restoration and sustainable use of terrestrial and inland freshwater ecosystems and their services, in particular forests, wetlands, mountains and drylands, in line with obligations under international agreements Target 15.2 By 2020, promote the implementation of sustainable management of all types of forests, halt deforestation, restore degraded forests and substantially increase afforestation and reforestation globally

Water is a valuable resource in Islam and preserving it is a duty for the Moslem community8

SDG 14: Life under water

SDG 15: Life on land

Islam encourages forestation and natural ecosystems that ensure a balanced life on earth9 Islam also encourages Moslem to take care of animals10

Source The Author’s own

8 Narated By Abu Huraira: Allah’s Apostle said, “Do not withhold the superfluous water, for that will prevent people from grazing their cattle.” Sahih Bukhari Volume 3, Book 40, Hadith Number 543. 9 Narrated By Anas bin Malik: Allah’s Apostle said, “There is none amongst the Muslims who plants a tree or sows seeds, and then a bird, or a person or an animal eats from it, but is regarded as a charitable gift for him.” Sahih Bukhari Volume 3, Book 39, Hadith Number 513. 10 Narrated By Abu Huraira: Allah’s Apostle said, ‘While a man was walking he felt thirsty and went down a well and drank water from it. On coming out of it, he saw a dog panting and eating mud because of excessive thirst. The man said, ‘This (dog) is

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Chapter Conclusion The Sustainable Development Goals can be classified into four categories: SDGs targeting people’s basic well-being (category 1), SDGs focusing on equity among people (category 2), SDGs focusing on people’s work environment (category 3) and SDGs focusing on the protection of the environment (category 4). The Islamic economic model defines the global frame of an inclusive economy where all the members of the society have free access to appropriate economic and social opportunities to be part of the production operations. The model also aims at reinforcing the cohesion between all the members of the society through mechanisms that ensure a minimum income for everyone. In fact, the Islamic economic model encourages the individual initiative and the entrepreneurial mindset while safeguarding the purchasing power of those who fail through specific mechanisms such as zakat and waqf. Moreover, Islam pays particular attention to the protection of the environment including water, plantation, animals and the entire natural ecosystem. Indeed, the Islamic economic model is in line with the Sustainable Development Goals in terms of purposes and targets. Nevertheless, in terms of mechanisms, the Islamic economic model has its own solutions to achieve an equitable and sustainable development. This chapter focuses more on the principles underlying the Islamic economic model and their alignment with the Sustainable Development Goals. The next chapter discusses the instruments and the institutions specific to the Islamic economic model that belong to the Islamic social finance sphere.

suffering from the same problem as that of mine. So he (went down the well), filled his shoe with water, caught hold of it with his teeth and climbed up and watered the dog. Allah thanked him for his (good) deed and forgave him.’ The people asked, ‘O Allah’s Apostle! Is there a reward for us in serving (the) animals?’ He replied, ‘Yes, there is a reward for serving any animate.’ Sahih Bukhari Volume 3, Book 40, Hadith Number 551.

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References Amina Mohammad NASIR. (1995), «L’islam et la protection de l’environnement», Revue l’Islam Aujourd’hui, N° 13-1416H/199. Bettcher, K.E. and Teodora, M. (2015, May 26), “Economic inclusion: Leveraging markets and entrepreneurship to extend opportunity”, Center for International Private Enterprise. Retrieved May 26, 2019, from https://www.cipe. org/wpcontent/uploads/2015/05/FS_05262015-Economic-inclusion.pdf. Dinia, A.C. (2009), “al-isl¯am wa h.im¯ayat al baya”, majallat al iqtis¯ad al isl¯ami, No. 345, December 2009, pp. 28–41. Fahlevi, M. (2019), “Islamic economy and politics in the view of Muhammad Baqir Sadr”, Journal of Research in Business, Economics and Management, Vol. 13 No. 2, pp. 2431–2436. Ford, L. (2015), “Sustainable development goals: All you need to know”, The Guardian, p. 19. Ibn taymia. (2010), ‘Al Hisba-fil-islam-‘, d¯ar al kutub al ilmia, First edition. Sachs, J.D. (2012), “From millennium development goals to sustainable development goals”, Viewpoint, Vol. 379 No. 9832, pp. 2206–2211. Tahiri Jouti, A. (2021a), “Islamic fintech and financial inclusion”, in Islamic FinTech, Billah, M.M. (ed). Palgrave Macmillan: Cham. https://doi.org/10. 1007/978-3-030-45827-0_12. Tahiri Jouti, A. (2021b), “The Fourth Market theory and interest rate benchmarking in the Islamic finance industry”, ISRA International Journal of Islamic Finance, Vol. 13 No. 1, pp. 46–65. https://doi.org/10.1108/IJIF05-2020-0094.

CHAPTER 3

The Islamic Social Finance: From Instruments to Institutions

This chapter aims at: • Presenting the zakat and waqf instruments and institutions. • Addressing the main issues and challenges facing the zakat and waqf institutions to contribute actively in the achievement of SDGs

Chapter Introduction Islamic social finance differs from social finance. Indeed, experts include the philanthropic institutions of Islam such as zakat and waqf in the sphere of Islamic social finance while that the ‘social finance’ concept covers only the ‘social banking’, ‘Microfinance’ and impact investment. In the Islamic social finance sphere, there are traditional institutions (zakat and waqf) and modern ones (Islamic financial institutions) including Islamic social banking, Islamic Microfinance, Takaful and Islamic capital markets. Facing new social challenges, human societies in general require more funding and more innovative solutions to tackle the various issues in an effective manner. In this context, the traditional Islamic social finance institutions need a deep reform to fulfill these expectations. From an institutional standpoint, there are three categories of Moslem countries. The first category includes Moslem countries that do not have

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_3

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zakat or waqf entities. However, zakat and waqf practices exist but in the absence of any institutional framework. The second category covers Moslem countries that have specialized institutions but contributions are made voluntary reducing their budget and thus, their social impact. The third category comprises Moslem countries having specialized institutions with contributions made compulsory but the institution business model requires the development of new capabilities to achieve the expected impact on societies. This chapter would define the Islamic social finance concepts and would focus mainly on the traditional institutions such as waqf and zakat.

Islamic Social Finance: Main Concepts and Underlying Principles From Social Finance to Islamic Social Finance Ecosystems Social Finance Concepts Social finance attempts to achieve a positive impact on society and the environment. Social finance and impact finance are interchangeably used (Baker and Nofsinger 2012). Social finance is the application of tools, instruments and strategies where capital deliberately and intentionally seeks a blended value (economic, social and/or environmental) return (Harji and Hebb 2009). Chertok et al. (2008) locate conventional finance at the extremity of the spectrum focusing exclusively on financial return while they position nonprofit investment at the other extremity where the focus is on social return. The social finance is located in the middle balancing both the financial and the social return (Fig. 3.1). In literature, social finance includes social banking, impact investment and Microfinance. Social banks are institutions that offer products and services that should create a social impact (Baker and Nofsinger 2012). Financial

Social return

return

focus Conventional finance

Social finance

Nonprofit finance

Fig. 3.1 From conventional finance to nonprofit finance (Source Author’s own)

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THE ISLAMIC SOCIAL FINANCE …

Financial return focus

35

Social return focus For profit oriented finance

For profit socially oriented finance

Nonprofit finance

Islamic Social finance

Fig. 3.2 The Islamic social finance scope (Source Author’s own)

Benedikter (2011) stipulates that social banking implements the triple principle of profit-people-planet. Indeed, these banks care about making profit, but also about promoting human and environmental well-being. Impact investments are those that intentionally target specific social objectives along with a financial return and measure the achievement of both (Impact 2014). Microfinance means building inclusive financial systems that integrate specified services tailored to serve the needs of the poor and make them part of the mainstream financial system (Rahman 2010). Islamic Social Finance Concepts The Islamic social finance covers a broader scope (Zain et al.). It covers the Islamic traditional instruments based on philanthropy (such as zakat, Sadaqat and waqf) and cooperation (such as Qard and Kafala) (Islamic Social Finance Report 2015). The Islamic social finance is not limited to these traditional instruments but it also covers the modern form of Islamic financial services such as Islamic Microfinance, S.uk¯uk and Takaful (Fig. 3.2). Unlike the social finance concept that excludes the nonprofit finance, the latter is a major component of the Islamic social finance. From this book perspective, the Islamic social finance can include all the modern Islamic financial institutions and financial technologies that have a social impact focus without any limitation. Islamic Social Finance Ecosystems A social finance ecosystem includes providers of social finance and social enterprises, plus all stakeholders who participate in, influence or are impacted by social investment activities (Varga and Hayday 2016).

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An Islamic social finance ecosystem involves the social welfare initiators, the Islamic social finance providers and the Islamic social finance ecosystem coordinators (Tahiri Jouti 2019). From this perspective, the social welfare initiators include governments, international agencies and NGOs, associations, social enterprises and socially responsible corporations. The Islamic social finance providers are the zakat institution, the waqf institution, Islamic Microfinance institutions, Islamic banks, Islamic capital markets and Crowdfunding platforms. The Islamic social finance ecosystem coordinators can be one of the Islamic social finance providers or the social welfare initiators. Islamic Social Finance Instruments As discussed earlier, the Islamic social finance instruments are composed of traditional instruments based on philanthropy and cooperation as well as the modern Islamic financial instruments with a social impact focus. This section will focus more on the zakat and waqf instruments to have a common understanding of these two tools since most of the schemes suggested in this book are based on them. The other products belonging to the Islamic social finance sphere would be explained in detail in the next chapters. The zakat Instrument ‘Zakat’ is one of the five pillars of Islam. It is an act of financial adoration that aims at redistributing the wealth among all Muslims. Thus, it is prescribed that any Muslim who has a financial wealth likely to grow ,’ (zakat assets) and reaching a fixed legal threshold called ‘Nissab: calculated according to the lunar or solar calendar, is subject to zakat within the limit of a determined percentage of his wealth for the benefit of the needy. The categories of the beneficiaries of zakat funds are mentioned in the following Qur’anic verse: The alms are for the poor, the needy, those who are in charge of collecting these gifts and distributing them, those whose hearts to federate, the redemption of captives, the insolvent debtors, those who devote themselves to the cause of God, and the destitute travelers. This is a ruling of God, and God is All-Knowing and All-Wise. (Sourat At-Thawba, Verse 60)

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Zakat is mentioned in more than eighty Quranic verses and more than two hundred Prophetic Hadiths in Sahih Al-Bukhari alone. This indicates the importance of this ritual in the Muslim creed and consequently in the culture of the Muslim community. Before determining the components of a zakat base and its calculation techniques, it would be important to recall that it is a prescription applicable to any Muslim person, minor or major, of sound mind or affected, having a financial wealth meeting the following conditions: – Acquired lawfully and in full ownership of a natural person or private legal entity; – Acquired with the aim of fructifying it and generating an income; ’ i.e., what the Muslim jurists call the condition of ‘Namaa: growth; – Reaching the minimum threshold of wealth called ‘Nissab’ according to the nature of each asset subject to zakat; for a monetary asset the threshold is the equivalent of either 85 g of pure gold or 595 g of pure silver; – Deducted from overdue debts if the person liable is indebted; – Nissab saved for a whole lunar or solar year (condition of the year’s ). In other words: the calculation of zakat must passing ( be done on an annual basis. It should be noted that an asset qualified by Muslim jurists as a financial asset ‘Mal’ differs according to the evolution of the Muslim society. Therefore, the list of zakat assets constituting the basis for calculating the annual amount of zakat can be enriched and completed according to the fulfillment of the above-mentioned conditions. In this sense, the list of the following items includes the following: – – – – – – – –

Livestock consisting of camels, cattle and goats ( ); ); Harvest of agricultural holdings ( ); Gold, money and property of monetary character ( ); Commercial goods ( ); Private mining proceeds ( ); Proceeds from profit-making operations ( Shares owned in private companies; Liberal trade income or wages paid periodically (

);

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The amount of zakat (on these items except livestock) is calculated by applying a percentage of 2.5% on the base of assets subject to zakat in the case of a lunar year. If the calculation is made for a solar year, the percentage moves to 2.577%. The aforementioned Quranic verse of Surate At-Thawba has determined the eight categories of the beneficiaries of zakat which could be described as follows: ): These are people who do not • The poor and needy ( have enough income to meet their needs. This category includes those who ask and those who do not ask for zakat even though they are needy. ): • Those who work on zakat collection and distribution ( This category includes people who collect and distribute zakat. It could be independent individuals or a zakat institution. : This category • Those whose hearts to federate: comprises people who are newly converted to Islam and people who can serve the interests of the Moslem community. ) • The redemption of captives: The notion in Arabic of (Rikab: refers to the Muslim captives and slaves who sought to recover their freedom but did not have enough means. ): refers to those who took out loans • The insolvent indebted ( and found themselves in difficulty to honor their commitments. ): This class can cover all the aspects • For the sake of God ( in line with Shari’ah purposes. ): This refers to people who traveled • Distressed travelers ( and found themselves running out of sufficient means to come back to their homeland. From the macro-economic perspective, zakat contributes to the effective reduction of hoarding practices. Indeed, people would pay zakat on a yearly basis and therefore money would lose its value automatically if it does not circulate. (Tahiri Jouti 2021). In this context, in order to safeguard their wealth, people have three options. The first option consists of investing the available funds, get a profit to pay zakat, protect its capital and have an additional return. The second option consists of spending the funds to acquire fixed assets on which zakat is not calculated. This behavior would encourage

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the consumption in the economy. The third option consists of maintaining their funds and accepting to pay zakat. These three options would enhance investment and consumption in the economy while using the collected zakat to safeguard the purchasing power. The Waqf Instrument The waqf also called ‘Habs’ in some regions of the Islamic world, means holding certain property, preserving it for the confined benefit of certain philanthropy, and prohibiting any use of disposition of it outside its specific objective (Kahf 2003). The waqf can be classified into different categories depending on the purposes it is serving or uses (Hassan and Ashraf 2010): • Religious waqf: including mosques and real estate confined for providing revenues to spend on mosques’ maintenance and running expenses. • Philanthropic waqf: supports the poor segment of the society and all activities that are of interest to people such as helping the poor and needy, building or supporting libraries, universities, hospitals, etc. • Family waqf: dedicates a revenue to the family of the waqf donor starting with his own children and descendants. If there is a surplus, it can be given to the poor. From a Shari’ah perspective, the basic elements of waqf include the form of donation, the waqif (the donor) and the donated property (AAOIFI Shari’ah standard 33, 2008). In terms of form of donation, the waqf requires only an offer since acceptance is not necessary. The waqf can be declared effective from a future date. For example, the waqf donor can declare that his property would become waqf from next year. The waqif (the waqf donor) can be a natural or a legal person who must be legally eligible for disposing of his property. When it is a legal person, the decision of waqf must be taken by the General assembly. The waqf beneficiary should not be an impermissible purpose. It is permissible to make waqf the benefit of non-Muslims since it does not involve a sin. Once, the beneficiary of the waqf does no longer exist, the benefits should go to charity purposes.

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The waqf underlying assets can take the following forms: • Real estate property with permanent furniture and fittings • Movable assets whether they are part of a real estate or independent. • Cash waqf that can be used to grant free loans or invested and the income generated would be paid to charities. In this case, it is accepted to invest cash waqf amounts in Shari’ah compliant shares, S.uk¯uk, Mutual funds, investment accounts and in any other instrument in line with Shari’ah principles. Waqf is broadly divided into spiritual-religious and philanthropic-socioeconomic dimensions (Lamido and Haneef 2021). Indeed, for economic development, the waqf contributes (Budiman 2014) to the economic progress enhancement, the poverty eradication, the government expenditure reduction and the deficit financing prevention. In addition to these socio-economic missions, the waqf plays the following roles (Tahiri Jouti 2013): Maintenance of public property: The revenues generated can benefit individuals or a well-defined category of people as well as be used for the maintenance of public assets such as mosques, hospitals, universities, etc. In addition to maintenance, waqf revenues can contribute to the construction and development of public goods and infrastructure with socio-economic significance. In the fourteenth century, the hospital of Ibn Thuloon (Yalawae and Tahir 2006) in Egypt had about 100,000 medical books, while the University of Paris, that had the largest library in Europe at the time, had only 400 books. It should be noted that in the case of a waqf on public property, the revenues must be allocated, in priority, to maintenance expenses. If there is a surplus, it is allocated to the development of the property.

Investment Promotion: One of the economic missions of the waqf is to develop the assets under management in order to safeguard its value and to increase the generated income. This mission requires the institution to become an investor and entrepreneur.

3

Compulsory / Institution Libya, Saudi Arabia, Pakistan, Soudan

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Voluntary / Institution Indonesia, Jordan, UAE, Lebanon, Bangladesh, Malaysia

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No institution Morocco, Mauritania, Syria, Irak, Niger, Nigeria, Turkey, etc.

Fig. 3.3 Zakat collection regime in Moslem countries (Source Authors own)

Islamic Social Finance Institutions Zakat Institution Today, the operating models of zakat management at the international level can be categorized into three main forms: • Existence of zakat institutions managing the collection and distribution with compulsory contributions. • Existence of zakat institutions managing collection and distribution with voluntary contributions. • Absence of institutions managing zakat, which is distributed individually at the discretion of each individual. A Central Zakat Institution with Compulsory Contributions Zakat collection and distribution is one of the duties attributed to the Islamic state (Owolabi Yusuf and Derus 2013). It has been the case since the prophet Muhammad (Peace be upon him) until the fall of the last Caliphate (Fig. 3.3). Therefore, having central zakat institutions with compulsory contributions constitutes the normal case. Compulsoryzakat contributions consist of collecting zakat from all the eligible people. The following table summarizes the main features of experiences in countries with compulsory zakat applications (Table 3.1). A central zakat institution with Voluntary Contributions A government may choose to implement a central zakat institution with voluntary contributions for the following reasons:

The bureau of zakat and income was created in 1936. Then converted to the General Authority of zakat and taxes in 2016 and in 2021, it became the zakat, Tax and customs authority1 The zakat and Ushr law was voted in 1980 and gave birth to the zakat and Ushr department in the same year

The Libyan zakat fund was established in 2012

Kingdom of Saudi Arabia

Lybia

1 zatca.gov.sa.

Pakistan

Date of creation

National Zakat institutions with obligatory contributions

Country

Table 3.1

The zakat and ushr law defines the 11 zakatable assets. Banks, companies and other financial institutions deduct the zakat automatically The collected amounts are deposited in the Central zakat fund and the Central Bank of Pakistan. Then, the funds are transferred to provincial funds and regional zakat committees. Then the local zakat committees as well as other institutions such as religious schools in Pakistan state educational institutions do the actual disbursement The Libyan zakat fund aims at raising awareness of Libyan people towards the obligation of zakat and introduces technology in collection and distribution The operating expenses of the fund are undertaken by the Libyan government budget

The zakat payment to the authority is compulsory for businesses but not for individuals

Main features

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The zakat law was voted in 1990 and the zakat chamber was created

Sudan

In 1980, a national zakat fund was created. All the contributions were made on a voluntary basis. In 1985, the zakat and tax chamber was created and imposed obligatory contributions to all the moslem citizens. In 1990, the zakat chamber was created, its general secretary is appointed by the council of ministers2

Main features

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2 zakat-sudan.org.

Source Author’s own

Date of creation

Country

3

43

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• The country population is not mainly moslem • The country is secular even if its population is mainly composed of moslem • There is a common practice that consists of donating its zakat to relatives and this practice seems to have a positive impact. In this case, the zakat institution is considered as a second option. • The awareness towards zakat is very weak. The zakat institution with voluntary contributions constitutes a transition phase and a way to educate people. The following table summarizes the main features of zakat institutions in countries with voluntary contributions (Table 3.2). In this context, zakat institutions are only collecting voluntary contributions. Therefore, the amounts collected are by far less important than those of zakat institutions with obligatory contributions. Indeed, the challenge in this context is to convince more people to contribute to the fund and move gradually from voluntary contributions to obligatory ones. No Central Zakat Institution The absence of a central zakat institution does not mean that people in this country do not pay their due zakat. Nevertheless, the absence of an institutional framework for zakat collection and distribution would reduce its social and economic impacts. In this context, people eligible to zakat prefer paying it to close relatives and rarely pay it to associations or non-governmental organizations. The challenge is to implement a central zakat institution that attracts the maximum of voluntary contributions to bring more impact and then embark more people. New Trends and Best Practices in zakat institutions It goes without saying that zakat institutions need to improve their effectiveness and efficiency through multiple practices such as: – Measuring the efficiency of the zakat institutions and their impact on the economy

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Table 3.2 National zakat institutions with voluntary contributions Country

Date of creation

Main features

Indonesia

The Zakat Act was voted in 1999 BAZNAS (Zakat State fund) was created in 2011

Malaysia

There is not any central zakat institution in Malaysia

Jordan

The first zakat law was voted in 1978. Then, a second law was voted in 1988 that gave more powers and independence to the national zakat fund The Lebanese zakat fund was created in 1984

The zakat act authorized public institutions (BAZ) and non-governmental institutions (LAZ) to work in the zakat field. All of these institutions are working under the supervision of BAZNAS BAZNAS is an independent institution attached to the president of the republic and the ministry of religious affairs Each state’s Islamic religious council collects and distributes zakat The Islamic religious councils do not have the same powers of the tax federal authorities The zakat fund in Jordan has a board of directors and the minister of waqf is the chairperson3

Lebanon

United Arab Emirates

The federal zakat fund in the UAE was created in 2003

The fund is part of the institutions of Dar Al Fatwa (the only institution able to issue fatwas)4 The zakat fund in the UAE collects contributions and distributes them to eligible people

Source Author’s own

The best examples to cite are BAZNAS in Indonesia and the UAE Zakat fund. Indeed, in 2016, BAZNAS developed a tool to measure the development and evolution of zakat in Indonesia called the zakat national index (ZNI). This index measures the impact of zakat through two dimensions:

3 http://www.zakatfund.org/Default.aspx?Lng=1&P=PD&T=1&S=1&Q=1&ID=1. 4 https://www.zakat.org.lb/pages/ar/about-us#tab-Zakat-Fund-in-Brief-1.

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First, the macro perspective includes three sub-indicators that are the regulatory support, the budgetary support and the open access to the institution databases. The second dimension covers two main indicators. The first indicator focuses on the zakat institution governance, the growth of collected amounts, the management of the institution (through the preparation of strategic planning, the Shari’ah compliance framework, the financial reporting, etc.). The second indicator measures the impact of the distributed zakat on beneficiaries. This impact is not limited to the material aspects but includes also other elements such as spirituality, health, independence and empowerment of the beneficiaries. The UAE zakat fund participates in the Sheikh Mohamad Ben Rashid Government Excellence Award that is a part of Sheikh Khalifa Government Excellence Program. The award is based on the Government Excellence Model (GEM 2.0) designed to inspire government entities to achieve excellence and to result in major leaps of performance. The Award assessment methodology5 is divided into three main sections: Assessment of the capabilities (including four dimensions: design, deploy, transform and disrupt), assessment of the results (including four dimensions: Relevance, Performance excellence, competitiveness Impact and impact on national well-being) and assessment of the catalysts (covering four dimensions as well; define, deploy, distinguish and impact). Experts from all over the world conduct the assessments. Those experts have no direct or indirect links with the entities involved in the award. The final score obtained defines the position of the entity in the excellence journey. Unlike the BAZNAS experience, the UAE zakat fund is in competition with all the other federal entities. Indeed, the zakat fund is not expected to develop its activities and its impact only but to achieve excellence in all the fields. – Implementing Multi-channel zakat payment The establishment of a multi-channel framework for zakat payment is intended to encourage zakat contributions. With this in mind, many 5 www.skgep.gov.ae/en/award/assessment-tool

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countries, through their central zakat institutions, have set up a variety of payment channels to, among other things; adequately cater to the payment habits of their citizens. For instance, in Singapore, people can pay their zakat through a variety of channels starting with physical touch points in mosques and ending with several electronic means such as6 : • A dedicated website7 set up by the Islamic Council of Singapore (MUIS) whose functions include the management of zakat in Singapore.8 • The payment via the mobile application of a number of local banks. Once the payment is executed, the zakat donor can go to another website9 to retrieve an official payment receipt used for the tax benefits offered by the zakat payment among others. • Payment via terminals called AXS,10 installed all over the country, which allow to make several types of transactions among which the payment of zakat. • Payment via ATMs • Payment via recurring debit order (called GIRO) where the donor fills out a form where he/she indicates an estimate of his/her zakat for the next year. This amount is then divided by twelve since payment via GIRO is monthly. If, at the end of the year, the actual contribution should be higher than the amounts debited monthly, the donor can ask to pay the difference by check, in cash, on AXS or via the MUIS website. On the contrary, if the contributions collected are higher than the amount to be collected, the donor has the choice to benefit from the difference as an advance payment on his future zakat or to consider this difference as a voluntary Sadaqah. • Payment by check in the name of MUIS as beneficiary. In Indonesia, the zakat payment can be done through various forms (BAZNAS, 2019a, b): 6 https://www.muis.gov.sg/Zakat/Zakat-Payments/Zakat-Payments/Overview. 7 https://www.zakat.sg/ePayment/zakat.aspx. 8 https://www.muis.gov.sg/About-MUIS/Roles-Functions. 9 https://form.gov.sg/#!/5e9b9158d273ec0011e12257. 10 https://www.axs.com.sg/axsNetwork_axsStation.php.

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• Mobile applications such as Kitabisa.com, Gopay, OVO, Tcash, Kaskus, Invisee and many others. • E-commerce websites and platforms like Elevenia.co.id, Blibli.com, Shopee.co.id, Tokopedia.com, etc. • Social media • Online payment through internet banking, SMS banking, e-wallets. Moreover, the zakat payment can be done on the BAZNAS11 website through different means such as the Bank transfer, PayPal and others. – Adopting the latest trends in terms of marketing and communication in the field of charity and zakat In the context of zakat institutions with obligatory contributions, the communication campaigns should focus on reporting and full transparency. Indeed, the reporting instruments shall present the impact of zakat on the national well-being and the economic development while transparency can reinforce the credibility of the institution. For zakat institutions with voluntary contributions, the communication campaigns should raise awareness towards the practice of zakat, attract more donors and target higher impact in terms of social support to position itself as a major social player. To do so, the zakat institutions need to conceive their own zakat literacy policy, experiment nudging practices and using various means of communication including social media. • The zakat literacy policy The zakat literacy policy consists of sharing the necessary knowledge with the different stakeholders (accountants, zakat donors, partners like electronic platforms and banks, etc.) and accompany them during the zakat payment. This accompaniment shall ensure, among other things, that zakat donors would pay a part of their due amounts to the zakat institution.

11 https://baznas.go.id/bayarzakat.

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The zakat literacy and accompaniment can be done through different ways including brochures, guides, TV and Radio Programs, Chatbots12 in the institution website, social media pages and call center, zakat applications, etc. • The nudging practices In the field of donation collection, three nudging practices are known for their effectiveness. First, the zakat institution needs to identify the social projects to support and give them a marketing packaging. For instance, the UAE federal zakat fund, in his website, enumerates more than 15 social projects eligible to zakat (the people with low-income projects, university students projects, the insolvent debtors project, the widow women project, the divorced women project, the chaste families project, etc.) The zakat institution has to pick up the social projects with the highest perceived impact. Then, it has to set goals for each project. For example, the zakat institution can define the number of targeted beneficiaries and the amounts to allocate to each project. The second nudging practice consists of showing for each project the achievement rate in terms of zakat collection. This is a common practice in the crowd funding platforms. The third nudging practice consists of elaborating and sharing reports with the zakat donors and prospects. These reports can be shared in the website but also through videos and audio recordings. • The social media campaigns Thezakat institutions must reinforce their presence in the various social media including the newest platforms to target all ages and all the segments that can be eligible to zakat. It is worth noting that a social media campaign targeting youngsters could seem unsuccessful in the short term since this is a population that is

12 https://www.zakatfund.gov.ae.

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not necessarily eligible to pay zakat but it can be very fruitful in the long term since these youngsters are the zakat payers of the future. Waqf Institution From a historical perspective, many surveys and case studies focused on the Ottoman waqf institution. Indeed, waqf was used for the development of public and commercial institutions leading to the economic revitalization of major Ottoman cities (Dallal 2004). In 1527, 12% of the whole Ottoman state revenues were controlled by the waqf administration (McChesney 1981). In modern times, Moslem countries were under the French or British colonization. The French colonization in countries like Morocco and Tunisia minimized the role of the waqf institution and restricted it to mosques and public baths. In Algeria, the French authorities gradually and systemically replaced the Islamic law with French public, property and penal law. In parallel, the British in India had embraced Islamic law and came out with the so-called Anglo-Muhammaden law (Dallal 2004). After the colonial period, most of the waqf administrations failed to revitalize the waqf culture in the Moslem countries in the absence of clear policies and in some contexts, of a strong will to make waqf as a pillar of the economy. The Limited Performance of Waqf in Moslem Countries In practice, the waqf administrations in many Moslem countries are lagging behind for the following reasons: • The limited investment policies of waqf administrations In most of the Moslem countries, the majority of the assets of the waqf administrations are composed of real estate properties and lands. Moreover, in some contexts, these assets are experiencing deterioration and a significant decrease in their value but also in their income.

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The general observation is that waqf administrations are not diversifying the categories of waqf to include Shari’ah compliant financial instruments and cash waqf. Moreover, they are having trouble dealing with the financing needs to renovate the existing waqf assets and to increase their income and value. From another perspective, the waqf administrations are not investing intensively in modern economic projects such as malls, banks and business centers to generate more income. In Turkey, the waqf administration (the Directorate General of foundations) has created its own Bank called (Vakif Bankasi) in 1954 to manage efficiently the assets of the foundations. In parallel, the waqf administrations are not involved strongly in the social field to build universities, hospitals, schools and other necessary social infrastructure. • The absence of waqf literacy policy The waqf administrations in many countries are attached to the Islamic and religious affairs authorities or ministries. This attachment creates a confusion in the mind of people that ignore the concept of waqf or consider it limited to religious assets such as mosques and public baths. Moreover, the absence of waqf in the fields of education, health care and other social sectors reinforces this perception. Indeed, the absence of waqf literacy policies targeting all the segments of the Moslem society makes it hard to attract more waqf donations and to make its impact grow throughout time. • The capabilities issue of waqf administrations In many jurisdictions (like Morocco, Algeria, UAE, Kuwait, Jordan, Qatar, Bahrain and Lybia), the waqf administration is part of the ministry or the authority of waqf and Islamic affairs. As discussed earlier, such attachment would reinforce the idea that waqf is limited to the religious assets and cannot contribute to the social and economic activity of the country.

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In other jurisdictions (like the Kingdom of Saudi Arabia and Egypt), the waqf administration is isolated from the Islamic affairs administration mainly because of the different requirements in terms of capabilities. Indeed, the waqf administrations need to be managed as Investment banks with a confirmed expertize in the social fields. For instance, the MUIS (Majlis Ugama Islam singapura) has created a subsidiary company known as Waqf Real Estate of Singapore (WAREES Investment Pte. Ltd) to ensure the development of waqf properties. Indeed, the value of waqf property has increased by ten times and generates a more important income for the waqf fund (Harun and Ali 2012). Overall, the waqf administration needs to upgrade its business model to level up their investments in terms of value and income and contribute to the social welfare of the society while achieving the donors’ requirements. The New trends of the waqf Practice As per the zakat institution, the waqf administrations need deep changes and reforms in terms of business model, governance, investment strategies, marketing approaches and partnerships. Obviously, such reforms would require the development of new capabilities and competencies in order to achieve the objectives of modernization and effectiveness. The main trends of waqf administrations can be summarized as follows: – Creating special authorities of waqf with a special governance system The waqf administration requires stability in drafting the policies and dedicated resources to develop sustainable waqf assets that are contributing to the economic growth and the social stability of the country.

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– Creating independent waqf administrations For this purpose, the waqf administration shall take the form of an independent authority that is not submitted to any government policy or will. A special authority that is not attached to any other governmental entity would ensure the stability in terms of strategies, policies and management of waqf. • Implementing a Governance system focusing mainly on increasing the investment and the social impact From another perspective, the Governance of the waqf administration shall be focused on the social impact and investment. Therefore, the board shall gather people who are not politicians or in the government. It shall rather attract experts and people who have deep knowledge of Sustainable Development, Islamic finance and Shari’ah to increase the waqf income and the social impact as well while being in line with Shari’ah principles. – Developing new investment policies with a broader range of instruments Investment is the only way for waqf administrations to maintain the assets under their management and increase the income and hence the impact. To revitalize the waqf investment activity, it is important to replace the existing assets by financial instruments with higher returns, to open the door to new categories of waqf such as cash waqf and to invest in the social field. • Replacing the existing assets by financial instruments with higher returns If the waqf administration fails to maintain the asset and its income to achieve the purpose of the waqf donor, it is possible to sell the asset at a reasonable price in order to reinvest the amount in other assets with higher returns to safeguard the waqf purpose itself. This exit option would enable the waqf administrations to have an active investment policy replacing continuously the least performing assets

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with the highest performing instruments to keep the waqf investment portfolio dynamic and evolutionary. • Recognizing new categories of waqf assets Since historically, most of the waqf assets are composed of real estate properties and lands, it is hard for people who do not own such assets to make waqf during their lives, which reduces the volume of donations and the impact of the whole practice on the daily life of people. Therefore, it is important to recognize and promote new categories of waqf assets that would encourage people with small amounts to be part of the waqf donors’ community. Indeed, recognizing cash waqf would increase donations and contribute to the diversification of the investment portfolio of the waqf. Nevertheless, to ensure the efficiency and the effectiveness of the cash waqf, the waqf administration needs to develop external synergies with Islamic financial institutions, digital platforms and any other relevant partners. • Investing in the social field Promoting cash waqf donations would provide the waqf administration with the necessary funding to contribute to the social development of the country. For instance, the waqf administration can launch a campaign to raise funds for building a university and create an investment portfolio for that university to cover the operating expenses. Moreover, investing in the social field would improve the notoriety of the waqf administration and would attract more donors to create more impact. From another perspective, the waqf administration can prioritize the investment in social impact projects with higher returns. Indeed, the administration would support the social purposes when investing but also when spending the return generated. – Taking the lead on the social field The waqf administration is not supposed only to invest funds and redistribute the income among needy people. The waqf administration is

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supposed to have an investment strategy that supports the economic development and reinforces the social infrastructure of the country. Moreover, it is expected to have a distribution policy achieving the highest impact possible. • The Investment strategy The waqf administration shall draft an investment strategy that covers: – The economic sectors to support and the businesses to invest in with exit options at the end of the investment period. Such disposition would enable the waqf administration to support the major businesses and revive the economy. – The assets diversification in terms of risk/return. Indeed, the waqf administration shall also invest in Shari’ah compliant financial instruments and define the allocation strategy. Moreover, the administration shall define non-financial criteria for asset selection mainly in terms of social impact and Sustainable Development Goals. – The expected return from all investments and the Risk management strategy. – The replacement policy of assets with a decreasing return. – The distribution policy. The income generated from the investments shall be re-allocated to various purposes. The waqf administration needs to define the following aspects: – The social sectors to support. Indeed, the waqf administration can have its own initiatives in partnership with other entities as it could support initiatives of other entities. – The waqf administration support shall be oriented to specific social sectors with targeted key performance indicators. – The distribution shall be done through a variety of channels (associations, applications, electronic platforms, etc.) – Adopting the latest marketing trends. To attract more waqf donations, the waqf administration needs to adopt the latest marketing trends. Indeed, as per any other institution, the

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administration shall identify the segments of people it is serving, their needs and requirements. Based on that, the waqf administration can introduce the following practices. • Drafting a waqf literacy policy The waqf administration shall conceive a waqf literacy policy to raise awareness towards the waqf practices and to attract more donors. Indeed, the literacy policy shall include guides for donors to understand the fundamental aspects in a waqf operation such as the assets eligible to waqf, the procedures to make a waqf donation, the conditions that a waqf donor can stipulate, the charities and social purposes that the waqf can serve and the available periodic reporting. The waqf administration is supposed to share all the strategic orientations and targets including the Key Performance indicators with the public. Such practice can help the different stakeholders to know how to deal and benefit from the waqf administration. Indeed, the waqf administration is not supposed to attract donors only but also social projects holders and innovators to increase its impact. • Introducing nudging practices The waqf administration can introduce nudging practices to raise more funding. For instance, the administration can apply the ‘Donate Tomorrow’ principle as per the ‘Save Tomorrow’ principle (Thaler et al., 2004). In partnership with Islamic Banks, the waqf administration can develop this product that consists of giving a share of the salary increase for a period of time. The amounts deducted are invested in financial instruments based on cash waqf. Other practices can be also introduced such as packaging the social purposes served by waqf in specific ecosystems with specific targets and indicators to achieve. – Developing the administration capabilities

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• Conducting an organizational reengineering The waqf administration has to be managed as an Investment Bank that has a social concern. The administration collects new donations, maximizes the return on investment and tries to satisfy the needs of different segments and population. • Concluding partnerships with financial institutions A very serious path to collect donations would be collaborating with financial institutions. Indeed, such partnerships can give birth to new products and financial structures based on cash waqf and can contribute to the differentiation journey of Islamic financial institutions compared to conventional ones.

Chapter Conclusion The Islamic social finance traditional institutions played an important role in the history of the Islamic civilization. Nevertheless, these institutions knew a tough deterioration during the colonization period. Later, some countries have already set up waqf administrations and zakat institutions while others are still lagging behind in terms of Islamic social financial institutions. As discussed in this chapter, the zakat institutions and waqf administrations are facing many challenges and constraints such as the lack of awareness towards zakat and waqf practices, the absence of appropriate capabilities to develop these institutions in an effective manner and the absence of adequate governance frameworks. The success of these institutions would depend mainly on their ability to conceive marketing campaigns, raise awareness, multiply the channels to raise funds and to increase their social impact. One of the paths identified to enhance the performance of these institutions is to collaborate with Islamic financial institutions through the development of products and structures that would have a significant impact on raising more donations, investing them in the right projects while generating an income to support charities and social projects and initiatives. In the next chapters, this path will be explored and discussed in a more accurate way while keeping in mind that this partnership should serve the

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interests of both sides in a long-term win–win relationship. Otherwise, such efforts would be focused only on the short term.

References Baker, H. Kent and Nofsinger, John R. (2012), “Socially responsible finance and investing” (p. 528). John Wiley & sons. BAZNAS. (2019a), “How does Zakat institution respond to Fintech? Evidence from BAZNAS Indonesia”, (page 4), available at: https://www.researchgate. net/publication/335135736_How_Does_Zakat_Institution_Respond_to_Fin tech_Evidence_from_BAZNAS_Indonesia and https://baznas.go.id/id/cha nnel-pembayaran. BAZNAS. (2019b), “National Zakat Index 2019”, (pages 1, 2 et 81), available at: https://www.puskasbaznas.com/publications/books/1237-nationalzakat-index-2019b. Benedikter, R. (2011), “European answers to the financial crisis: Social banking and social finance”, Spice Stanford. Budiman, M.A. (2014), “The significance of Waqf for economic development”, Journal Equilibrium, Vol. 2 No. 1, June 2014, pp. 19–34. Chertok, M., Hamaoui, J. and Jamison, E. (2008), “The funding gap”, Stanford Social Innovation Review, Vol. 26, pp. 44–51. Dallal, A. (2004), “The Islamic institution of Waqf: A historical overview”, Islam and social policy (pp. 13–43). Vanderbilt University Press. Harji, K. and Hebb, T. (2009), “The quest for blended value returns: Investor perspectives on social finance in Canada”, Carleton Centre for Community Innovation, Ottawa, Canada. Harun, R., Isa, Z.M. and Ali, N. (2012), “Preliminary findings on Waqf management practices among selected Muslim countries”, in International Conference on Economics Marketing and Management (Vol. 28, pp. 117–120). IACSIT: Singapore. Hassan, M.K. and Ashraf, A. (2010), “An integrated poverty alleviation model combining zakat, awqaf and micro-finance”, in Seventh International Conference–The Tawhidic Epistemology: Zakat and Waqf Economy (pp. 261–281). Bangi, Malaysia. Ibn taymia. (2010), ‘Al Hisba-fil-islam-‘, d¯ar al kutub al ilmia, First edition. Impact, S. and Taskforce, I. (2014), “Impact investment: The invisible heart of markets”, GSG. IRTI. (2015), “Islamic social finance report 2015 (1436)”, Islamic Research and Training Institute, Jeddah, available at: Islamic Social Finance Report 1436H (2015)—Islamic. Kahf, M. (2003, January), “The role of waqf in improving the ummah welfare”, in International Seminar on Waqf as a Private Legal Body (pp. 6–7).

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Lamido, A.A. and Haneef, M.A (2021), “Shifting the paradigms in Waqf economics: Towards renewed focus on socioeconomic development”, Islamic Economic Studies, Vol. 29 No. 1, pp. 18–32. https://doi.org/10.1108/IES04-2021-0014. McChesney, Robert D. (1981), “Waqf and public policy: The Waqfs of Shah Abbas, 1011-1023/1602-1614”, Asian and African Studies, Vol. 15 No. 2, pp. 165–190. Owolabi Yusuf, M. and Mat Derus, A. (2013), “Measurement model of corporate zakat collection in Malaysia: A test of diffusion of innovation theory”, Humanomics, Vol. 29 No. 1, pp. 61–74. https://doi.org/10.1108/082886 61311299321. Rahman, W.A.A. (2010), “An overview of microfinance: History and evolution, definition and practice”, Ahfad Journal, Vol. 27, No. 2, pp. 3–21. Tahiri Jouti, A. (2013), «L’institution des Waqf, Quel financement de l’entrepreneuriat social?», JBE, Vol. 1 No. 2, pp. 68–74. Tahiri Jouti, A. (2019), “An integrated approach for building sustainable Islamic social finance ecosystems”, ISRA International Journal of Islamic Finance, Vol. 11 No. 2, pp. 246–266. https://doi.org/10.1108/IJIF-10-2018-0118. Tahiri Jouti, A. (2021), “The Fourth Market theory and interest rate benchmarking in the Islamic finance industry”, ISRA International Journal of Islamic Finance, Vol. 13 No. 1, pp. 46–65. https://doi.org/10.1108/IJIF05-2020-0094. Varga, E. and Hayday, M. (2016), “A recipe book for social finance: A practical guide on designing and implementing initiatives to develop social finance instruments and markets”, Publications Office of the European Union.

CHAPTER 4

Impact Investing Involving Islamic Finance and Islamic Social Finance

This chapter aims at: • Explaining why Islamic financial institutions need to collaborate with Islamic social finance institutions while using the United Nations SDG framework. • Presenting the impact management and measurement processes as defined in the UN SDG impact standards.

Chapter Introduction Islamic financial and Islamic social financial institutions are both part of the global financial system and their contribution to the achievement of the Sustainable Development Goals is not up for debate or demonstration. Indeed, this chapter discusses the idea of collaborating between the two types of institutions to achieve Sustainable Development Goals. As discussed in my book, ‘The Fourth Market Theory and the paths to differentiation,’ Islamic financial institutions are duplicating the business model of their conventional peers. Both the fourth market theory and the neutrality trap phenomenon are justifying such behavior (Tahiri Jouti 2021b). In the same book, endorsing the Islamic social finance instruments and collaborating with its institutions has been always raised as part of the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_4

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solution and a serious path to differentiation. Indeed, Islamic financial institutions can use zakat to reduce its cost of risk and thus its pricing while contributing to its collection through its various channels. Moreover, building or at least contributing to the construction of sustainable Islamic social finance ecosystems has been also identified as a major path to differentiation of the whole industry. Indeed, people are not only interested in financial products that comply with Shari’ah principles; they are also expecting a social and economic impact that would reveal the true face of the Islamic economic model. For Islamic social financial institutions, such partnership can revive them and initiate a new dynamic that will increase their impact and reinforce their position and image. This chapter would present briefly the way Islamic social financial institutions and Islamic financial institutions can collaborate and build a long-term win–win relationship through ecosystems that would use zakat and waqf as well as Shari’ah compliant investment instruments to achieve impact. Finally, this chapter would present also how Islamic financial institutions can conceive, implement, optimize and reinforce their impact management and measurement processes. This section is based mainly on the SDG impact standards for investors and for enterprises.

Islamic Finance and Islamic Social Finance: Paths of Collaboration The Main Objections and Difficulties Facing the Islamic Finance Industry The institutional theory stipulates that the structure of organizations is submitted to external and internal pressures (Zucker 1987). These pressures can be coercive and impose the adoption of certain policies or changes in the structure of organizations (DiMaggio and Powell 1991). They have been found to influence an innovation’s adoption and implementation in both private (Liang et al. 2007) and public organizations. In the context of Islamic financial institutions, there are two types of external pressures that impose major adjustments in their business model that are the competition with conventional financial institutions (in terms of pricing policy) and the regulators adopting a neutral approach favoring incumbents (neutrality trap and incumbency protection phenomena).

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• The pricing policy and the fourth market theory Most of Islamic financial institutions are introduced in a dual financial system where they will be in competition with large conventional financial institutions in a hostile context. Indeed, the Islamic financial institutions are under the pressure of inappropriate legal and regulatory frameworks, economic rules and practices as well as customers’ behavior. (Tahiri Jouti 2021b). Facing such competition and pressure, Islamic financial institutions adopt a pragmatic approach that favors the financial performance and the economic viability over the independence of its business model. From this perspective, Islamic financial institutions are duplicating the risk profile of their conventional peers when it comes to product features and financial mechanisms to calculate the profit and margin rates. First, for Islamic financial institutions to attract more depositors, they have to offer investment instruments with similar features like those of conventional financial instruments by using smoothing mechanisms and profit waiver techniques or even by adopting fixed income contracts such as commodity mur¯abah.ah (tawarruq) or wak¯ alah. Moreover, to achieve such performances, the Islamic financial institutions are oriented towards fixed income financing instruments while applying the same pricing levels, mechanisms and benchmarks. The fourth market theory concludes that instead of replacing or competing with the conventional finance in the economy, the Islamic financial institutions become a part of the conventional financial system. • The neutrality trap and incumbency protection phenomena In all the economic sectors, incumbents develop their own competitive advantages to establish hurdles to new entrants. In highly regulated sectors, regulators contribute to the establishment of such advantages for incumbents, which can lead to what I called in my book ‘the incumbency protection phenomenon’. In the context of Islamic financial institutions, this incumbency protection phenomenon occurs in the licensing process and in the rules governing tax and prudential requirements whenever the financial authorities are adopting a neutral regulatory approach.

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Indeed, adopting neutrality by the regulators leads to impose the treatment of conventional financial instruments to Islamic financial products to protect the stability of the system and reduce the customers’ migration, the tax revenue for the government and the market share of incumbents. Overall, the neutrality constitutes a trap for Islamic financial institutions since they need to adapt their business model to the various regulatory requirements. The Main Paths to Differentiation of the Islamic Finance Industry • The partnership with Islamic social finance institutions In order to ensure the differentiation in terms of pricing policy, implementing zakat can be effective. First, zakat reinforces the attractiveness of the Islamic investment instruments for Shari’ah aware people. Indeed, when investing in conventional investment instruments, a Moslem should pay the interests to a third party while paying zakat on his/her capital. In an investment account, a Moslem gets his Shari’ah compliant profit and pay zakat while safeguarding his capital. Moreover, the zakat collected can be used to pay for customers in difficulty and hence, reduce the cost of risk of the Islamic financial institutions. This mechanism can increase the profit rates of Islamic investment instruments and break the hegemony and control of conventional financial institutions over the financial flows of the economy. From another perspective, using cash waqf-based investment accounts and instruments can provide Islamic financial institutions with permanent funding that would improve their long-term financial equilibrium. Moreover, a portion of these funds can be allocated to support innovative projects with a proven social impact. This is, in itself, a very sound marketing argument for differentiation. • The sustainable development The complexity of social and environmental issues facing human societies requires the involvement of all the stakeholders including businesses and financial institutions.

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From a theoretical perspective, Islamic finance adopts a risk-sharing business model instead of a risk-transferring model, which, in itself, can create a real impact on people. In practice, Islamic financial institutions are lagging behind when it comes to impactful initiatives. Therefore, it is important to work on initiatives that contribute to the achievement of Sustainable Development Goals. For this purpose, Islamic financial institutions can use Islamic social finance instruments as presented in the previous chapter in order to raise more resources to allocate to impactful projects and initiatives. • The business model reengineering ‘Stick to the knitting’ is the most appropriate key idiom to wrap up this section (Peters and Waterman 1984). Tom Peters popularized this expression in his book meaning that what can help in building a business to be the best it can be is staying with the business and concentrating on it. Obviously, Peters used this expression to recommend not to invest in different sectors and to keep focusing on one sector. In this section, it would rather mean that Islamic financial institutions should stick to their business model and try to implement ecosystems that are in line with the Islamic theory of economy. Indeed, here are some of the recommendations I discussed in my book ‘the fourth market theory and paths to differentiation’ that share the same idiom: • Sticking to al-gunm-bil˙ gurm ˙ principle when conceiving investment instruments in order to transform them to neutral vehicles instead of being part of the money market. • Sticking to al-gunm-bil˙ gurm ˙ principle when conceiving financing instruments by adopting financial features and contracts applied in the real economy sphere in order to eliminate the control of Islamic financial institutions on market prices. • Sticking to the business model of Islamic financial institutions by moving from products-based innovation to business model-based innovation in order to implement correctly the different components of the Islamic alternative.

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The Paths of Collaboration Between Islamic Social Finance Institutions and Islamic Financial Institutions The collaboration between Islamic social finance institutions and Islamic financial institutions would have the following impacts: • Mobilizing more resources and multiplying the collection channels As discussed in the previous chapter, zakat and waqf institutions need to collect more funds to create a real impact. Therefore, collaborating with Islamic financial institutions to build up social finance ecosystems where funds collected are allocated to impactful businesses and projects and then the income generated is paid to charities, would simply enhance the credibility of both types of institutions. From their perspective, zakat and waqf would multiply and diversify the collection channels while Islamic financial institutions would mobilize more resources and allocate them to impactful projects and investments. • Diversifying the investment assets (for Islamic social finance institutions) From the Islamic social finance perspective, collaborating with Islamic financial institutions would enable them to invest in financial instruments, to get an income on a regular basis, and to reduce the portfolio’s concentration on real estate assets. These financial instruments cover several horizons of investment, levels of liquidity and profiles of risk. Moreover, the financial instruments can be in line with the Sustainable Development Goals and be classified as impact investing instruments. • Increasing the social impact This partnership would raise awareness towards sustainable development. For instance, a waqf donor willing to increase its impact would look for investment instruments that contribute to the achievement of Sustainable Development Goals while allocating the income generated to initiatives sharing the same purposes. Moreover, zakat funds can also support the economic activity to safeguard the waqf funds.

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Therefore, the for-profit activity would be supported through Islamic social finance instruments and the income generated by the investment activity would, in return, support the nonprofit activities.

SDG Impact Management in the Context of Islamic Financial Institutions and Islamic Social Finance Instruments To embed effectively and successfully the Sustainable Development Goals in the management practices of enterprises and investors, the United Nations Development Program has launched an initiative called the SDG Impact Standards. The standards are organized around four pillars—Strategy, Management approach, Transparency and Governance. Every one of these pillars contributes to the full integration of sustainability into organizational systems and decision-making processes. The following figure presents the purpose of each pillar in the SDG impact standard general approach (Fig. 4.1). This section is perfectly in line with the SDG impact standards while taking into account the Shari’ah requirements for financial products, cash waqf and zakat. Standard 1 (Strategy): Embedding foundational elements into purpose and strategy Standard 2 (Management Approach): Integrating foundational elements into operations and management approach Standard 3 (Transparency): Disclosing how foundational elements are integrated into purpose, strategy, management approach and governance, and reporting on performance Standard 4 (Governance): Reinforcing Commitment to foundational elements through governance practices

Fig. 4.1 The SDG impact standards (Source SDG Impact standards)

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In the next part of the book, there are eight schemes of financial products meeting SDG and cash waqf requirements. Some schemes are undertaken by Islamic financial institutions and enterprises while others are developed by asset managers and investors. In this context, we will be presenting the main principles underlying the impact management and measurement processes for enterprises and for investors as enumerated in the SDG impact standards.1 Setting the Strategy to Embed Sustainable Development Goals • For Islamic financial institutions and enterprises An Islamic financial institution/enterprise needs to embed contributing positively to Sustainable Development Goals into its purpose and strategy and sets ambitious impact goals. Indeed, a financial institution/enterprise has to: 1. Define its purpose and objectives. The aim for the Islamic financial institution/enterprise is to link its approach to creating long-term value for its stakeholders while contributing to the achievement of the SDGs. 2. Identify the sustainable development issues relevant to stakeholders. In our context, stakeholders are shareholders but also investment account holders (including waqf donors) and the government. The standard stipulates that the enterprise has a formal engagement plan to effectively identify and engage stakeholders including underrepresented stakeholders and governments to understand the national priorities in terms of SDGs on an ongoing basis. 3. Define its priorities in terms of SDG targets since a financial institution/enterprise cannot tackle all the issues identified by its stakeholders. 4. Assign ABC goals for each SDG outcome. Indeed, A stands for act to avoid harm, B for benefit stakeholders and C contribute to solutions. 5. Define impact thesis with business actions to support each SDG.

1 https://sdgimpact.undp.org/practice-standards.html.

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• For asset managers and investors The asset managers and investors have to develop an impact thesis (or theses), embed contributing positively to Sustainable Development Goals in their purpose(s) and strategy. Then, they should set realistic and ambitious portfolio level impact goals aligned with the strategy. Finally, the investors and asset managers should periodically review their impact thesis, investment strategy and portfolio level impact goals to ensure they remain fit for purpose throughout the fund lifecycle and SDG context changes. Indeed, asset managers and investors have to: 1. Define an investment thesis (theses) to identify the key financial and investment objectives of the portfolio. The asset manager or investor shall define the nature of the capital allocated to impact and its risk return and impact profile. They should identify the stakeholders and the investment thesis for this capital. 2. Identify sustainable development issues relevant to stakeholders. The asset managers and the investors should define the outcomes that matter most and the segments impacted by the investments. 3. Define the priorities in terms of SDG outcomes to target. The asset manager and the investors should ensure the alignment of the SDG outcome with its investment thesis, its size, its network and potential for influence. 4. Assign ABC investment goals. As per enterprises, A stands for ‘Act to avoid harm,’ B for ‘Benefit stakeholders’ and C for ‘Contribution to the solutions.’ 5. Set investors’ contribution level. In this step, the asset managers or investors should define their contribution level (signaling that SDG impact matters, engaging actively, growing new or undersupplied capital markets, being flexible or risk-adjusted financial return, demonstrating market leadership and contributing to field building). 6. Finally, embed SDG outcome goals into strategy. The asset manager of investors need to update the investment policy statement and any other investment governance documents to embed identified SDG outcomes. Moreover, they have to communicate their commitments

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with stakeholders and ensure the adherence of internal teams to achieve the outcomes. Integrating Impact Management into Its Management Approach and Optimizing It For Islamic financial institutions/enterprises An Islamic financial institution/enterprise integrates impact management into its management approach for optimizing its contribution to Sustainable Development Goals. In this phase, the Islamic financial institution/enterprise has to: 1. Implement a formal approach to identify relevant metrics and collect, verify, manage and use impact data. 2. Implement a formal approach to ensure its impact management practices continue to improve over time and remain fit for purpose. Indeed, the Islamic financial institution needs to assign roles and align incentives among the team for continuous decision-making. 3. The Islamic financial institution needs to monitor and manage its ongoing impacts and acts to optimize its contribution to Sustainable Development Goals. It has to analyze over performance as well as underperformance deviations and conduct a benchmarking of these achievements with the projected impact, the relevant peers and SDG target thresholds. Then, based on the conclusions, the Islamic financial institution has to optimize the impact through new actions. • For asset managers and investors The asset managers and investors have to integrate the impact management and contribute positively to Sustainable Development Goals into its operations and management approach. In this phase, the asset managers and investors should: 1. Have effective mechanisms and processes to deliver on its strategy, including its impact thesis and portfolio level impact goals.

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2. Establish criteria and pre-screen potential investments to assess strategic alignment with their purpose and strategy including the impact thesis and portfolio level impact goals. 3. Conduct ex-ante impact assessments of potential investments that pass its pre-screening criteria, to assess relevant and material impacts, make informed choices between investment options and optimize its impact performance in line with its portfolio level impact goals. 4. Engage openly, proactively and collaboratively with limited partners and potential investees during the due-diligence and investmentstructuring phase, to agree on how to embed impact considerations within the investment terms and optimize future impact performance. 5. Monitor systematically and manage its ongoing impact performance overall and for each investment, and act to optimize impact. 6. Manage proactively their exits from investments to optimize impact on sustainable development and achieving SDGs post-exit. Reinforcing Impact Management and Measurement Processes and Governance • For Islamic financial institutions/enterprises An Islamic financial institution/enterprise has to disclose the way it integrates contributing positively to Sustainable Development Goals into its purpose, strategy, management approach, governance and decisionmaking and reports on its performance. Moreover, the Islamic financial institution/enterprise has to reinforce its governance practices to ensure its full commitment to contribute positively to Sustainable Development Goals. In this phase, the Islamic financial institution/enterprise has to: 1. Communicate its impacts consistently by using SDGs (targets and indicators) as well as ABC impact classifications. 2. Implement reporting mechanisms to meet the needs of stakeholders affected by its activities and the civil society organizations. 3. Involve an independent third party to validate its impact-related reporting and identify the rectification measures.

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4. Draft the policies concerning the respect of human rights and impact management and its performance, the process of stakeholder identification and involvement in decision-making. 5. Ensure that its governance system meets the minimum corporate governance standards in terms of competencies, transparency and accountability. • For asset managers and investors Asset managers and investors have to disclose how they integrate their contribution to Sustainable Development Goals into their strategies, management approaches, governance and decision-making and reports on their performance. Moreover, they should reinforce their governance practices and their commitment towards the achievement of Sustainable Development Goals. In this phase, the asset managers and investors have to: 1. Disclose relevant information about the funds and the managers. These disclosures need to include its purpose and approach to longterm value creation, impact thesis, investment strategy and portfolio level impact goals using ABC classifications and SDGs targets and indicators. 2. Report publicly at least annually on the fund’s impact performance at the portfolio level but also at each investee level. 3. Implement reporting mechanisms best-suited to meeting the needs of stakeholders affected by their activities and the civil society organizations. 4. Ensure active oversight from its governing bodies to matters related to organizational culture, policies, performance and conformance, process of stakeholder identification and involvement in decisionmaking. 5. Implement governing bodies that have the necessary competencies while prioritizing gender and other dimensions of diversity. 6. The governance system has to meet minimum corporate governance standards at a national level. The next part presents eight schemes targeting Sustainable Development Goals.

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Chapter Conclusion The partnership between Islamic finance and Islamic social finance institutions is a win–win relationship that can reinforce their common credibility and turn them to impact-oriented organizations targeting the achievement of Sustainable Development Goals. For this purpose, both institutions need to adopt impact management and measurement processes in line with international standards to ensure an effective implementation and monitoring of financial schemes and solutions increasing their impact. First, Islamic finance and social finance institutions have to embed contributing to the Sustainable Development Goals in their strategies and purposes and define the expected SDG outcomes and assign ABC investment goals. Based on the defined strategic goals, the Islamic finance and social finance institutions implement the necessary processes to measure, monitor and optimize the impact across their activities. According to the SDG impact standards, impact-oriented institutions need to reinforce their governance frameworks and systems while disclosing their impact performance deviations (both negative and positive) to all the stakeholders. In such schemes, the impact perspective is as important as the Shari’ah compliance requirement. Therefore, the business models should focus on three dimensions (Shari’ah compliance, impact, financial return) and contribute actively in achieving Sustainable Development Goals in an effective manner.

References DiMaggio, P.J. and Powell, W.W. (1991), “The Iron Cage revisited: Institutional isomorphism and collective rationality in organizational fields”, in The new institutionalism in organizational analysis, Powell, W.W. and DiMaggio, P.J. (eds). The University of Chicago Press: Chicago. Liang, H., et al. (2007), “Assimilation of enterprise systems: The effect of institutional pressure and the mediating role of top management”, MIS Quarterly, Vol. 31 No. 1, pp. 58–87. Peters, T.J. and Waterman, R.H. (1984), “In search of excellence”, Nursing Administration Quarterly, Vol. 8 No. 3, pp. 85–86.

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Tahiri Jouti, A. (2021a), “Islamic fintech and financial inclusion”, in Islamic FinTech, Billah, M.M. (ed). Palgrave Macmillan: Cham. https://doi.org/10. 1007/978-3-030-45827-0_12. Tahiri Jouti, A. (2021b), “The Fourth Market theory and interest rate benchmarking in the Islamic finance industry”, ISRA International Journal of Islamic Finance, Vol. 13 No. 1, pp. 46–65. https://doi.org/10.1108/IJIF05-2020-0094. Zucker, L.G. (1987), “Institutional theories of organization”, Annual Review Sociology, Vol. 13, pp. 443–464.

PART II

Cash Waqf Based Financial Instruments Meeting Sustainable Development Goals

This part aims at presenting eight financial schemes based on cash waqf and zakat while contributing to the achievement of Sustainable Development Goals. The eight financial schemes are: • Cash waqf investment accounts meeting Sustainable Development Goals requirements. • Cash waqf liquid guarantees meeting Sustainable Development Goals requirements. • Cash waqf -based Microfinance meeting Sustainable Development Goals requirements. • Takaful funds meeting cash waqf and Sustainable Development Goals requirements. • Islamic social finance-based crowd funding platforms meeting Sustainable Development Goals requirements. • Cash waqf mutual funds meeting Sustainable Development Goals requirements. • Cash waqf s.uk¯uk meeting Sustainable Development Goals requirements. • Cash waqf venture Capital funds meeting Sustainable Development Goals requirements.

CHAPTER 5

Cash Waqf Investment Accounts Meeting Sustainable Development Goals

This chapter aims at: • Presenting the investment accounts’ main principles • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme

Chapter Introduction Islamic banks can implement sustainable business models through the creation of micro-ecosystems that are targeting the UN Sustainable Development Goals and are based on investment accounts and cash waqf principles. These micro-ecosystems consist of: • Introducing new features into investment accounts based on cash waqf. • Creating new categories of investment accounts that are allocated to an investment portfolio including financing products and financial instruments meeting Sustainable Development Goals. • Giving the opportunity to investment accounts’ holders to pay part of their profit (if not all of it) to charities serving the Sustainable Development Goals that the Bank promotes. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_5

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The model offers the opportunity to customers to support the Bank’s investment portfolio in providing funds to impactful projects and businesses serving (a) Sustainable Development Goal(s) while paying part of the profit generated to charities supporting the same Goal(s). Indeed, the micro-ecosystem relies on the two pillars of any development that are the for-profit activity and the nonprofit activity. Supporting the for-profit activity consists of providing financial assistance and funding to projects that have real impact on society while the nonprofit activity intervenes where the for-profit activity fails. From another perspective, the success of this model relies on the following elements: • Selecting the right Sustainable Development Goal (SDG) to serve: the existence of an important number of businesses and social businesses working in fields that target the SDG. Moreover, the SDGs shall be also targeted by the government that supports all the initiatives in the field (associations, social businesses, businesses, etc.) • Implementing methodologies to assess the impact of each investment and each action in order to monitor the development of the ecosystem and its sustainability. ‘What cannot be measured cannot be managed.’ • Introducing literacy programs that aims at raising awareness towards the Sustainable Development Goal targeted by the Bank. Moreover, the programs shall target individuals as well as businesses and associations to involve in the Bank’s initiatives.

The Financial Structure of the Product Investment Accounts: Principles and Concepts • Investment accounts: definitions and categories An Investment account is defined as an account for the holder of an instrument under a Mudarabah or its equivalent representing funds received by the Islamic financial institution for investment on behalf of the other party (Rab-al-mal) with or without conditions as regards how the funds may be invested (AAOIFI Financial Accounting Standard n° 27). Investment accounts are categorized according to two main criteria:

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• The underlying contract: indeed, Mudarabah, Wakala bi Istithmar or Commodity Murabaha can be used as the underlying contracts of investment accounts. Each of these contracts defines a special method to calculate the profit due to investment accounts’ holders (IFSB Standard n°15). For instance, under Mudarabah, the Bank shares the monthly profit generated by its investment portfolio according to predefined sharing ratios. Under Wakala bil Istithmar, the Bank deducts a fixed commission (flat or percentage of the investment amount), allocates the targeted profit rate to investment accounts’ holders and shares with them the outperformance (the part of the profit exceeding the target) according to predefined sharing ratios. Under Commodity Murabaha, the Bank guarantees a fixed return to investment accounts’ holders based on the margin rate applied. • The terms applied: investment accounts can take the form of term deposits (from 1 to 60 months), saving accounts or current accounts sharing the profit of the Bank’s investment portfolio based on their average deposit amounts. In this chapter, the categories of investment accounts to be considered are term deposits based on Mudarabah or Wakala bil Istithmar. • Investment accounts profit calculation mechanisms On a monthly basis, the Bank calculates the profit generated from its investment portfolio (based on the income and expenses attributed directly to the portfolio). Then, the Bank calculates for each investment account holder his share from the monthly profit calculated before applying the profit sharing ratios agreed (in case the underlying contract is Mudarabah) (Archer et al. 2010; Al Shattarat and Atmeh 2016). In case the Bank is applying Wakala bil Istithmar, it deducts a fixed commission (that is included in the profit calculation as an expense for the investment portfolio). Then, it calculates the monthly profit generated from the investment portfolio and identifies for each investment account holder his part from the monthly profit calculated.

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If the monthly profit calculated is higher than the targeted profit rate, the outperformance is shared between the Bank and the investment account holder according to the predefined sharing ratios. If the monthly profit calculated is lower than the targeted profit rate, the investment account holder gets the monthly profit while the compensation of the Bank is limited to the fixed commission deducted. • Investment accounts profit distribution mechanisms In both cases, when the term is equal or less than one year, the monthly profit calculated is then set aside in an internal account created per customer until the maturity date. Then, the customer’s internal account balance is paid into its current account after deducting taxes if there are any. When the term is superior to one year, the customer’s internal account balance is paid into its current account after deducting taxes if there are any, quarterly, bi annually or annually. The General Scheme of the Product The General Scheme of Cash Waqf investment accounts meeting Sustainable Development Goals is as follows (Fig. 5.1). 1. The Islamic Bank invests funds collected through cash waqf investment accounts 2. The Islamic Bank allocates the funds to its investment portfolio in line with Sustainable Development Goals. 3. On a periodic basis, the Investment portfolio generates a return. 4. The return generated is shared between the Islamic Bank, the charities selected and the waqf investment accounts’ holders (if decided so). It is worth noting that the return could be positive (profit) or negative (loss) and the capital of waqf investment accounts can be temporary (paid back to the waqf investment account holder at maturity) or permanent (kept invested in the portfolio of the Bank). Cash waqf investment accounts would provide adequate financing to economic and social sectors in line with one of the sustainability development goals. A share of the profit generated would be paid to charities

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1 Waqf investment accounts

Islamic Bank

2

Investment portfolio meeting SDGs

4 Charities meeting SDGs

3

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Capital + Return 4

Fig. 5.1 The general scheme of the cash waqf based investment accounts meeting SDGs (Source Author’s own)

contributing to the efforts of Sustainable Development Goals targeted by the Bank. The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of Shari’ah compliant investment instruments that are meeting Sustainable Development Goals. For instance, the Bank shall have appropriate financing instruments to provide funding to small businesses or entities evolving in targeted sectors such as health, education or agriculture.

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• The existence of impact measurement and audit mechanisms to ensure the alignment of the Bank to Sustainable Development Goals in terms of requirements and targets. • The implementation of adequate reporting mechanisms to customers and other stakeholders. • The creation of a foundation that will manage the charities or a dedicated team to select partners (association and social businesses). The Advantages of the Product In this product, the Bank continues to play its initial role as a financial intermediary while allocating funds to impactful projects and sharing benefits with customers and charities serving social or environmental purposes. In this context, the Bank provides its expertise in terms of engineering, structuring and monitoring while adopting the same business model. Moreover, from a marketing perspective, this product would position the Bank as an institution that cares about the community and its well-being. Therefore, retail investors would prefer to invest their funds in impactful institutions targeting the enhancement of the mutual well-being of society. Moreover, it would constitute a sales argument to commercialize the product. From another perspective, the Bank would not renounce to its financial performance while allocating part of the revenue generated to charities. The Applications of the Product Example 1: Health and Well-Being An Islamic Bank creates a cash waqf investment account targeting the Sustainable Development Goal n°3 related to health and well-being. Indeed, the Bank provides the following financing instruments and support mechanisms in relationship with the targets of the Sustainable Development Goal n°3:

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3.C.1 3.c Substantially increase health Health worker density and distribution financing and the recruitment, development, training and retention of the health workforce in developing countries, especially in least developed countries and small island developing States

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Practices In terms of financing • The Bank provides health equipment financing for hospitals, medical centers and doctors’ offices • The Bank provides adequate financing for medical studies • The Bank provides home financing to medical workforce In terms of support mechanisms • Through associations and charities paid by cash waqf investment accounts’ holders, the Bank provides scholarships to medical students • The Bank also provides grants and aids to medical institutions in order to bear part of the medical treatments’ costs

The Islamic Bank is committed to allocate 25% of its investment portfolio to provide adequate financing to medical workforce (studies, trainings, offices) and institutions (equipment, grants and aids to reduce the costs). The Islamic Bank can enlarge gradually its financing products and services as well as its assistance mechanisms in a way that contributes to the achievement of the Sustainable Development Goal n°3 related to health and well-being. Example 2: Quality Education An Islamic Bank creates a cash waqf investment account targeting the Sustainable Development Goal n°4 related to Education. Indeed, the Bank provides the following financing instruments and support mechanisms in relationship with the targets of the Sustainable Development Goal n°4:

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Targets

Indicators

Practices

4.1 By 2030, ensure that all girls and boys complete free, equitable and quality primary and secondary education leading to relevant and effective learning outcomes 4.6 By 2030, ensure that all youth and a substantial proportion of adults, both men and women, achieve literacy and numeracy

4.1.2 completion rate (primary education, lower secondary education, upper secondary education) 4.6.1 percentage of population in a given age group achieving at least a fixed level of proficiency in functional (a) literacy and (b) numeracy skills by sex

In terms of financing • The Bank provides funding to innovative investors in the field of education and to the private sector • The Bank provides funding to education of youth people with advantageous profit rates In terms of support mechanisms • Through associations and charities paid by cash waqf investment accounts’ holders, the Bank provides scholarships to students

Obviously, in both examples, as per the SDG impact standards, the Bank has to define the expected outcomes and impact thesis. Then, it has to define the metrics and the data to collect in order to optimize the whole process. Finally, it has to disclose all the necessary information to the different stakeholders and reinforce its governance system with the necessary capabilities (to join the board of directors) and the third party consultants and auditors.

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The Implementation Methodology The implementation of cash waqf Investment accounts meeting Sustainable Development Goals requires five different steps: 1 Identify the Sustainable Development Goals to target

2 Identify the SDG financial products and services to launch

3 Identify the investment accounts’ allocation

The Bank shall identify its targets and commitments towards the community.

The Bank shall identify the way it can contribute to the achievements of the targets fixed in terms of SDGs through financing products.

The Bank can allocate cash waqf investment accounts to a dedicated investment portfolio or to a portfolio that is investing partially in line with the SDG (carve-out)

4 Identify the Investment accounts’ categories

The Bank can define the categories of Investment accounts in terms of maturity and profit sharing ratios

5 Identify the SDG charities

The Bank can identify charities that serve the same SDGs targeted

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Identify the Sustainable Development Goals to Target The Bank shall select one (or more) of the Sustainable Development Goals to target based on the following criteria:

• The strategic alignment between the Sustainable development goal(s) targeted and the strategic positioning of the Bank: The Bank shall select a Sustainable Development Goal (or more) that serves its customers or prospects in a direct or in an indirect way in terms of financing and impact (Table 5.1). If the Bank customers or prospects are not involved, cash waqf investment accounts would not be interesting and financing opportunities would be scarce. Indeed, this step is decisive and it could lead to the success or the failure of the whole product. Hence, the Bank shall select a field where the targeted segments of customers can contribute directly to the ecosystem implementation. • The expertize of the Bank to achieve the Sustainable Development Goal(s) selected:

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Table 5.1 Examples of Sustainable Development Goals and targets to achieve Sustainable development goals

Targets to achieve

Quality education

Provide adequate instruments to finance the education sector and enhance the quality as well as the access to education Ensure access, for all, to adequate, safe and affordable housing that provides basic services and contributes in upgrading slums Play an important role to achieve this target through dedicating a part of their resources to grant adequate financing to the poor and vulnerable to access to different forms of ownership (land, buildings, technology, etc.)

Sustainable cities and communities

No poverty

Source The Author’s own

Serving (a) Sustainable Development Goal(s) requires an expertise. For instance, if the Bank wants to achieve SDG n° 11—Make cities and human settlements inclusive, safe, resilient and sustainable, it is important to have experts in real estate, in construction and in raw material to monitor the projects’ execution in an effective way. In relationship with the economic sectors to serve, the Bank shall acquire expertise in the sectorial risk assessment, the business leaders’ accompaniment and coaching, the impact management and measurement, the technical aspects of the sector and the market constraints and requirements. If the Bank is unable to acquire the necessary expertise, the product could hardly be interesting as well as the expected impacts. • The expected impact on the community that the Bank serves and targets In order to convince a customer or a prospect to adhere to cash waqf investment accounts, the Bank shall define precisely the expected impacts of such a product. Indeed, the expected outputs and outcomes shall be in line with the expectations of the community and the targeted segments of customers and prospects that the Bank serves. Finally, the expected impacts shall be defined precisely in a way that can make their measurement and assessment easy to conduct. • The readiness of the ecosystem to host such a financial scheme

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The Bank shall make sure that the ecosystem is ready to host the product. For example, if the Bank wishes to provide Home financing for low-income population, the ecosystem shall be able to provide houses with a low cost while respecting all the requirements in terms of sustainability and safety. Moreover, the ecosystem shall include a government guarantee for low-income population and an adequate insurance coverage for the segment to serve in order to get access to Home ownership. Otherwise, the product would be costly and irrelevant. Identify the Sustainable Development Goals Financial Products and Services to Launch Once the SDG(s) to target are identified, the Bank shall define financial products and services to launch. For this purpose, the Bank shall identify the following elements (Fig. 5.2). • The segments of customers or prospects to serve: The Bank shall define precisely the segments of customers or prospects to serve. The segmentation can be done based on different criteria (profession, income, geographical location, etc.). Once the

The segments of customers to serve

The eligibility criteria for granting funds Define the financing products and services to achieve Sustainable Development Goals

The financial features of the financing products

The outcomes and outputs measurement methodology

Fig. 5.2 The main features of financial products and services to launch (Source Author’s own)

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segments of customers or prospects to serve are identified, the Bank shall inventory all their needs and expectations in terms of financial services and products. • The eligibility criteria for financial products and services: For each segment, the Bank shall define the criteria to fulfill in order to be eligible to the financial products and services. These criteria shall not focus solely on solvency and financial performance but shall include impact criteria in terms of expected outputs and outcomes and the capacity to achieve them. Moreover, the Bank can conceive a scoring system that assesses the capacity of customers to achieve Sustainable Development Goals and adjust the pricing matrix accordingly. Indeed, the survival, continuity and success of the product structure all rely on the capacity of the Bank to select and support businesses and individuals with greater impact. • The financial features of the financing products: Generating a profit is very important for the product structure to achieve its objectives and goals. Indeed, without a profit, customers would not be able to support charities. Hence, part of the product scheme would not be functioning according to the general scheme. Therefore, the Bank shall define a pricing matrix that favors very impactful projects and that would apply reasonable rates and prices to customers that fail to achieve Sustainable Development Goals. The aim of the Bank is to make a profit while encouraging impactful projects since investment accounts holders would be expecting profit (to pay partially or totally to charities) and impact (to serve the community). • The outcomes and outputs measurement methodology: The Bank shall implement a methodology to measure: – The outcomes and the outputs of each customer to adjust its impact score and its pricing for future projects. – The outcomes and the outputs of the whole investment portfolio to assess the efficiency and legitimacy of the Bank policy in terms of eligibility criteria and selection process.

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Define the Investment Accounts’ Allocation The Bank shall allocate the funds collected through cash waqf investment accounts to an investment portfolio in order to make a profit. This investment portfolio is dynamic; it would include existing receivables as well as new affairs. Moreover, this portfolio can be constituted according to two different options (Fig. 5.3): • Option 1: Creating a dedicated investment portfolio meeting Sustainable Development Goals In this option, the Bank would create a separate investment portfolio with exclusively the financing products and instruments meeting Sustainable Development Goals. The profit generated by the investment portfolio will be allocated directly to cash waqf investment accounts. Nevertheless, in this scheme, the Bank shall make sure that the average amounts collected monthly through cash waqf investment accounts do not exceed the average amounts of financing granted during the month in order to ensure the stability of the investment portfolio profit rate throughout the different periods. • Option 2: Creating a unique investment portfolio that includes both financing products and instruments meeting Sustainable Development Goals as well as ordinary financing products (Carve-out) In the second option, the cash waqf investment accounts would be allocated to an investment portfolio that includes a portion of financing products that are meeting Sustainable Development Goals. Option 1: the Bank will create a dedicated portfolio with all the financing assets meeting SDGs Investment portfolio

Waqf investment accounts

meeting SDGs Option 2: the Bank will allocate funds collected to its investment portfolio that includes a percentage of financing assets meeting SDGs

Fig. 5.3 Options of investment accounts’ allocation (Source Author’s own)

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This option is recommended to Banks with a unique investment portfolio and that are willing to launch financing products meeting Sustainable Development Goals. In this case, the Bank shall define gradual targets in terms of portion. For instance, in the first year, the portion of financing products meeting SDG(s) is 5%. Then, in the second year, this portion would jump to 10% and in the third year, it would go to 20%. In this case, the Bank shall make sure that at all times, the portion of financing products meeting SDG(s) fulfills the Bank’s commitments towards investors. Otherwise, it would have a negative impact on the Bank’s reputation. Define the Investment Accounts’ Categories The cash waqf investment accounts can be categorized according to three main criteria (Fig. 5.4): • The Maturity As per ordinary investment accounts, the terms to be applied can vary from one month to sixteen months and each term has its own profit sharing ratio. It goes without saying that the longer the term is, the higher the profit sharing ratio is and vice versa.

The terms (3, 6, 9, 12, 24 months) and the profit waiver percentage

Waqf investment accounts The possibility to create for each investment portfolio specific categories of investment accounts

Fig. 5.4 Categories of cash waqf investment accounts (Source Author’s own)

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Moreover, the Bank can offer permanent cash waqf investment accounts with no term at all. In this case, it is recommended that the Bank coordinates with the national waqf administration to define the arrangements in the event of liquidation of the Bank so that the waqf continues to play its role as a growth lever. • The profit Waiver The Bank can define four categories of cash waqf investment accounts: – 100% profit waiver cash waqf investment accounts: The customers deposit their funds for a period and get them back while that the whole profit is donated to charities according to the terms of the product. – 50% profit waiver cash waqf investment accounts: The customers deposit their funds for a period and get them back while getting a reward worth 50% of the profit while the remaining 50% is donated to charities. – No profit waiver defined cash waqf investment accounts: The customers deposit their funds for a period and have the liberty to define the profit waiver percentage. – SDG investment accounts: The customers deposit their funds to support the investment portfolio of the Bank that is meeting Sustainable Development Goals without any profit waiver. • The investment portfolio The Bank can create a unique investment portfolio or many investment portfolios. Each portfolio is dedicated to serve a specific Sustainable Development Goal. Therefore, the categories of cash waqf investment accounts can be presented as follows: – Cash waqf investment accounts allocated to the unique investment portfolio of the Bank: The investment portfolio of the Bank includes a portion of financing products meeting SDG(s). – Cash waqf investment accounts allocated to specific investment portfolios meeting Sustainable Development Goals. Each portfolio is dedicated to a specific Goal such as Health, Education, Eradicating poverty, etc.

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Select Charities Meeting SDGs The Bank shall select a list of charities that contribute to the achievement of the Sustainable Development Goals while complying with the KYC (Know your customer) requirements. The list shall include nonprofit organizations, associations, nonprofit oriented social businesses and Waqf institutions. These organizations shall target exclusively or partially the Sustainable Development Goals targeted by the Bank. Moreover, the Bank shall adopt an internal scoring method or use external scoring to assess the impact of these charities on the community and their contribution to the achievement of the Sustainable Development Goals.

Chapter Conclusion As simple as it seems, the scheme of a cash waqf investment accounts meeting Sustainable Development Goals can be considered as the basis of the Shari’ah compliant investment universe governed by cash waqf and targeting Sustainable Development Goals. First, the cash waqf investment accounts meeting Sustainable Development Goals can be seen as a transitional phase for S.uk¯uk meeting Sustainable Development Goals. The product would enable the Bank to constitute an investment portfolio that is targeting specific Goals of Sustainable Development. Then, it would become easier to issue SDG S.uk¯uk allocated to the same investment portfolio. From another perspective, the investment accounts meeting SDGs could be used as investment instruments for Takaful funds meeting cash waqf requirements and Sustainable Development Goals as presented in Chapter 8 and cash waqf Mutual funds meeting SDGs as described in Chapter 10. Finally, it is recommended to start with the implementation of cash waqf investment accounts in Banks as a preliminary step to set up a comprehensive ecosystem of Islamic social finance targeting Sustainable Development Goals. Nevertheless, Banks shall conduct financial literacy programs to accompany businesses targeting Sustainable Development Goals in implementing a viable model that can generate an acceptable income for all the stakeholders while being impactful.

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References AlShattarat, W.K. and Atmeh, M.A. (2016), “Profit-sharing investment accounts in Islamic banks or mutualization, accounting perspective”, Journal of Financial Reporting and Accounting, Vol. 14 No. 1, pp. 30–48. https://doi.org/ 10.1108/JFRA-07-2014-0056. Archer, S., Karim, R.A. and Sundararajan, V. (2010), “Supervisory regulatory and capital adequacy implications of profit-sharing investment accounts in Islamic finance”, Journal of Islamic Accounting and Business Research, Vol. 1 No. 1, pp. 10–31.

CHAPTER 6

Cash Waqf Liquid Guarantees Meeting Sustainable Development Goals

This chapter aims at: • Presenting the cash waqf liquid guarantees fund underlying principles • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme.

Chapter Introduction Banks can improve their efforts in terms of financial inclusion and their contribution to the empowerment of small businesses and startups targeting Sustainable Development Goals while providing Guarantee mechanisms based on waqf. Banks can create a cash waqf fund that is constituted of donations made in cash or by transferring an investment portfolio composed of Shar¯ıah compliant investment instruments. Then, Banks would invest the cash waqf fund in High quality liquid assets and the return generated would be reinvested again. The cash waqf fund is expected to back small businesses and projects targeting the achievement of Sustainable Development Goals to get appropriate funding. This model suggests two guarantee formulas that © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_6

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the cash waqf fund can provide. The first formula is a simple guarantee allocated to a project, and if the latter fails, the waqf fund would pay for the project holder. The second formula consists of replacing real guarantees by liquid ones that would help small businesses and projects to get a lower financing cost. Nevertheless, if the project fails, the waqf fund calls in the real guarantees to get the funds reimbursed. The success of this model relies on the following elements: • Having a dynamic investment universe in line with Shar¯ıah principles and Sustainable Development Goals. • Having a significant demand coming from small businesses and projects targeting Sustainable Development Goals. Otherwise, the cash waqf fund promoters can set up a literacy policy to raise awareness towards this niche. This policy can be funded by the return generated from the cash waqf investment fund. • Having a clear roadmap to start covering gradually all the guarantee formulas. Indeed, the cash waqf will start small and grow gradually. Therefore, the promoters shall define the priorities depending on the market and its expectations.

The Financial Structure of the Product Liquid Guarantees: Principles and Concepts • Freezing Cash amounts Freezing Cash amounts is a common practice in the banking sector. It is an amount of money set aside in a dedicated account to cover commitments of a customer. For instance, the Bank can deliver a letter of guarantee and have its amount in a special account that the customer cannot access. In case the Bank is required to cover part or all of the customer commitments covered by the letter of guarantee, it will use the cash in the special account. In Islamic Banks, this concept is widely utilized in the daily operations (for instance, Hamish-Al-Jiddiyah is based on this concept). Nevertheless, this type of pledge does not generate any return for the customer. According to the AAOIFI Shari’ah standard, it is not permitted for the institution to stipulate a right to freeze the customer’s current account in a credit transaction. However, such a stipulation

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is allowed where the customer has freely, willingly and absolutely agreed to his current account to be frozen. • Freezing Investment accounts When created, investment accounts can be used as a guarantee. In this case, there are two major differences compared to classic investment accounts. First, the investment account holder cannot get his money back until the end date of the guarantee but he gets regularly the whole return. Second, if the maturity of the investment account is mismatching with the maturity of the commitment, the investment account is renewed automatically. According to the AAOIFI Shari’ah Standard n°5, it is permissible for the institution to stipulate, that it is entitled to freeze the customer’s investment account or to revoke his right to withdraw money from such an account entirely or to block an amount in the account equivalent to the debt, which is the preferred option in order to secure future payment of debts on a single payment or an installment basis. It is worth noting that the customer has the right to share profits on the whole balance of the investment account after deducting the institution’s share for acting as a Mudarib. • Bank Guarantees The AAOIFI Shari’ah Standard n°5 identifies the permissible types of guarantees: – – – – – – –

Letters of guarantee Documentary credits Use of checks or promissory notes Insurance for debts Freezing Cash deposits Underwriting the subscription of shares issued Guarantees in tenders, security deposits in Murabahah transactions and ‘Arboun. – Priority right of recovery and the right to follow up – Mortgage (Rahn). The General Scheme of the Product The General structure of cash waqf based liquid guarantees meeting Sustainable Development Goals is as follows (Fig. 6.1).

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Waqf donors 1

Cash Waqf 4

fund 2

3

5

Projects meeting SDG requirements

Banks

High Liquid Shari’ah Compliant Investment instruments meeting SDGs

Fig. 6.1 General scheme for cash waqf liquid guarantees meeting Sustainable Development Goals (Source Author’s own)

1. The waqf donors contribute to the cash waqf fund. The contributions can be made in cash or by transferring a portfolio of Shari’ah compliant instruments meeting or not the Sustainable Development Goals. 2. The cash waqf fund is managed by the Bank. 3. The Bank invests the cash waqf fund in High Liquid Shari’ah compliant investment universe meeting Sustainable Development Goals such as investment accounts meeting SDGs, S.uk¯uk, Mutual funds, etc. 4. The profit generated from the High Liquid Shari’ah compliant investment instruments is reinvested. The Bank can deduct or not its share of the profit as a Mudarib. 5. The Bank can allocate the cash waqf fund as an underlying guarantee to projects meeting the Sustainable Development Goals and the Shari’ah requirements.

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The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of a Shari’ah compliant investment universe meeting Sustainable Development Goals or waqf requirements. In the absence of such universe, the cash waqf fund can be invested in Shari’ah Compliant instruments without necessarily being in line with SDGs. • The willingness of the Bank to attract and serve innovative projects targeting Sustainable Development Goals while being in line with Shari’ah principles. The Advantages of the Product Through this product, the Bank can achieve two objectives: • Including more small businesses in the financial system through the guarantee mechanisms. Therefore, the Bank can encourage more projects targeting SDGs to get access to appropriate financing. • Reducing the cost of financing for small businesses who have guarantees that are not liquid. Indeed, the Bank can grant liquid guarantees to small businesses in counterparty of other categories of guarantees. To ensure the neutrality of the Bank towards the projects, it shall not provide both guarantees and financing to projects at the same time. Indeed, the project holder shall have a financing from another Bank. The Applications of the Product Example 1: Education The Bank A can offer financing to young people who would like to complete their university education. The Bank B can offer guarantees to these young people in order to get the necessary funding at a lower cost. In parallel, the cash waqf fund is invested in liquid instruments supporting the educational sector at a lower cost.

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Targets

Indicators

Practices

4.3 By 2030, ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university

4.3.1 Participation rate of youth and adults in formal and non-formal education and training in the previous 12 months, by sex

In terms of investment • The Bank would invest the cash waqf investment fund in Educational projects (Universities, Business Schools, and Engineering Schools with highly innovative business models) In terms of support mechanisms • The cash waqf investment fund guarantees the financing granted to students. This would reduce the cost of financing

The Implementation Methodology The methodology to implement liquid guarantees meeting SDGs and cash waqf requirements is divided into five steps presented as follows (Fig. 6.2). Identify the Sustainable Development Goals to Target In this structure, selecting the Sustainable Development Goals would depend on the following criteria: – The availability of investment instruments meeting the Sustainable Development Goals selected. – The availability of projects to guarantee targeting the Sustainable Development Goals selected. For instance, if the Bank is targeting education, it should make sure that there are a sufficient number of schools, universities and education projects to support. From another perspective, the Bank can select two distinct groups of Sustainable Development Goals to target. The first group of SDGs is related to investment instruments while the second group is related to the projects to guarantee.

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1

Identify the Sustainable Development Goals to serve

2

Identify the Guarantees formulas to offer

3

Identify the investment instruments meeting SDGs

4

Create the cash waqf Investment fund

5

Identify the compensation mechanisms of the Islamic Bank

The Bank defines the Sustainable Development Goal(s) to serve including the targets and the indicators to monitor

The Bank defines the formulas of Guarantees to offer to customers (Liquid Guarantees in counterparty of other categories of Guarantees, Simple Liquid guarantees)

The Bank identifies the Investment instruments meeting SDG and in line with Shari’ah requirements and principles.

The Bank creates the cash waqf Investment fund and the necessary processes to collect, invest and settle debts.

The Bank identifies the compensation mechanisms of the Bank (Mudarib share for managing the investments, flat fees for managing the guarantees)

Fig. 6.2 Implementation methodology for implementing Liquid guarantees meeting SDGs and cash waqf requirements (Source Author’s own)

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Define the Guarantees’ Formulas to Offer There are two formulas for guarantees to offer: – The first formula consists of what we can call ‘a donation’ guarantee. Indeed, if the project holder could not fulfill its financial commitments, the cash waqf fund would pay for him without any request of reimbursement. Generally, the return on investment instruments serve to back this type of guarantees. – The second formula consists of ‘highly liquid’ guarantee. Indeed, the project holder may have other types of guarantees that he can replace with a highly liquid guarantee provided by the cash waqf fund. In this formula, the cash waqf fund would pay for the project holder and would claim the reimbursement by calling in the guarantees collected. If the Bank or the entity implementing this structure is offering both formulas, then, it should create a sub account for the cash waqf Investment fund that would be constituted exclusively of investment instruments’ return. This sub account would serve to back the donation guarantees while that the main account would back the ‘highly liquid’ guarantees. Moreover, the Bank or the entity implementing this structure can define the portion of return on investment instruments that would be allocated to the sub account and the portion to allocate to the main account of the cash waqf Investment fund (Fig. 6.3). Moreover, a single project can benefit—if relevant—from both categories of guarantees with a defined portion for each category. Identify the Investment Instruments Meeting Sustainable Development Goals The cash waqf investment fund shall define a specific investment strategy that meets the following requirements: – Meeting the Sustainable Development Goals as defined and selected by the cash waqf fund manager. – Meeting the Shari’ah compliance requirements as defined by the Shari’ah board of the cash waqf fund manager.

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Investing cash waqf main account resources

Highly liquid Cash waqf main account

Profit share allocated to main and sub accounts

Projects meeting SDG requirements

‘Donation’ guarantees

Investment instruments meeting Shari’ah and SDG requirements

Cash waqf sub account

Investing cash waqf sub account resources

Fig. 6.3 Categories of guarantees backed by the cash waqf investment fund (Source Author’s own)

– Having a portion of the fund allocated to highly liquid assets to meet the repayment claims and requests. The portion of the fund that would not be used in the repayment of claims can be invested in less liquid investment instruments and assets but with higher returns. Indeed, the aim is to constitute a highly liquid investment fund but with a portion invested in assets with higher returns. From another perspective, meeting Sustainable Development Goals (SDGs) is an optional requirement. Indeed, if there are not enough investment instruments meeting SDGs, the cash waqf fund manager can select other categories of instruments. Finally, there are several classes of investment instruments such as investment accounts, Sukuk and Mutual funds as detailed in this book. Create the Cash Waqf Investment Fund From a legal perspective, the cash waqf investment fund can take the form of a Mutual fund or a real estate fund or any other form of

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funds according to the underlying assets. Moreover, the cash waqf investment fund can be under the supervision of the waqf authority, the Bank, the asset management company or any relevant entity in terms of decision-making and strategic shifts. If the waqf authority is the supervisory body, it can also manage the cash waqf investment fund if the necessary capabilities are available. Otherwise, the management can be attributed to other bodies. From another perspective, the capital market authority in partnership with the waqf authority can develop a dedicated regulation for cash waqf investment fund in terms of asset allocation, tax, prudential requirements and other aspects. This regulatory framework shall give more latitude to cash waqf investment fund in order to encourage such initiatives that would solve social problems and would make the capital markets more attractive. Identify the Compensation Mechanisms of the Cash Waqf Investment Fund Manager The cash waqf investment fund managers shall take in charge the following assignments: – Define the Guarantee and investment policies of the fund and submit it to the supervision body for approval. – Implement the structure including the legal aspects. – Grant letter of guarantees to individuals and businesses after conducting appropriate risk assessments. – Collect cash waqf contributions and promote the fund to increase its size and activities. – Invest the cash waqf fund and re-invest the generated profit. – Assist the customers in difficulty by repaying their due debts and providing them with the necessary accompaniment – Ensure the collection of the fund debts according to the categories of the guarantees. The cash waqf investment fund managers other than waqf authorities can take in charge the management tasks for free as part of their corporate social responsibility. Otherwise, the managers can get a compensation for the assignments they are undertaking.

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Chapter Conclusion Providing the necessary support and back up in terms of guarantee to innovative businesses and projects with high potentialities can improve the effectiveness of the financial inclusion efforts. Moreover, it would make the shift to innovation smoother and faster. This chapter focuses more on the business model, the formulas and the methodology to implement the cash waqf fund and did not mention issues related to the post-implementation such as the strategies to sustain the fund. Indeed, there could be a strong temptation from the fund promoters to select rigorously the projects and businesses to back. If so, the fund will be oriented to the second formula instead of the first one while it should be a balanced portfolio serving High risk, medium risk and low risk projects in order to achieve its goals in terms of financial inclusion and support to achieve Sustainable Development Goals. Therefore, the cash waqf fund promoters shall keep an eye on the capabilities of the fund to serve a wider segment of innovative businesses and projects while ensuring its sustainability and growth since it is the purpose of any waqf initiative. Finally, this business model requires a close collaboration with other initiatives based on cash waqf and targeting Sustainable Development goals as discussed in the next chapters of the book.

CHAPTER 7

Cash Waqf Based Microfinance Meeting Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying cash waqf based Microfinance • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme.

Chapter Introduction Microfinance is, in itself, a business model that aims at enhancing financial inclusion and facilitating the access of people to basic financial services. It includes basic current accounts, micro-loans, nano-loans and microinsurance products. According to researches (Cull and Murdoch 2017), the Microfinance has shown only modest average impact on customers. It has been used to cover the normal ups and downs of household spending instead of supporting new investment projects generating more income to the community. Moreover, Microfinance institutions are not developing their activities on a large scale for obvious reasons such as the time consuming tasks to support customers, to collect the installments, which makes it hard to keep margins at a reasonable level.

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Therefore, Microfinance needs to reposition itself with a business model that serves the community with a lower cost (or no cost), ensures proximity through more effective empowerment efforts of individuals and very small businesses. In this context, involving a cash waqf fund, a zakat fund and financial technologies can be rewarding and contribute to the upgrading of the business model of Microfinance institutions. From another perspective, Microfinance is expected to provide the necessary funding and accompany very small businesses in their setup phase and prepare them to be upgraded and move from a Microfinance customer to a Bank customer. This model uses zakat to reduce the cost of risk of the Microfinance portfolio, cash waqf to cover the Microfinance operating expenses and financial technologies to reduce the cost of collection. The success of this model relies on the following elements: • Having an existing mobile payments platform for collection purposes. Otherwise, the Microfinance institution can create its own platform. In this case, the institution would be able to cover a wider geographic space thanks to technology. • Having sound partnerships with other players that would collect cash waqf funds and allocate them to the Microfinance institution. • Finally, if it is an existing Microfinance institution, it should develop new capabilities others than the ones available or required to run a classical business model.

The Financial Structure of the Product Microfinance Operations: Principles and Concepts Microfinance services consist of providing financial services to low-income people. These services include small loans, micro-insurance, savings and money transfer to assist people in improving their quality of life and their wealth. Small loans are granted to people that may have enough income or collaterals but they cannot be served by banks because they need small amounts and more assistance and empowerment to grow their businesses.

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These services are provided by specialized banks, financial institutions or associations depending on the legal framework in each country. Nevertheless, the Microfinance institutions were criticized mainly because of their high financing cost, their selectiveness when granting loans and weak impact. The high financing cost is justified by the small amounts granted and the high cost of transactions in terms of risk assessment and collection efforts. Moreover, the Microfinance institutions are very selective and have a preference for existing businesses that have only gaps in terms of cash flows while they are supposed to contribute to the creation of new small businesses, accompany them in their growth journey, satisfy their financial needs and prepare them to become a Bank customer. From another perspective, Microfinance institutions does not support exclusively money making activities but also provide help in the form of essential living costs, medical or educational expenses. The main idea about Microfinance institutions is that is a phenomenon linked directly to developing countries while they are needed worldwide. This chapter suggests a new business model based on cash waqf to support the activity of Microfinance institutions, to reduce their cost of financing, help them provide the necessary funding and coaching to newborn small businesses. The General Scheme of the Product The General structure of cash waqf based Microfinance meeting Sustainable Development Goals is as follows (Fig. 7.1). 1. Financial institutions can collect cash waqf and allocate it to the Microfinance institution. The cash waqf based on free loans is collected and allocated to the Microfinance institution. 2. The Microfinance institution would use the cash waqf to distribute free loans to its customers. 3. The financial institutions can offer the cash waqf investment instruments and allocate the income generated to the Microfinance institution. 4. The Microfinance institution would use the income generated to cover its operating expenses. 5. The zakat fund would pay for customers in difficulty in order to safeguard the waqf fund without incurring any loss.

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Zakat fund

Financial institutions collecting cash waqf based instruments 3

5

Cash waqf Fund allocated to investment purposes

1

Cash waqf Fund based on free loans

4 2

Micro finance Fig. 7.1 General scheme for cash waqf based Microfinance institutions (Source Author’s own)

The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions:

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• The existence of supportive Islamic financial institutions that have cash waqf based financial instruments. Otherwise, the Microfinance institution can take the lead on creating such partnerships to promote cash waqf and raise the necessary resources. • The size of cash waqf generating an income to cover the operating expenses of the Microfinance institution and the size of the zakat collected to absorb the cost of risk. If the Microfinance institution is a subsidiary of an Islamic banking group, the partnership can be easily concluded. Otherwise, the Microfinance institution has to collaborate with a private banking entity or an investment Bank to set up cash waqf based instruments. The Advantages of the Product Through this product, the Microfinance institution can achieve two objectives: • Providing free loans to very small businesses while covering its expenses with cash waqf investment instruments generating income. • Allocating more funds to investment and creating jobs instead of accompanying those existing with liquidity gaps. Overall, the Microfinance institution would serve its purpose in a more effective way. It would target impactful projects and support new innovative ideas and accompany them until they reach a defined size to be eligible to deal with Banks. The Applications of the Product Example 1: No Poverty Through the cash waqf funds collected, the Microfinance institution can provide the necessary funding to people in a vulnerable situation to access the basic services, ownership and control over land and other forms of property, inheritance, natural resources and appropriate new technologies. The Microfinance institution can create a cash waqf fund dedicated to women support and empowerment. It would provide free loans to women to start their own businesses or to acquire the production tools. The

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Microfinance institution can provide women with the necessary trainings and connections to develop their activities. Moreover, the Investment oriented cash waqf fund can allocate the funds collected to support the Government efforts and the businesses’ initiatives to reduce poverty. The Income generated can serve to cover the operating expenses including the coaching and empowerment services. Targets

Indicators

Practices

1.4 By 2030, ensure that all men and women, in particular the poor and the vulnerable have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including Microfinance

1.4.1 Proportion of population living in households with access to basic services 1.4.2 Proportion of total adult population with secure tenure rights to land, (a) with legally recognized documentation, and (b) who perceive their rights to land as secure, by sex and type of tenure

In terms of investment • The Investment cash waqf fund can be allocated to financial instruments targeting the SDG • The Microfinance institution would contribute to set up new activities and businesses through free loans In terms of support mechanisms • The income generated from the cash waqf investment fund would serve to cover the Operating expenses of the Microfinance institution including expenses related to coaching and empowerment

Example 2: Quality Education The Microfinance institution can increase the supply of qualified teachers in the rural areas by providing them with free loans as an incentive to move from large cities to areas where they are much needed.

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Targets

Indicators

Practices

4.C By 2030, substantially increase the supply of qualified teachers, including through international cooperation for teacher training in developing countries, especially least developed countries and small island developing States

4.c.1 Proportion of teachers In terms of investment with the minimum required • The Investment cash qualifications, by education waqf fund can be level allocated to financial instruments targeting the improvement of education • The Microfinance institution would provide appropriate funding to teachers in rural areas In terms of support mechanisms • The income generated from the cash waqf investment fund would serve to cover the Operating expenses of the Microfinance institution

The Implementation Methodology The methodology to implement cash waqf based Microfinance meeting SDGs is divided into five steps presented as follows (Fig. 7.2). Partner with an Islamic Financial Institution Promoting Cash Waqf The partnership can be initiated by the Microfinance institution or the Islamic financial institution. Moreover, the Microfinance institution can be a subsidiary of the financial institution. Otherwise, the Microfinance institution shall select a partner based on: • Its capacity to innovate and implement the necessary products and investment instruments to fulfill the requirements of the partnership and the cash waqf. • Its capacity to promote cash waqf and collect waqf donations to constitute the cash waqf funds.

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1 Partner with a financial institution promoting cash waqf

2 Identify the Sustainable Development Goals to serve

3 Create an investment cash waqf fund

4 Create a free loan based cash waqf fund

5 Identify the Microfinance instruments to achieve SDG(s)

The Microfinance institution needs to partner with an Islamic financial institution (or more) promoting cash waqf.

Together with the Islamic financial institution, the Microfinance entity can define the Sustainable Development Goals to target and identify the relevant instruments.

The Islamic financial institution shall collect waqf donations to constitute the investment cash waqf fund.

The Islamic financial institutionshall collect free loan based waqf donations to constitute the second fund to support the activity of the Microfinance institution.

The Microfinance institution shall set up instruments to support individuals and businesses targeting Sustainable Development Goals.

Fig. 7.2 Implementation methodology for implementing Microfinance instruments meeting SDGs and cash waqf requirements (Source Author’s own)

From another perspective, the financial institution can select a Microfinance institution based on: • Its capacity to achieve Sustainable Development Goals and respond to the needs of a particular segment.

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• Its capacity to optimize its operating expenses while achieving its goals. It is worth noting that the Microfinance institution can have both activities: the regular Microfinance transactions and the cash waqf funds based operations. In this case, the revenue generated by the Investment cash waqf fund shall cover exclusively the direct expenses related to the cash waqf fund based activities. Identify the Sustainable Development Goal(s) to Target The Partners should identify together the Sustainable Development Goal(s) to target. For instance, when it comes to the Investment cash waqf fund, the Islamic financial institution can allocate the collected funds to projects that are contributing to the achievement of the SDGs targeted. Moreover, the Islamic financial institution can allocate part of the collected funds to the Microfinance institution portfolio targeting SDGs. As explained earlier, the Microfinance Institution can have a unique business model based on free loans with the investment cash waqf fund covering its operating expenses or have two business models with one working according to the usual Microfinance rules. Create an Investment Cash Waqf Fund Both partners shall create an Investment cash waqf fund to generate a revenue that covers the operating expenses of the Microfinance institution. If it is an Islamic Bank, the underlying financial instruments are investment accounts and if it is an asset management company, the underlying financial instruments are Shari’ah compliant Mutual funds. In both cases, it is preferable that financial instruments target Sustainable Development Goals. There are three options regarding the investment cash waqf fund: 1. An Investment cash waqf targeting specific Sustainable Development Goal(s) that are different from those of the Microfinance institution. In this case, the product guide would specify that the product is not focusing on a particular SDG.

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2. An Investment cash waqf targeting the same Sustainable Development Goal(s) as per the Microfinance institution. 3. An Investment cash waqf fund that is not targeting any Sustainable Development Goals. In practice and from an impact standpoint, the best option is (2). If the Microfinance institution is targeting a Sustainable Development Goal that is not appropriate to the Islamic financial institution, option (1) can be adopted. Otherwise, the option (3) should be left as a final option if and only if it is not possible to target any Sustainable Development Goals when investing. Create a Free Loan Based Cash Waqf Fund The Islamic financial institution should also promote the free loan based cash waqf fund. There are three types of donations in this context: 1. The waqf donations made permanently in order to grant free loans for Microfinance customers. 2. The waqf donations made temporarily in order to grant free loans for Microfinance customers for a period of time inferior to 2 years generally. In both cases, zakat is used to pay for customers in difficulty to safeguard the waqf capital and maintain the size of the funds allocated to Microfinance operations. 3. Donations made by Investment account holders that prefer to pay their income to the free loan cash waqf fund to encourage the Microfinance institution transactions Identify the Microfinance Instruments to Achieve SDG(s) The complexity of this product is to constitute cash waqf funds that can together grant free loans to people and cover the operating expenses of the Microfinance institution. Indeed, there are two cases:

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• The first case is related to a very important free loan based cash waqf funds while that the Investment cash waqf fund is still insignificant. In this case, the Microfinance institution would be able to grant free loans to people which will generate more expenses that the Investment cash waqf fund would be unable to cover. • The second case is related to a very important Investment cash waqf fund with a small free loan based cash waqf fund. In this case, the Microfinance institution would be able to cover all its expenses but it does not have sufficient resources to serve its main purpose and achieve SDGs. In order to ensure its effectiveness and efficiency, the Microfinance institution can start with the usual business model that consists of granting mark up financing while developing a second business model based on cash waqf. In this context, there would be two cases: • The first case is related to a very important free loan based cash waqf funds while that the investment cash waqf fund is still small. In this situation, the Microfinance institution can grant free loans while that the additional expenses would be covered by the Microfinance institution at a certain limit. • The second case is related to a very important Investment cash waqf fund with a small free loan based cash waqf fund. In this situation, the Microfinance institution would reduce its cost of financing that would be covered by the income generated from the Investment cash waqf fund while distributing free loans according to the size of the free loans based cash waqf fund.

Chapter Conclusion This product requires a long-term partnership between a Microfinance institution and an Islamic financial institution to collect more cash waqf donations. In some areas, Microfinance institutions are also allowed to collect funds from their customers. Nevertheless, the Microfinance customers are less eager to make waqf donations. Therefore, the main challenge of this structure is to find a partner that shares the same values and vision unless if it is a parent company.

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The second challenge for the implementation of this product is to reach the equilibrium between the Investment cash waqf fund and the free loan based cash waqf fund in a way that enables the Microfinance institution to grant the maximum of free loans while covering all of its operating expenses. The third challenge is to align the Sustainable Development Goals served by the Microfinance institution and those targeted by the Islamic financial institution. Nevertheless, the alignment is just the best case to target, and it does not mean that in the absence of alignment, the product would not be in line with the structure presented in this chapter. Finally, the Microfinance institutions are expected to accompany very small businesses in their growth and help them upgrade to become eligible to banking products. Indeed, this is supposed to be the main performance and excellence indicator for any Microfinance institution targeting Sustainable Development Goals and social impact.

Reference Cull, R. and Murdoch, J. (2017), “Microfinance and economic development”, World Bank Policy Research Working Paper No. 8252, World Bank Group.

CHAPTER 8

Takaful Funds Meeting Cash Waqf Requirements and Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying the Takaful funds meeting cash waqf requirements and Sustainable Development Goals. • Addressing the prerequisites of the product, its advantages and applications. • Presenting the implementation methodology of the financial scheme.

Chapter Introduction Takaful operators can contribute to the achievement of Sustainable Development Goals through the creation of Micro-Takaful funds targeting low-income population to offer them adequate insurance coverage. The Micro-Takaful fund would be supported by a cash waqf investment fund allocated to investment instruments in line with Shari’ah principles and targeting Sustainable Development Goals. The cash waqf investment fund is constituted of donations of the Takaful fund participants that are invested on a continuous basis. The profit generated by the cash waqf investment fund is paid annually to support the Micro-Takaful fund. The model offers the opportunity to Takaful participants to support the Takaful operator efforts in providing adequate insurance coverage to © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_8

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low-income people. Indeed, the Takaful participants can donate a part or their entire surplus or accept to donate a minimum amount to the Micro-takaful fund. Moreover, the cash waqf investment fund is not limited to donations made by Takaful participants. For instance, the fund can be included as a charity in a cash waqf investment account scheme. Therefore, the investment accounts’ holders can donate part or the entire profit to the cash waqf investment fund as a charity if and only if the cash waqf investment fund and the micro-Takaful fund are targeting the same Sustainable Development Goals. The success of this model relies on the following elements: • Having a regulatory framework that allows donations from Takaful participants to a special investment fund managed by the Takaful operator itself. Moreover, the investment fund can be recognized as a waqf fund without being managed by the waqf authority. • Selecting the right Sustainable Development Goal (SDG) to serve. Indeed, an important number of investment instruments meeting SDGs or waqf requirements with an interesting targeted profit rates shall exist in the market to ensure the financial viability of the fund. • Starting ‘Small’ and getting bigger gradually when it comes to the Micro-Takaful fund. Indeed, to ensure efficient support from the cash waqf investment fund, the Micro-Takaful fund size shall increase gradually.

The Financial Structure of the Product Takaful: Principles and Concepts • Takaful: definitions and principles Takaful is a process of agreement among a group of persons to handle the injuries resulting from a specific risk to which all of them are vulnerable (AAOIFI Shari’ah Standard n° 26). Takaful is based on the following principles and rules of Shari’ah: • Donation: The participant donates his contribution and the returns thereon to the insurance account for payment of indemnity and may undertake to bear any deficit that may occur according to current

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regulations. The contribution can also take the form of a donation commitment that means that the contribution is still the ownership of the participant that is committed to donate part or all of his contribution to settle the claims but at the end of the year, the remaining part of the contribution is paid back to the participant. • Separation of funds between participants and shareholders: The operator that takes in charge the Takaful operations should maintain two separate accounts: one for its own rights and liabilities, and the other for the rights and liabilities of the policyholders. Moreover, in some markets, regulators authorize the window model. Therefore, conventional insurance operators can set up dedicated units to manage Takaful operations. • Compensation of the Takaful operator: in consideration of management services, the Takaful operator can deduct fees from the funds. These fees can take many forms: – Wakala: The operator deducts a fixed commission from the contributions collected. – Mudarabah: The operator deducts a share in the investment portfolio profits of the Takaful funds. In some jurisdictions, the operator deducts a share in the funds’ surplus. – Wakala & Mudarabah: The operator can deduct both a Wakala commission and a Mudarabah share. • Surplus ownership: Depending on the Takaful model, the surplus of funds is the exclusive ownership of participants. In some contexts, the surplus of funds is shared between the Takaful operator and the participants depending on the Takaful model adopted. • Takaful: Surplus and deficit calculation A Takaful fund is constituted of contributions made by participants that serve to settle the claims, pay the Takaful operator’s management fees (according to the Takaful compensation model) and take in charge the direct expenses of the fund. The fund surplus, if there is any, has to be paid back to participants. Otherwise, in case of deficit, the Takaful operator would grant a free loan or advance to the fund in order to fulfill its commitments towards participants. The Takaful operator would get back its loan whenever it is possible.

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• Takaful: Surplus distribution A Takaful fund surplus can be distributed according to three methods: • Method 1: Distribution of the surplus among the policyholders in proportion of their respective contributions, and regardless of whether the policyholder has received indemnity during the financial period or not. • Method 2: Distribution of the surplus among the policyholders who have not received indemnity during the financial period. • Method 3: Distribution of the surplus among policyholders after deducting the amounts of indemnity they receive during the same financial period. The General Scheme of the Product The General structure of Takaful funds meeting cash waqf requirements and Sustainable Development Goals is as follows (Fig. 8.1). 1. The Takaful operator creates a Micro-Takaful fund separated from the other Takaful funds. The Micro-Takaful fund aims at achieving financial inclusion. 2. The technical reserves of the Takaful funds are invested in instruments aligned with SDGs or in waqf instruments. 3. The participants can donate part or all of the surplus to the waqf investment fund created by the Takaful operator. 4. The waqf investment fund is invested in instruments in line with SDGs. 5. The pricing of Micro-Takaful products takes into account the waqf investment fund financial support. The return on investment of the waqf fund serves to cover the deficit in the Micro-Takaful funds or the management fees of the Takaful operator.

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Takaful participants 3

1

2

3 Takaful fund surplus

Takaful

Investment instruments meeting SDGs and/or waqf

fund

4

3 Waqf investment

5

fund

Micro-takaful fund 1

Micro-takaful participants

Fig. 8.1 General scheme for Takaful funds meetings SDG and waqf requirements (Source Author’s own)

The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The creation of a Micro-Takaful fund that aims at promoting financial inclusion through Shari’ah compliant insurance coverage adapted to the needs of the targeted segments of people. • The existence of a Shari’ah compliant investment universe meeting Sustainable Development Goals or waqf requirements.

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• The possibility for participants, from the regulatory perspective, to donate part or their entire surplus to charities. In this case, the Takaful operator would set up a waqf investment fund that collects the donations, invests them and supports the Micro-Takaful fund. The Advantages of the Product Through this product, the Takaful operator can target Sustainable Development Goals in several manners. Indeed, the Operator can select investment instruments serving the education sector for example while the Micro-Takaful fund can offer products promoting the Health care for targeted segments of population. Moreover, the waqf investment fund can support the Micro-Takaful fund in order to decrease the contributions of the participants while having an optimal coverage. From another perspective, this scheme can be presented as a marketing argument to attract more customers for the Takaful fund. The Applications of the Product Example 1: Health and Well-Being A Takaful operator creates a cash waqf investment fund to allocate to the health sector. Indeed, the cash waqf investment fund would target instruments issued by Health institutions (hospitals, laboratories, etc.) and instruments that are providing funds and assistance to the health sector such as investment accounts. Moreover, the Micro-Takaful fund offers Health insurance products with a low cost and an optimal coverage for low-income population.

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Targets

Indicators

Practices

3.8 Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all

3.8.1 Coverage of essential health services (defined as the average coverage of essential services based on tracer interventions that include reproductive, maternal, newborn and child health, infectious diseases, non-communicable diseases and service capacity and access, among the general and the most disadvantaged population) 3.8.2 Proportion of population with large household expenditures on health as a share of total household expenditure or income 3.c.1 Health worker density and distribution

In terms of investment • The Takaful Operator would invest the cash waqf investment fund in health projects ensuring quality essential healthcare services In terms of support mechanisms • The cash waqf investment fund return would be paid to the Micro-Takaful fund to reduce the cost of the insurance coverage and contribute to the increase of the access to healthcare insurance coverage

3.c Substantially increase health financing and the recruitment, development, training and retention of the health workforce in developing countries, especially in least developed countries and small island developing States

In terms of investment • The Takaful Operator would invest the cash waqf investment fund in health projects ensuring quality essential healthcare services

The Implementation Methodology The methodology to implement Takaful funds meeting Sustainable Development Goals is divided into five steps presented as follows (Fig. 8.2). Define the Takaful Funds Surplus Donation Mechanisms Annually, the Takaful Operator calculates for each fund the surplus and for and each participant his share of the calculated surplus. Each participant can donate part or his entire surplus according to the following mechanisms:

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1 Define the Takaful funds surplus donation mechanisms

The Takaful fund surplus is the ownership of the participants. In such case, the Takaful contract can define the mechanisms of partial or total donation of the surplus by participants to the waqf investment fund.

2 Create a cash waqf investment fund

3 Establish a Micro-Takaful fund targeting financial inclusion

4 Identify the Investment instruments meeting SDGs and waqf requirements

5 Identify the pricing methodology for the Micro-Takaful funds

The Takaful operator creates a specialized cash waqf investment fund that is composed mainly of surplus donations approved by participants in the Takaful funds.

The Takaful operator creates a MicroTakaful fund targeting financial inclusion offering a range of products adapted to underserved segments of people (healthcare, death, incapacity, etc.)

The Takaful operator drafts an investment policy in line with Shari’ah principles and SDGs. Investment assets can be waqf ṣukūk as an example.

The waqf investment fund is taken into account in the pricing of products that are part of Miro-Takaful funds since the return on investment (cash waqf fund) are usually paid to the Micro-Takaful funds.

Fig. 8.2 Implementation methodology for implementing Takaful funds meeting SDGs and waqf requirements (Source Author’s own)

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• Participants with surplus lower than X amount will donate automatically their surplus to the waqf investment fund. For some participants, the cost of surplus distribution (transfer cost, check execution) could be higher than the amount of the surplus itself. Therefore, in such cases, participants can donate their surplus to the waqf investment fund instead. • Participants with surplus higher than their initial contribution will donate the part of the surplus exceeding the contribution to the waqf investment fund. Indeed, in Takaful, the participant cannot get a surplus amount that is higher than his contribution. Therefore, participants can donate the part of the surplus exceeding their contributions to the waqf investment fund. The two previous methods do not require the approval of the participants since the Takaful operator can integrate them as part of the contract. • Participants can define the share of their surplus to be donated automatically to the waqf investment fund. The waqf investment fund can also receive contributions from other sources including the Takaful operator or other institutions. The following scheme presents the Surplus donation mechanisms as described below (Fig. 8.3). Create a Cash Waqf Investment Fund The Takaful Operator creates a cash waqf Investment fund according to the following features: • The legal form: the cash waqf investment fund can have a separate legal entity or just a separate investment portfolio inside the Takaful Company. Depending on the current regulations and the investment purposes, the cash waqf investment fund can take the form of a Real estate investment fund, a Mutual fund or a unit trust, or any other form. In case, the Takaful Operator manages the cash waqf investment fund, it is considered as a separate investment portfolio having its own accounting.

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The surplus donation mechanisms

1

2

3

Participants with surplus lower than X amount would donate automatically their surplus to the waqf investment fund

Participants with surplus higher than their initia contribution would donate the part of the surplus exceeding the contribution to the waqf investment fund

Participants would determine the share of their surplus to be donated automatically to the waqf investment fund

Waqf investment fund

Fig. 8.3 Surplus donation mechanisms options (Source Author’s own)

• The Supervision bodies: The cash waqf investment fund can be under the supervision of the waqf authority or the Takaful Operator in terms of decision-making and structure upgrade. • The Management bodies: The cash waqf investment fund can be managed by the waqf authority (if the necessary competencies are available) or by the Takaful Operator. These choices can be defined according to the regulatory assignments attributed to the waqf Authority. Indeed, the waqf Authority can: • Label the projects as meeting waqf requirements and control periodically the fulfillment of these requirements.

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Waqf investment fund

1 The cash waqf investment fund can have a separate legal entity or just a separate investment portfolio

2 The cash waqf investment fund can be under the supervision of the waqf authority or the Takaful operator

3 The Takaful operator or the waqf authority or any asset management firm can manage the cash waqf Investment fund

Fig. 8.4 Supervision and management options for waqf authorities (Source Author’s own)

• In addition to the projects labeling, the waqf Authority would supervise the projects in terms of decision-making and structure upgrade while delegating the management to external bodies. • The waqf Authority would undertake the management of the projects in line with the waqf requirements. The following scheme presents the different choices related to the supervision and the management of projects (Fig. 8.4). Establish a Micro-Takaful Fund Targeting Financial Inclusion The Micro-Takaful fund is a separated fund having its own product offerings, segments of customers eligible to the product and its distribution channels. To create the Micro-Takaful fund, the operator needs to identify the following: • The segments of customers to target The operator shall define the eligibility criteria to Micro-Takaful products in terms of income, financial inclusion and any other relevant criteria. Moreover, it is recommended to target segments that would be of interest

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to Takaful customers of the operator. For instance, a Takaful Operator that offers family oriented products can set up a Micro-Takaful fund to target domestic workers. • The products and coverages to offer For the targeted segments of customers, the operator shall define the products and coverages to offer in line with the Sustainable Development Goal(s). For example, the Operator can launch a dedicated offer for domestic workers covering work accidents and health care. It can also add a retirement savings product. • The distribution channels to implement In this context, the aim is to enlarge the Micro-Takaful customers’ base while reducing the amounts of contributions. Indeed, the cost of distribution channels should be optimized while attracting an important number of customers eligible to Takaful. Identify the Investment Instruments Meeting SDGs and Waqf The Takaful operator should select Investment instruments meeting Sustainable Development Goals while taking into account the following criteria: • The strategic alignment of the Sustainable Development Goals selected compared to the strategic positioning of the Takaful operator The Takaful Operator shall select a Sustainable Development Goal (or more) that serves its customers or/and prospects in a direct or in an indirect way in terms of coverage and impact. If the customers and prospects are not involved, the Surplus donations would not be collected in a sufficient way and the size of the investment cash waqf fund would be impacted significantly.

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Moreover, the Sustainable Development Goal(s) selected shall be easy to introduce in the Micro-Takaful products schemes. Finally, it is understood that this step is very decisive because such schemes could not work in an efficient way unless the customers and prospects are correctly involved. • The financial return and liquidity of investment instruments The size of the investment cash waqf fund does really matter in terms of impact. Hence, maximizing the collection of donations is very important as well as the financial return of investments. From this perspective, the availability of investment instruments that are liquid and generating an interesting financial return seems to be a key element in the success or the failure of such scheme. Therefore, when selecting the Sustainable Development Goal to serve, the Takaful Operator shall pay attention to the investment universe and the features of the underlying instruments. • The expected impact on the community that the Takaful Operator serves and targets Insurance products play an important role in preserving and developing wealth regardless of its size. Therefore, adding a Sustainable Development Goal layer to the Takaful products would strengthen the impact on the community. • Any other relevant criterion for the Takaful Operator Identify the Pricing Methodology for the Micro-Takaful Funds As per insurance premiums, the Takaful Gross Contributions are constituted of three components: • Acquisition costs: refer to the fees paid to the intermediaries, agents and brokers. • Management fees: refer to the fees deducted by the Takaful Operator in counterparty of managing the Micro-Takaful fund.

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• Pure premium: refer to the amounts that are paid to the MicroTakaful fund. Reducing the Gross Takaful contribution means impacting one of the three components (pure premium, acquisition costs or management fees) according to the following options: • Option 1: The return on the waqf investment fund is paid as an initial contribution to the Micro-Takaful funds • Option 2: The Takaful operator grants a free loan to the MicroTakaful funds. At the end of the year, the waqf investment fund pays back the free loan to the Takaful Operator. • Option 3: The return on the waqf investment fund is paid to the Takaful Operator as a compensation for the management of the Micro-Takaful funds • All the other options that can reduce the pricing of the MicroTakaful products and that are in line with Shari’ah can be admitted.

Chapter Conclusion Implementing Takaful funds meeting Sustainable Development Goals and waqf principles requires the willingness of the Takaful operator to contribute to the enhancement of financial inclusion efforts through the setup of a Micro-Takaful fund that would serve low-income population. Moreover, the possibility to create a cash waqf investment fund that supports the Micro-Takaful fund would encourage operators to implement such schemes. From another perspective, the cash waqf investment fund is meant to be composed mainly of donations from the Takaful participants. Nevertheless, to increase its efficiency, the operator can collaborate with other institutions that can allocate their donations to the fund. In addition to this, the availability of investment instruments is decisive to ensure the growth of the cash waqf investment fund in a way that would generate sufficient profit to support the Micro-Takaful fund. Moreover, the operator shall pay particular attention to reducing the acquisition costs and the management fees in order to optimize the amounts of contributions to collect.

CHAPTER 9

Islamic Social Based Crowd Funding Platforms Meeting Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying the Islamic social finance based crowd funding platforms meeting Sustainable Development Goals. • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme.

Chapter Introduction Crowd funding platforms can contribute to the achievement of Sustainable Development Goals through the creation of new categories of loans based on cash waqf to support and assist innovative and impactful projects. These platforms would also contribute to the collection of zakat that would be paid to projects having financial difficulties to help them pay back their loans. The cash waqf loans can be permanent or temporary and once repaid, they could be allocated to new projects serving the same Sustainable Development Goals with or without the permission of the cash waqf donor.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_9

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Cash waqf funds collected through the platform would enable the issuers to raise the necessary amounts faster and increase their achievement rates that would encourage other categories of lenders to support and assist the projects. It is worth noting that the crowd funding platforms would collect cash waqf loans but also other Shari’ah compliant categories of loans. The success of this model relies on the following elements: • Promoting the cash waqf loans and constituting gradually an important waqf fund to assist and support projects meeting Sustainable Development Goals. • Adopting nudging practices that would enable the crowd funding platform to promote its model in a very efficient way. • Selecting the right Sustainable Development Goal (SDG) to serve. Indeed, doing so would encourage people to contribute more and more to the projects promoted by the platform • Having a regulatory framework that allows crowd funding platforms to raise zakat funds and allocate them to projects having financial difficulties. • Adopting a sound Governance framework to support the most innovative projects and safeguard the interests of the different stakeholders.

The Financial Structure of the Product Crowd Funding: Principles and Concepts Crowd funding is the activity of raising funds for specific projects on platforms that gather a group of investors to provide funds on a commercial or non-commercial (social) basis. Indeed, it is the practice of funding a project of venture by raising money from a large number of people, leveraging on financial technologies, and hence, eliminating the traditional financial intermediaries from the process. The funding can be in the form of commercial funds e.g., lending with returns, investment on participation basis, etc., or in the form of non-commercial funds e.g., interest-free loans, charitable donations, etc. The stakeholders in a crowd funding system are:

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• Crowd funding platforms refer to the technology operated by the Operator to connect the investors with the issuers including a website/web portal and/or mobile application that is accessible through the electronic means of communication. • Operator refers to the entity that provides the crowd funding services (directly, or under a service contract with the platform-provider). • Issuer refers to a person (natural or juristic) or an association of persons that raises (or seeks to raise, in the initial stage) investment for the underlying operations through a crowd funding issuance using the platform. • User—includes person who accesses the platform as an issuer, investor or merely as a subscriber to the platform. Islamic Crowd Funding: Specificities Islamic crowd funding adheres to the Shari’ah principles and rules in respect of all financial arrangements, contracts and transactions. In addition to the adherence to Shari’ah principles, Islamic crowd funding has an additional specific feature that is Islamic social crowd funding practices. Indeed, Islamic social crowd funding is crowd funding whereby the underlying operations are of non-commercial nature and the issuance either does not carry a return on the amount of investment or is in the nature of donation. It can take the form of zakat, waqf or any other form of alms and donations. Hence, Islamic crowd funding is a form of crowd funding that is in line with Shari’ah principles while being a new digital channel to collect zakat, waqf and alms and allocate them to eligible projects. The General Scheme of the Product The General Scheme of Islamic social finance based crowd funding platforms meeting Sustainable Development Goals is as follows (Fig. 9.1): 1. The new waqf loans collected and the waqf loans reimbursed are (re)allocated to new projects meeting Sustainable Development Goals. The waqf loans are the preliminary funds to allocate to projects in order to increase the achievement rate.

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New waqf loans/ reimbursed waqf loans re-allocated 1

Waqf loans Waqf loans reimbursed 2

Simple loans collected are granted 3

Projects meeting Sustainable Development Goals

4

Simple loans

Simple loans reimbursed

5

Zakat donations Fig. 9.1 General structure of the Islamic social based crowdfunding platforms meeting Sustainable Development Goals (Source Author’s own)

2. The waqf loans reimbursed and re-allocated to projects meeting Sustainable Development Goals as per the waqf instructions. 3. Simple loans are collected to provide supplementary funding to projects meeting Sustainable Development Goals. Surveys conducted showed that when the achievement rate increases, the individual contribution amounts increase from 10 to 67%. Therefore, waqf loans are the primary funds to be allocated to projects as a way to nudge lenders to achieve quickly the funding targets. 4. The Simple loans are reimbursed to lenders while waqf loans are reallocated. It is worth noting that simple loans can be converted to waqf loans (if the lender decides so). 5. The zakat fund is constituted to provide adequate support and funding to projects meeting Sustainable Development Goals.

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The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of Shari’ah compliant projects targeting Sustainable Development Goals. For instance, the crowd funding platform can develop an expertise in certain economic sectors to increase the impact of loans. • The existence of impact measurement and audit mechanisms to ensure the alignment of the projects to Sustainable Development Goals. • The implementation of adequate reporting mechanisms to customers and other stakeholders. • The possibility to collect zakat from eligible people through the platform. The zakat constitutes a second option to support projects targeting Sustainable Development Goals having trouble or difficulties. The Advantages of the Business Model The business model in itself is a way to enhance financial inclusion and achieve the Sustainable Development Goals. It offers the opportunity to investors to support startups and innovative projects through three mechanisms: waqf loans, simple loans and zakat. From another perspective, such platforms would require funding to cover their expenses. Therefore, there are various scenarios: 1. The Crowd funding Operator may have several platforms and this platform constitutes a product among others. Hence, there is no need to raise funds from external players to cover their operating expenses. 2. The Crowd funding Operator can call for contributions (mainly donations) to cover the expenses. 3. The Crowd funding Operator can receive donations from cash waqf investment accounts or any other financial scheme presented in this book.

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Indeed, the business model can be considered, for Islamic financial institutions, as an extension of their models to increase their impact. The Applications of the Product Example: Industry, Innovation and Infrastructure A financial institution creates a crowd funding platform to provide funding to innovative small-scale industries and enterprises as targeted by the Sustainable Development Goal n° 9. The cost of funding is equal to zero and the platform introduces zakat in order to guarantee loans for investors and encourage them to contribute effectively to the growth and development of the platform. Targets

Indicators

Practices

9.3 Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets

9.3.1 Proportion of Small-scale industries in total industry value added 9.3.2 Proportion of small-scale industries with a loan or line of credit

In terms of financing • The platform provides funding to innovative small-scale industries having an impact on society and on the economy In terms of support mechanisms • The platform collects zakat to support projects that are in difficulties in order to reimburse their loans

It is worth noting that the platform can select projects and social businesses that are targeting Sustainable Development Goals.

The Implementation Methodology The methodology to implement an Islamic crowd funding meeting both cash waqf requirements and Sustainability Development Goals is divided into the following steps (Fig. 9.2):

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1 Identify the Sustainable Development Goals to serve

2 Identify the waqf loan categories

3 Identify the waqf loan reallocation mechanisms

4 Create the zakat fund mechanisms to support projects in difficulty

5 Implement the nudging mechanisms for projects

The crowd funding platforms shall identify the Sustainable Development Goals to target and start to attract projects that meet one of the SDGs defined.

The crowd funding platforms would identify waqf loan categories available: • Permanent waqf loan versus temporary waqf loan • Unrestricted waqf loan versus restricted waqf loan The crowd funding platforms shall define the re-allocation mechanisms (with or without any prior permission from the waqf donor / possible conversion from restricted to unrestricted waqf loan in the absence of projects The crowd funding platforms shall identify the zakat fund mechanisms to support projects in difficult by reimbursing their debts and maintaining the waqf fund size.

The crowd funding platforms shall identify the nudging practices to implement in order to increase the volume of transactions

Fig. 9.2 Implementation methodology of Islamic social finance crowdfunding platforms (Source Author’s own)

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Identify the Sustainable Development Goals to Target The Crowd funding operator shall select one or more Sustainable Development Goals to target according to the following criteria: • The selected Sustainable Development Goal(s) shall be aligned with the national or the regional priorities and plans. Indeed, the Crowd funding operator shall contribute to the national efforts to achieve socio-economic impact. • The availability of projects meeting Sustainable Development Goals. In general, when the Crowd funding operator is aligned with the national efforts, priorities and plans, there will be an important number of projects initiated or supported by the Government. Otherwise, the Crowd funding Operator shall make sure before selecting a particular Sustainable Development Goal that the volume of investment projects and opportunities is significant. • The SDGs selected are in line with the expectations of donors. Indeed, donors may prefer certain types of projects that would be more impactful in their context. Otherwise, the Crowd funding operator shall initiate specific campaigns to raise the awareness of donors towards the SDGs selected. • Any other relevant criterion for the crowd funding platforms. Identify the Waqf Loan Categories In this model, there are four waqf categories defined as follows: • Restricted waqf loans are waqf donations that serve as loans for projects that are meeting a particular SDG. • Unrestricted waqf loans are waqf donations that can be allocated to all kinds of projects meeting SDGs. • Permanent waqf loans are waqf donations that are provided to the crowd funding platform for a determined period of time. Indeed, there are two dimensions to classify the waqf loans (restriction and permanence). In this case, the matrix of waqf loans is as follows (Fig. 9.3).

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Restricted

Permanent

Restricted Permanent waqf loan

Unrestricted Permanent waqf loan

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Temporary

Restricted temporary waqf loan

Unrestricted temporary waqf loan

Fig. 9.3 Waqf loans’ categories matrix (Source Author’s own)

Identify the Waqf Loans Re-allocation Mechanisms The waqf loans are granted to projects targeting SDGs. When paid back, they shall be re-allocated to other projects. In this case, the re-allocation can be done with or without the permission of the waqf donor: • Re-allocation with permission: The waqf donor can be part of the re-allocation process and select the projects to be funded. Indeed, the Crowd funding platform shall implement processes to involve the waqf donor in the decision-making process. • Re-allocation without permission: The waqf donor can give the full powers to the crowd funding platform to re-allocate the waqf loans to projects in line with his/her requirements and waqf loan category. Moreover, in the absence of available projects that are in line with the requirements of restricted waqf loans, the waqf donor can authorize the Crowd funding platform to re-allocate his/her funds in projects meeting other SDGs. Once the loan is reimbursed, the waqf loan can be re-allocated to projects in line with the waqf loan category requirements without involving the donor in the decision-making process.

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Identify the zakat Fund Mechanisms to Support Projects in Difficulty The Crowd funding platform can create a special donation category to collect zakat in order to support and assist projects in difficulty to settle their debts. The zakat fund would be an efficient way to maintain the waqf funds. Indeed, the zakat can be used as a way to maximize the repayment rate and thus enhance the credibility of the platform and its reliability. The zakat donors can select the types of projects in difficulty to support as a way to ensure their continuity and their social impact. The zakat collected can serve to reimburse loans for projects in difficulty. The zakat fund mechanisms would: • Enhance the credibility and attractiveness of the crowd funding platform • Ensure the continuity of projects funded by waqf and Simple loans. • Ensure the social impact of projects with a limited financial performance. Implement Nudging Mechanisms for Projects The Crowd funding operator shall implement nudging mechanisms to raise the effectiveness and the credibility of the platform. The most common nudging practices in the field of crowd funding are as follows: • Focusing on the Social impact indicators and selecting sectors with high impact: The platform is supposed to select economic sectors with high social and environmental impacts. Such orientation would encourage investors to lend money without expecting any return to projects with high impact. • Presenting for each issuance the achievement rate Each project has a specific target in terms of Cash collection to fulfill the issuer needs. A study conducted by Karlan and List (2007) demonstrated that showing the achievement rate in terms of Cash collection target contributes to raise the percentage of donations by 10% to 67%. Moreover, the study also demonstrated that when the achievement rates increase, the average amounts of donations increase too.

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For instance, when the achievement rate is equal to 10%, the average amount of donations is 15 USD but when it reaches 33%, the average amount of donations is equal to 26 USD, and this continues until the target is achieved. • Waqf loans re-allocation first In order to increase the achievement rates of the various projects, waqf loans would be allocated automatically at the beginning of the campaign. Indeed, such practice would encourage other categories of investors to increase the amounts of their loans and reach the target in a faster way. Therefore, these practices would increase the impact of the platform and would attract more lenders and investors. • Repayment rate Zakat funds collected through the platform can be allocated to pay for borrowers that are in difficulty and cannot honor their commitments. Based on specific eligibility criteria, the crowd funding platform can attribute zakat to projects with high impact but requiring more funds. From another perspective, increasing the repayment rate would make lenders and investors more comfortable about their loans, which would help to raise more funds.

Chapter Conclusion Providing cash waqf based loans (interest free) backed by zakat funds would encourage issuers to initiate riskier and innovative projects. Nevertheless, the crowd funding platforms setting up such practices shall ensure the adoption of Governance Standards to safeguard the interests of the different stakeholders. From another perspective, it is possible to replace interest-free loans with other financing formulas generating a return to investors when it comes to projects requiring more funding. Moreover, cash waqf can take the form of Mudarabah expecting a return that can be allocated to charities or any other social purposes. Indeed, engineering efforts are not limited in this area and can include other categories of investors and financing schemes. For instance, Islamic banks promoting cash waqf based investment accounts (Chapter 5) can use a crowd funding platform to allocate part of their resources to new innovative projects while using financing formulas generating a profit. The cash waqf investment fund that supports Micro-Takaful funds (Chapter 8)

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can invest part of its resources in Crowd funding platform in interest-free loans or any other financing formulas generating a profit. Finally, it is important for the Crowd funding platform to promote financing formulas that can generate a profit in order to deduct its fees and commission in a way that would cover part of its expenses. Indeed, such schemes require the sustainability of the crowd funding platform. Therefore, generating a profit is very important.

Reference Karlan, D. and List, J.A. (2007), “Does price matter in charitable giving? Evidence from a large-scale natural field experiment,” American Economic Review, Vol. 97 No. 5, pp. 1774–1793.

CHAPTER 10

Cash Waqf Mutual Funds Meeting Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying the cash waqf Mutual funds meeting Sustainable Development Goals. • Addressing the prerequisites of the product, its advantages and applications. • Presenting the implementation methodology of the financial scheme.

Introduction Asset management companies can contribute to the efforts of achieving the Sustainable Development Goals by providing appropriate structures to raise funds through the cash waqf formula or any other relevant formula and allocate them to financial instruments meeting Sustainable Development Goals. Indeed, asset management companies can target one or more sustainable development goals depending on the diversity and availability of financial instruments. This micro-ecosystem consists of: • Adapting the features of Mutual funds to the cash waqf requirements.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_10

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• Identifying the Sustainable Development Goals to serve depending on the availability of the underlying financial instruments. Otherwise, the asset manager can invest in classical financial instruments (with no Sustainable Development Goals to serve) and allocate the income generated to charities serving the predefined Sustainable Development Goal(s). This model offers the opportunity to investors and waqf donors to support both projects and charities achieving Sustainable Development Goals. The cash waqf investors can make a permanent cash waqf investment and give the asset manager (or the waqf authority) the total control on the strategic decisions or a temporary cash waqf investment and get back the funds at the end of the waqf contract. As per the previous models, this micro-ecosystem relies on two pillars: the lucrative business and the non-profit activity. There are three possible combinations for the asset manager: 1. Serve a specific Sustainable Development Goal when it comes to investment and another goal when it comes to charities. 2. Serve one common Sustainable Development Goal for both investment and charities 3. Serve a specific Sustainable Development Goal only when it comes to charities and invest in classical financial instruments. Indeed, the asset manager shall prioritize combination (2) as it increases its impact and leaves the combination (3) only when (2) and (1) are not possible to implement. As per the previous instruments, the success of this model relies on the following elements: • Checking the availability of the financial instruments that target Sustainable Development Goals and select the appropriate goal to serve. • Measuring the impact of each Mutual fund serving SDGs in order to assist cash waqf investors in selecting the right instruments. • Introducing literacy programs that aim at raising awareness towards the Sustainable Development Goal targeted by the asset manager. Moreover, the programs shall target individuals as well as businesses and associations.

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The Financial Structure of the Product Mutual Funds: Concepts and Principles A mutual fund is a professionally managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in different securities according to a predefined investment strategy. A unit investment trust is a concept similar to a Mutual fund. Indeed, both are baskets of stocks, bonds, and other securities that pool investors’ finances. Nevertheless, a unit investment trust is a listed company, and shares in this company can be bought and sold on a stock market. The price of these shares is determined by demand and supply in the Market. Mutual funds are open-ended funds, which work by splitting the assets they invest in into units. When more people want to buy than sell, the asset management company issues additional units. When more people want to sell than buy, the asset management company reduces the number of units being sold. Mutual funds are classified based on the underlying assets composing them: • Equity funds: Equity mutual funds buy stocks of a collection of publicly traded companies. • Bond funds: Bond funds are the most common type of fixed-income mutual funds, where (as the name suggests) investors are paid a fixed amount back on their initial investment. • Money market funds: Money market funds are also fixed-income mutual funds, investing mainly in money market instruments. Money market instruments are short-term investments. • Balanced funds: Balanced funds are funds that are investing in the different classes of assets and instruments. • Other mutual funds: There are other classes of mutual funds such as Shari’ah compliant mutual funds, green mutual funds and other thematic funds.

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Shari’ah Principles Underlying Islamic Mutual Funds The Shari’ah compliant or Islamic mutual funds shall fulfill the following principles: • The underlying assets should be in line with Shari’ah principles. For instance, stocks composing the mutual fund shall be selected based on a Shari’ah compliant stock market index. The S.uk¯uk and other financial instruments shall be approved by a Shari’ah board. • The liquidity management of the Mutual fund shall be addressed in line with the Shari’ah requirements. No interest bearing instruments shall be used to raise short-term funds or to invest for short term. • The mutual fund shall detect non-halal operations wrongly executed by the fund and identify the revenue to cleanse (if there is any). • The asset manager (or asset management company) can get a percentage of the funds managed as Wakala management fees. The General Scheme of the Product The General Scheme of cash waqf Mutual funds meeting Sustainable Development Goals is as follows: 3

Shari’ah compliant financial instruments meeting or not Sustainable Development Goals

Waqf donors or investors

2

Asset Managers

4

5

1

Cash Waqf Mutual fund

Charities meeting Sustainable Development goals

1. Waqf donors or investors buy shares of the Mutual fund(s) to support the underlying financial instruments’ issuers and the charities. 2. The asset manager undertakes the collection of waqf donations and investments as well as the daily management of the cash waqf Mutual fund. The asset manager gets periodic management fees.

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3. The asset manager is investing the funds collected in Shari’ah compliant financial instruments meeting or not Sustainable Development Goals. 4. The asset manager pays, on a periodic basis, the income generated by the Mutual fund to charities meeting the predefined Sustainable Development Goals. 5. For classic investors or temporary cash waqf donors, the asset manager pays back the invested funds. It is worth noting that the return could be positive (profit) or negative (loss) and the cash waqf amount invested in the Mutual fund can be temporary (paid back to the waqf Mutual fund investor at maturity) or permanent (kept invested in the Mutual fund). The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of Shari’ah compliant investment instruments that are meeting Sustainable Development Goals. For instance, the asset manager should identify a Shari’ah compliant universe with financial instruments’ issuers achieving Sustainable Development Goals such as Social S.uk¯uk, Stocks of listed companies and corporations, shares of other Mutual funds, Investment accounts, etc. Moreover, the financial instruments should be available, liquid and performing. • The existence of impact measurement and audit mechanisms to ensure the alignment of the Asset manager to Sustainable Development Goals in terms of requirements and targets. • The implementation of adequate reporting mechanisms to investors and other stakeholders. The Advantages of the Product In this sub-ecosystem, the asset manager provides its expertise in terms of financial engineering, marketing and investment strategies while allocating funds to impactful projects and sharing benefits with customers and charities.

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The asset manager would keep playing its role as an investment agent while promoting social impact instruments and purposes. Indeed, adopting such business model would not have any negative impact on the financial return of the asset manager since he would deduct its usual management fees on a periodic basis. Moreover, such products can improve the image of the asset manager and attract more customers that would prefer dealing with innovative and impact-oriented organizations. The Applications of the Product Example 1: Health and Well-Being An asset manager creates a cash waqf mutual fund targeting the Sustainable Development Goal n°3 related to health and well-being. The asset manager would invest partially or exclusively in financial instruments issued by specialized healthcare institutions or any other institution working in the field of healthcare improvement such as laboratories, Insurance companies developing new business models, hospitals, universities and training institutions in the field of healthcare, etc. Targets

Indicators

Practices

3.8 Achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality and affordable essential medicines and vaccines for all

3.8.1 Coverage of essential In terms of investment • The asset manager health services (defined as invests in financial the average coverage of instruments (S.uk¯uk, essential services based on stock market) issued by tracer interventions that hospitals, laboratories, include reproductive, insurance companies maternal, newborn and with a focus on health child health, infectious care, universities, diseases, non-communicable training organisms. The diseases and service capacity asset manager can also and access, among the invest in other Mutual general and the most funds or investment disadvantaged population) accounts mainly focused on the health sector (continued)

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(continued) Targets

Indicators

Practices In terms of support mechanisms • Through associations and charities supported by the Mutual fund, the asset manager provides scholarships to medical students • The asset manager also provides grants and aids to medical institutions and laboratories in order to bear part of the medical treatments’ costs

3.C Substantially increase health financing and the recruitment, development, training and retention of the health workforce in developing countries, especially in least developed countries and small island developing States

3.8.2 Proportion of population with large household expenditures on health as a share of total household expenditure or income 3.C.1 Health worker density and distribution

Depending on the investment universe (in terms of variety and availability of instruments), the asset manager can commit or not to allocate a part of its funds to financial instruments issued by healthcare organizations or by healthcare focused financial institutions (investment accounts, Mutual funds). The asset manager can conduct a financial literacy campaign to accompany healthcare organizations and other financial institutions in setting up financial instruments achieving Sustainable Development Goals while being Shari’ah compliant. In this context, the asset manager can enlarge gradually its portfolio as well as its assistance mechanisms to increase its impact.

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Example 2: Clean and Affordable Energy An asset manager creates a cash waqf Mutual fund targeting the Sustainable Development Goal n°7 related to clean and affordable energy. Indeed, the Mutual fund invests in financial instruments and provides aids and support mechanism in relationship with the targets of this Sustainable Development goal. Targets

Indicators

Practices

7.1 By 2030, ensure universal access to affordable, reliable and modern energy services 7.2 By 2030, increase substantially the share of renewable energy in the global energy mix

7.1.1 The proportion of population with access to electricity

In terms of investment • The Mutual fund would dedicate part of its resources to support projects in the field of clean energy • The Mutual fund can invest in instruments issued by financial institutions that provide appropriate financing to individuals and projects to access to clean energy In terms of support mechanisms • The Mutual fund would provide support to NGOs working in the field of environment friendly buildings and production units

7.2.1 Renewable energy share in the total final energy consumption

It goes without saying that the asset manager can target more than one Sustainable Development Goal or target a specific SDG in terms of investment and another SDG when it comes to support mechanisms.

The Implementation Methodology The implementation of cash waqf Mutual funds meeting Sustainable Development Goals requires five different steps (Fig. 10.1).

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1

Identify the investment universe in line with the Shari’ah and SDG requirements

2

Identify the Sustainable Development Goal(s) to target by the Mutual fund

3

Define the categories of Mutual funds

The asset manager starts by identifying the investment universe in terms of financial instruments (liquidity, availability, performance)

Depending on the investment universe, the asset manager identifies the Sustainable Development Goal(s) to target.

The asset manager defines the categories of contribution in the Mutual fund (cash waqf contribution, temporary waqf, simple investment) and the strategic allocation of the investment portfolio

4

Define the commitment of the Asset manager in terms of Portfolio allocation

5

Identify the Charities to support

The asset manager defines a limit for minimum investment in the SDG financial instruments.

The asset manager identifies the charities targeting the same Sustainable Development Goal(s) to support in this mini-ecosystem

Fig. 10.1 The implementation methodology of cash waqf mutual funds (Source Author’s own)

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Identify the Investment Universe in Line with the Shari’ah and SDGs Requirements The identification of the investment universe in line with the Shari’ah principles and SDGs requirements requires three different steps: First step: definition of the whole investment universe The asset manager defines the investment universe per asset category (S.uk¯uk, stock, investment accounts, Mutual funds, Real Estate Investment Trusts, etc.) and per market (according to the stock markets where the asset manager is able to invest). Second step: screening criteria Once the investment universe is defined, the asset manager starts his screening to identify the investment instruments that are in line with the Shari’ah principles as well as the Sustainable Development criteria. Third step: Elaborating the investment strategy The asset manager selects investment instruments based on the screening criteria to constitute its investment portfolio. At that level, the asset manager classifies the investment instruments selected according to the Sustainable Development Goals targeted by each instrument. Global Investment universe Shari’ah compliant Investment portfolio in line with SDGs

Investment instruments per SDG

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Identify the Sustainable Development Goal(s) to Target by the Mutual Fund Based on the outputs of the previous step, the asset manager can identify one or more Sustainable Development Goal(s) to target according to the availability of financial instruments, their liquidity and financial performance. The asset manager has two options: • The first option is to select one Sustainable Development Goal or more to target based on the availability of the financial instruments, their liquidity and financial performance. Moreover, the asset manager would select charities or NGOs serving the same Sustainable Development Goals selected to support. • The second option is to not select any of the Sustainable Development Goals in the absence of liquid and performing financial instruments. Nevertheless, the asset manager would select Charities or NGOs working in a specific field to support. Define the Categories of Mutual Funds In this sub-ecosystem, the asset manager can define the categories of Mutual funds to offer based on the following criteria: • The first criterion: the nature of the investment The participation in the Mutual fund can take the form of a cash waqf operation or a simple investment. In the first case, the person or entity is donating a specific amount to buy units in the Mutual fund. Then, the income generated is paid to specific charities and NGOs as specified in the contract. In the second case, the person or entity is investing in the Mutual fund and gets the income generated. • The second criterion: the waqf duration In case of cash waqf operation, the person or entity can donate its funds to the asset manager to be invested in a specific cash waqf Mutual fund permanently or for a limited period of time to be defined by both parties. • The third criterion: the SDG(s) scope Based on this criterion, there are three types of Mutual Funds meeting Sustainable Development Goals:

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– Mutual funds targeting a specific SDG: The investor selects this Mutual fund because it is investing in financial instruments that are in line with Sustainable Development Goals. Nevertheless, the income generated is the ownership of investors. Indeed, the fund can be a capitalization fund or distributing fund. – Cash waqf Mutual fund with mechanisms support to achieve SDG: The waqf donor selects a specific Mutual fund that is supporting charities and NGOs serving specific Sustainable Development Goals. This fund should be necessarily a distributing fund. – Cash waqf Mutual fund meeting full SDG requirements: The waqf donor selects a specific Mutual fund that invests in financial instruments meeting SDG requirements and that pays the generated income to charities and NGOs pursuing the same goals. The fund should be necessarily a distributing fund. It is worth noting that a Mutual fund can have the three categories of shareholders (or participants) if and only if it is a distributing fund. Moreover, the asset manager can create three different Mutual funds, one of each category. The following tree presents the different categories of Mutual funds that can be part of this mini-ecosystem (Fig. 10.2). A customer can buy units from each of the three categories based on its preferences in terms of donations and investments. Define the Commitment of the Asset Manager in Terms of Portfolio Allocation For Mutual funds meeting SDGs and cash waqf Mutual funds meeting full SDG requirements, the asset manager shall define its commitments related to the following aspects: • The share of financial instruments targeting Sustainable Development Goals: Based on the availability of an investment universe that meets the requirements of this sub-ecosystem, the asset manager can define the share of

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Nature of the participation

Cash waqf Participation

Cash waqf Mutual fund meeting SDG (Support mechanisms)

Fig. 10.2

Investment

Cash waqf Mutual fund meeting SDG (Investment & Support mechanisms)

Mutual fund meeting SDG

Different categories of Mutual funds (Source Author’s own)

financial instruments targeting Sustainable Development Goals in its portfolio. This commitment shall be disclosed to all the stakeholders and submitted to regular external audit to ensure that it is fully respected. Any change occurring to this commitment shall be justified by the Asset manager and disclosed to all the stakeholders. Nevertheless, in case of a cash waqf Mutual fund, if the asset manager sees that the predefined investment universe is becoming less interesting, he can select another SDG to serve. If the whole investment universe targeting SDGs has serious shortage in terms of performance, liquidity and availability, the asset manager can move from cash waqf Mutual fund meeting full SDG requirements to cash waqf Mutual fund limited to support mechanisms. • The Charities and NGOs targeting the same SDGs: The asset manager commits to pay the generated income of the cash waqf Mutual funds to NGOs or Charities serving the same Sustainable Development Goals. In this case, the asset manager should share a reporting about the Charities and NGOs activities and achievements in connection with the Sustainable Development Goal(s) targeted. • The commitment in terms of Outputs and Outcomes:

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The asset manager should provide the various stakeholders with the outputs and outcomes of its investments and support mechanisms in terms of impact. In the case of Mutual funds meeting SDG(s), the asset manager should define targeted Outputs and Outcomes for the fund. Moreover, regular reporting are expected to be shared with the community of investors and waqf donors. What if the asset manager fails to fulfill his commitments? There are two options to reinforce the governance of this subecosystem: 1. All the products shall be endorsed by the waqf authority to ensure permanently the fulfillment of all the Shari’ah and SDGs requirements. Obviously, the waqf authority should have the necessary capabilities in terms of Sustainable Development to assess the Mutual funds. In case, a Mutual fund is not fulfilling all the requirements, the waqf authority shall withdraw its endorsement to the Mutual fund and get back the cash waqf funds invested to re-allocate to other Mutual funds and financial instruments. 2. The asset manager should form a Board of waqf donors and their representatives to ensure the compliance of all the Mutual funds to the Shari’ah and SDG requirements. The board appoints an external Auditor to issue an opinion related to the compliance of the Mutual fund to the various requirements and expectations. If there is any significant gap, the board can decide to withdraw all the waqf funds invested and re-allocate them to another cash waqf investment instruments. Identify the Charities to Support The asset manager selects a list of charities based on screening criteria that are achieving Sustainable Development Goals. If the Government shares the list of effective associations, NGOs and other types of social-oriented organizations with or without any specific rating, the asset manager can select charities based on that list. Otherwise, the asset manager can develop its internal scoring or rely on external rating methodologies to assess the impact of these organizations on the community.

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Conclusion Depending on its context, the asset manager can start with cash waqf Mutual fund (support mechanisms) and gradually develop a cash waqf Mutual fund meeting the full Shari’ah and SDG requirements. This transition would require the development of financial instruments meeting Sustainable Development Goals. Once the Investment universe is adapted to the strategy of the fund, the asset manager can develop Mutual funds meeting Sustainable Development Goals as presented previously in this chapter. From another perspective, the Mutual funds meeting Sustainable Development Goals can invest in other financial instruments previously discussed in this book such as cash waqf investment accounts with an acceptable profit sharing ratio. Indeed, the asset manager can commit to invest a share of the Mutual fund in cash waqf financial instruments meeting Sustainable Development Goals including other Mutual funds. In this case, investors accept to invest part of their funds without getting any return. Moreover, as per other financial instruments, the asset manager should elaborate and implement financial literacy policy including the accompaniment of financial instruments issuers when it comes to targeting Sustainable Development Goals or adopting cash waqf structures. Finally, impact seems to be the only marketing argument to attract more customers and increase the size of the Mutual fund. Therefore, monitoring outcomes and outputs of the Mutual funds should be prioritized in the project to make the right decision in terms of investment and support mechanisms.

CHAPTER 11

Cash Waqf S.uk¯ uk Meeting Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying the cash waqf Mutual funds meeting Sustainable Development Goals. • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme.

Chapter Introduction The waqf is supposed to support small projects but also contribute to the implementation of large ones providing a bigger social impact. For this purpose, the synergies between modern Islamic financial institutions and the waqf shall cover all the instruments including S.uk¯uk. Therefore, a S.uk¯uk issuer can offer two categories of S.uk¯uk. The first category is cash waqf S.uk¯uk with a generated income that is allocated to a specific social purpose. The second category is ordinary S.uk¯uk that can be converted to cash waqf s.uk¯uk at any moment the investor wants. If the issuer’s project is targeting Sustainable Development Goals, the instrument can take the label of cash waqf s.uk¯uk meeting Sustainable Development goals.

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Moreover, the issuer can issue a cash waqf S.uk¯uk based on a free loan structure. Indeed, the investors would make a free loan to the issuer in order to support his project and at the end of the project duration, the investors get their funds back. This micro-ecosystem consists of: • Identifying the projects that are meeting the Sustainable development Goals. • Selecting the charities or NGOs that are serving the same Sustainable Development Goals. • Defining the share of cash waqf S.uk¯uk and the appropriate mechanisms to convert the ordinary S.uk¯uk to cash waqf S.uk¯uk. As per the previous models, the cash waqf s.uk¯uk meeting Sustainable Development Goals offer the opportunity to investors to invest in large impactful projects and get the revenue generated, to support large impactful projects while donating the revenue to charities and get back the funds at the end of the project duration or support impactful projects while donating both the revenue to charities and funds to be re-invested in similar projects. As per the previous instruments, the success of this model relies on the following elements: • Identifying projects that are meeting the Sustainable Development Goals and requirements. • Checking the availability of charities and NGOs that are serving the same Sustainable Development Goals. • Implementing appropriate mechanisms for converting ordinary s.uk¯uk to cash waqf ones. • Implementing an appropriate structure to re-invest the funds in similar financial instruments. • Introducing literacy programs that aim at raising awareness towards the Sustainable Development Goal(s) targeted by the s.uk¯uk issuer. Moreover, the programs shall target individuals as well as businesses and associations.

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The Financial Structure of the Product S.uk¯ uk: Concepts and Principles Investment S.uk¯uk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however, this is true after receipt of the value of the S.uk¯uk, the closing of subscription and the employment of funds received for the purpose for which the s.uk¯uk were issued. The AAOIFI Standard n°17 related to Investment S.uk¯uk identifies the generally accepted types of S.uk¯uk: • Certificates of ownership in leased assets These are certificates of equal value issued either by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets. • Certificates of ownership of usufructs The AAOIFI Standard defines two types of Certificates of ownership of usufructs: the first type is related to existing assets while the second is related to describe future assets or services. Indeed, these certificates aim at leasing existing or future assets and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the certificates. • Salam certificates (Salam s.uk¯uk) These are certificates of equal value issued for the purpose of mobilizing Salam capital so that the goods to be delivered on the basis of Salam come to be owned by the certificate holders. • Istisna’ certificates (Istisna’ S.uk¯uk) These are certificates of equal value issued with the aim of mobilizing funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holders. • Mur¯abah.a certificates (Mur¯abah.a S.uk¯uk) These are certificates of equal value issued for the purpose of financing the purchase of goods through Mur¯abah.a so that the certificate holders become the owners of the Mur¯abah.a commodity.

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• Muš¯araka certificates (Muš¯araka S.uk¯uk) These are certificates representing projects or activities managed on the basis of Muš¯araka by appointing one of the partners of another person to manage the operation. • Mud.¯araba s.uk¯uk These are certificates that represent projects or activities managed on the basis of Mud.¯araba by appointing one of the partners or another person as the Mud.¯arib for the management of the operation. • Investment agency s.uk¯uk These are certificates that represent projects or activities managed on the basis of an investment agency by appointing an agent to manage the operation on behalf of the certificate holders. • Sharecropping certificates (Muz¯araa s.uk¯uk) These are certificates of equal value issued for the purpose of using the funds mobilized through subscription for financing a project on the basis of Muz¯araa so that the certificate holders become entitled to a share in the crop according to the terms of the agreement. • Irrigation certificates (Mus¯aq¯at s.uk¯uk) These are certificates of equal value issued for the purpose of employing the funds mobilized through subscription for the irrigation of fruit bearing trees, spending on them and caring for them on the basis of a Mus¯aq¯at contract so that the certificate holders become entitled to a share in the crop as per agreement. • Agricultural certificates (Mug¯ ˙ arasa s.uk¯uk) These are certificates of equal value issued on the basis of a Mug¯ ˙ arasa contract for the purpose of employing the funds for planting trees and undertaking the work and expenses required by such plantation so that the certificate holders become entitled to a share in the land and plantation. The General Scheme of the Product The General Scheme of cash waqf s.uk¯uk meeting Sustainable Development Goals is as follows (Fig. 11.1):

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Investors

waqf donors

3

3

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4

Cash waqf Ṣukūk

Ordinary Ṣukūk

Special Purpose Vehicle

Charities meeting Sustainable Development Goals

1

Sukuk Issuer

Fig. 11.1 Financial scheme of the cash waqf s.uk¯ uk meeting SDGS (Source Author’s own)

1. The S.uk¯uk issuer creates a special purpose vehicle for the s.uk¯uk issuance. The funds raised would be allocated to (a) project(s) meeting the Sustainable Development Goals and requirements. 2. The special purpose vehicle issues two categories of s.uk¯uk. The first category is ordinary s.uk¯uk while the second category is the cash waqf s.uk¯uk. 3. The ordinary s.uk¯uk are offered to investors with a preference for projects meeting Sustainable Development Goals and principles. The cash waqf s.uk¯uk are offered to waqf donors who would like to support social impact projects while donating their revenue to charities.

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4. The ordinary s.uk¯uk holders have the possibility during the whole duration to convert their s.uk¯uk to cash waqf s.uk¯uk. 5. The revenue generated by the cash waqf s.uk¯uk is paid to charities meeting Sustainable Development Goals (similar or not to the Sustainable Development Goals served by the s.uk¯uk issuance) The financial structure underlying the s.uk¯uk can take different forms and can be used by different issuers such as Islamic banks, Takaful companies, corporations or the Government itself. The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of an active s.uk¯uk market including the segment of social and sustainable development s.uk¯uk. • The existence of impact measurement and audit mechanisms to ensure the alignment of the s.uk¯uk issuance to Sustainable Development Goals in terms of requirements and targets. • The implementation of adequate reporting mechanisms to investors and other stakeholders. The Advantages of the Product In this sub-ecosystem, the cash waqf s.uk¯uk can contribute to the diversification of the sources of funding for projects that are meeting sustainable development goals. At the same time, cash waqf would support large projects and would not be positioned as supportive exclusively to small projects. The special purpose vehicle includes two categories of s.uk¯uk (ordinary s.uk¯uk and cash waqf s.uk¯uk) as well as conversion mechanisms from ordinary s.uk¯uk to cash waqf s.uk¯uk. Depending on the expected impact of the project, the cash waqf s.uk¯uk holders can support the project with a free loan to reduce the cost of financing and reinforce the attractiveness of such projects.

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The Applications of the Product Example 1: Build Resilient Infrastructure, Promote Inclusive and Sustainable Industrialization and Foster Innovation A sovereign s.uk¯uk issuance can provide the necessary funding to the government to build the necessary infrastructure for transportation to enhance the size of economic and commercial transactions. Moreover, it could provide the necessary support and assistance to innovative industrial projects to increase the share of employment in the industrial sector. Targets

Indicators

Practices

9.1 Develop quality, reliable, sustainable and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all 9.2 Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product, in line with national circumstances, and double its share in least developed countries

9.1.2 Passenger and freight In terms of investment • The funds raised volumes, by mode of through the s.uk¯uk transport sovereign issuance can 9.2.1 Manufacturing value serve to support the added as a proportion of investments in the GDP and per capita transport infrastructure 9.2.2 Manufacturing of the country employment as a proportion of total • The funds raised can employment also be allocated to support new innovative industrial projects in the country In terms of support mechanisms • In this case, the cash waqf s.uk¯uk could provide free loans to projects with high growth potentialities and to transport infrastructure

In this example, the sovereign s.uk¯uk issuance can be replaced by cash waqf s.uk¯uk issued by new innovative projects supported by the government under the form of a free loan or a markup financial structure. In case of a markup financial structure, the income generated can serve to grant aids to industrial projects having financial difficulties or requiring more resources to upgrade their business model.

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Example 2: Clean Energy A cash waqf s.uk¯uk can contribute to the development of the infrastructure of clean energy in a specific location. The income generated can be allocated to support, for instance, homes and small businesses in villages to access clean energy at a lower cost. Targets

Indicators

Practices

7.1 By 2030, ensure universal access to affordable, reliable and modern energy services 7.2 By 2030, increase substantially the share of renewable energy in the global energy mix

7.1.1 The proportion of population with access to electricity 7.2.1 Renewable energy share in the total final energy consumption

In terms of investment • The cash waqf s.uk¯uk can contribute to the development of the necessary infrastructure to generate more clean energy In terms of support mechanisms • The income generated from the cash waqf s.uk¯uk can be allocated to small businesses to reduce the cost of access to solar energy

The Implementation Methodology The implementation of cash waqf s.uk¯uk meeting Sustainable Development Goals requires five different steps (Fig. 11.2). Identify a Project Targeting a Specific Sustainable Development Goal It all starts with an investment project that will contribute to the achievement of one of the 17 Sustainable Development Goals. It could be a public infrastructure that will reinforce transportation, public health sector or education. It could be also a project initiated by the private sector including a Sustainable Development Goal dimension. In both cases, the national priorities regarding the Sustainable Development Goals shall be taken into account. Moreover, for every selected project, the outcomes and the outputs targets and measurements shall be well defined.

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1

Identify the project targeting a specific Sustainable Development Goal

The project underlying the cash waqf ṣukūk issuance should be targeting one of the 17 Sustainable Development Goals.

2

Define the structure of the ordinary ṣukūk issuance

3

Define the structure of the cash waqf ṣukūk issuance 4

4

Identify the charities to serve

5

Identify the mechanisms of reallocation of the invested funds at the end of the ṣukūk duration

The ordinary ṣukūk issuance can be based on one of the commercial formulas such as Mudarabah, Murabaha, Ijara or any other accepted formulas.

The cash waqf ṣukūk issuance can take many forms (free loan to lower the cost of financing, based on the same formula of an ordinary ṣukūk issuance or an incentive based ṣukūk issuance)

The cash waqf ṣukūk would generate an income to pay to charities serving the same Sustainable Development Goals targeted by the issuance.

At the end of the ṣukūk duration, there should be defined mechanisms to re-allocate the funds raised to another form of cash waqf based financial instruments.

Fig. 11.2 The implementation methodology for cash waqf sukuk (Source Author’s own)

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Define the Structure of the Ordinary S.uk¯ uk Issuance For the fundraising purposes, there would be an ordinary s.uk¯uk issuance for those who want to support the project while getting an income. Depending on the nature of the underlying project, the structure of the ordinary s.uk¯uk structure can take one of the following forms: 1. If it is a project that is not generating a direct revenue, the s.uk¯uk should be based on Ijara or Istisna’ 2. If the project generates a direct income, the s.uk¯uk should be based on Mud.¯araba or Muš¯araka. Moreover, the s.uk¯uk issuer can add an incentive component in the s.uk¯uk structure: • The underlying project has its predefined targeted outputs and outcomes on an annual basis. • The s.uk¯uk issuance has two rates of return (especially for fixed income structures such as Ijara and Istisna’). An expected rate of return of the project and a discounted rate of return (equal to the expected rate of return with a discount as an incentive to the issuers to achieve the expected impact). • If the annual targets are reached, the s.uk¯uk holders get the discounted rate of return. • If the annual targets are not reached, the s.uk¯uk holders get the expected rate of return. Define the Structure of the Cash Waqf S.uk¯ uk Issuance There are two cash waqf s.uk¯uk issuance structures: 1. Cash waqf s.uk¯uk based on a free loan: in this case, the cash waqf s.uk¯uk donor supports the project itself without expecting any income or revenue. Therefore, the cash waqf can be permanent or temporary. If the cash waqf is permanent, once the project holder repays the total loan, it has to be re-invested. Otherwise, if the cash waqf is temporary, the loan is repaid back to the waqf donor at the end of the s.uk¯uk

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2. Cash waqf s.uk¯uk based on a structure similar to the ordinary s.uk¯uk structure with the generated income paid to charities. In this case, the cash waqf s.uk¯uk can be permanent or temporary. If it is permanent, the income generated would be paid to charities or NGOs and the capital is re-invested according to the re-allocation mechanisms. If it is temporary, the income generated would be paid to charities or NGOs and the capital is paid back to the waqf donor at the end of the period. Therefore, for s.uk¯uk issuers, they have two ways to reduce their cost of financing: 1. Applying a discount on the expected rate of return in case of achievement of the targeted impacts. 2. Issuing cash waqf s.uk¯uk based on a free loan. Identify the Charities to Serve When selecting cash waqf s.uk¯uk formula generating an income, the s.uk¯uk issuer shall identify the charities and NGOs to support. Indeed, the s.uk¯uk issuer can select beneficiaries achieving a different Sustainable Development Goal from the one targeted by the project underlying the s.uk¯uk issuance. As per the previous products and structures, the s.uk¯uk issuer should share a reporting about the Charities and NGOs activities and achievements in connection with the Sustainable Development Goal(s) targeted. Identify the Re-Allocation Mechanisms of the Funds Invested After the S.uk¯ uk Issuance Duration The re-allocation mechanisms of the funds invested after the termination of the s.uk¯uk issuance are related exclusively to the permanent cash waqf donations. For the temporary cash waqf donation, the income generated is paid to charities and the capital is paid back to the donor. Nevertheless, for permanent cash waqf donations, the capital is expected to be re-invested and re-allocated to similar projects. For this purpose, there are two options to achieve this objective:

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1. All the s.uk¯uk issuances including a permanent cash waqf s.uk¯uk issuance shall be endorsed by the waqf authority to ensure the reallocation of funds at the end of the investment period. As required previously, the waqf authority should have the necessary capabilities in terms of Sustainable Development and investment. 2. A second option is to attribute the decision of re-allocating the funds to an asset manager that has already the necessary Governance system to select the most appropriate financial instruments to invest the funds. Indeed, the asset manager can re-allocate the funds to another permanent cash waqf s.uk¯uk targeting or not the Sustainable Development Goals or can select another financial instrument (Mutual funds, investment accounts, any other instrument) if it is targeting the same Sustainable Development Goal.

Chapter Conclusion The Product can be adopted by an Islamic Bank while the underlying project can be its investment portfolio. The cash waqf s.uk¯uk can be permanent or temporary. It can also be based on a free loan if the financing is granted to a segment of people targeted by the Sustainable Development Goal selected. In the case of a permanent cash waqf s.uk¯uk, the Bank implements and executes the re-allocation mechanisms and ensures that the funds are re-allocated to similar financial instruments (targeting or not the same Sustainable Development Goal(s)) or different ones targeting the same Sustainable Development Goal. Moreover, for Islamic banks, this product structure is the upgrade of the cash waqf investment accounts meeting Sustainable Development Goals. Therefore, the Islamic Bank can start with the ecosystem of Investment accounts and upgrade it to cash waqf s.uk¯uk. In other fields and sectors, if the s.uk¯uk issuer is not able to implement appropriate re-allocation mechanisms, it is possible to issue exclusively free loans based cash waqf s.uk¯uk or/and temporary cash waqf s.uk¯uk. From another perspective, the s.uk¯uk issuer can have an arrangement with the selected charities and NGOs to re-invest the income generated or part of it in ordinary s.uk¯uk or in any other Shari’ah compliant instruments with a high return.

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Finally, the s.uk¯uk issuer shall contribute to the financial literacy efforts by promoting Sustainable Development Goals, the cash waqf practices and the s.uk¯uk structure.

CHAPTER 12

Cash Waqf Venture Capital Funds Meeting Sustainable Development Goals

This chapter aims at: • Presenting the principles underlying the cash waqf Venture Capital funds meeting Sustainable Development Goals • Addressing the prerequisites of the product, its advantages and applications • Presenting the implementation methodology of the financial scheme.

Chapter Introduction Disruptive solutions and innovations can contribute to the reduction of the social and environmental issues and achieve Sustainable Development Goals. Therefore, supporting social enterprises, sustainable businesses and startups can bring efficient and effective responses to a variety of problems. Nevertheless, the financial support to these newborn businesses and entities cannot be based on the debt formulas. It requires the setup of new investment vehicles that provide sustainable funding and technical support to ensure the growth of the business and its success. Indeed, Venture Capital funds buy shares in high potential businesses underestimated by the market, assist them to grow and have a sustainable business model, share the profits and then sell them at a higher rate. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_12

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Obviously, Venture Capital funds take more risks in terms of investments but achieve the highest rates of return in the financial systems. Moreover, venture capital funds help businesses to grow and to be listed in the stock markets. From this perspective, cash waqf formulas can be used in Venture Capital funds to provide appropriate financing to businesses and enterprises achieving Sustainable Development Goals. This micro-ecosystem consists of: • Identifying the projects that are meeting the Sustainable Development Goals that can be supported by the Venture Capital funds. • Selecting the charities or NGOs that are serving Sustainable Development Goals. As per the previous models, the cash waqf Venture Capital funds meeting Sustainable Development Goals offer the opportunity for investors to invest in impactful large projects and get the revenue generated, to support impactful large projects while donating the revenue to charities and get back the funds at the end of the project duration or support impactful project while donating both the revenue to charities and funds to be re-invested in similar projects. As per the previous instruments, the success of this model relies on the following elements: • Identifying projects that are meeting the Sustainable Development Goals and requirements. • Checking the availability of charities and NGOs that are serving the same Sustainable Development Goals. • Implementing an appropriate structure to re-invest the funds in similar financial instruments. • Introducing literacy programs that aim at raising awareness towards the Sustainable Development Goal targeted by the Venture Capital fund manager. Moreover, the programs shall target individuals as well as businesses and associations.

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The Financial Structure of the Product Venture Capital: Concepts and Types Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. In practice, there are three methods of venture capital financing that are equity, participating debentures and conditional loan. In this chapter, the focus will be on equity financing. However, Venture Capital funds can adopt the three methods provided that they are in line with Shari’ah principles. There are three principal types of venture capital: The early stage financing, the expansion financing and acquisition financing. The early stage financing consists of three sub-stages that are the seed financing (a small amount granted to an entrepreneur to be eligible for a startup loan), the startup financing (given to businesses in order to finish the development of their products and services) and the first-stage financing (granted to companies that require more funding to start their business after spending all of the seed capital and startup financing loans). The expansion financing is also composed of two sub-stages that are the second stage financing (investments provided to support the expansion of businesses) and bridge financing (provided as a short-term interest only financing). The acquisition or buyout is more commonly known as leveraged buyout financing. It consists of acquiring certain parts or an entire company. It helps a particular management group to obtain a particular product or another company. Venture Capital: Shari’ah Principles As this book is addressing exclusively Islamic financial instruments and products, Shari’ah compliant venture capital funds shall be in line with the following principles and guidelines: • The Venture Capital fund shall invest exclusively in businesses that are in line with Shari’ah. Indeed, the Shari’ah board should define

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the list of sectors and activities that are not compliant and can decide whether the fund can invest in businesses with a share of activities that is not compliant or not. If so, the venture capital fund manager shall ensure that the business would renounce to this share and would replace it with other Shari’ah compliant fields. • Moreover, the business manager/owner is not supposed from a Shari’ah perspective to guarantee the capital of the fund only if there is a breach, violation or negligence from his side. • The Venture Capital fund and the business manager/owner can agree upon profit sharing ratios that are different from the percentages of capital owned by each shareholder. Nevertheless, all the parties shall bear the loss according to their capital shares. The General Scheme of the Product The General Scheme of cash waqf Venture Capital funds meeting Sustainable Development Goals is as follows (Fig. 12.1). 1. The venture capital fund can issue two types of shares: The ordinary shares that investors can buy and get the profits and the cash waqf shares that donors can buy and renounce to the profits generated to social purposes. 2. The venture capital fund would invest in projects meeting Sustainable Development Goals while being in line with Shari’ah principles. The venture capital fund would invest the collected funds and re-invest the capital in particular projects. 3. The venture capital fund has two sources of profits: The dividends and the profit generated from the sale of its shares in a particular business. 4. The profits generated would be allocated to charities meeting Sustainable Development Goals for the cash waqf shares. These profits would be paid back to investors for the ordinary shares.

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Waqf donors or investors

1

Charities meeting SDGs

4

2 Venture capital fund

Projects meeting SDGs

3

Fig. 12.1 own)

Financial scheme of cash waqf venture capital funds (Source Author’s

The Prerequisites of the Product The product implementation requires the fulfillment of the following conditions: • The existence of projects that are targeting Sustainable Development Goals while being Shari’ah compliant. Otherwise, the venture capital fund shall at least make sure that it is providing financial support and assistance to Shari’ah compliant projects. • The existence of impact measurement and audit mechanisms to ensure the alignment of the venture capital fund and the businesses to Sustainable Development Goals in terms of requirements and targets. • The implementation of adequate reporting mechanisms to investors and other stakeholders.

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The Advantages of the Product In this sub-ecosystem, the cash waqf venture capital can contribute to the provision of permanent funds to support innovative businesses in the various stages of their life. Moreover, through this instrument, cash waqf would not be specialized exclusively in supporting existing projects and in investing in financial instruments. Indeed, cash waqf is also promoting innovation and participating in shaping the future and solutions for social issues. The holders of ordinary shares can convert them to cash waqf or renounce to part of their profits whenever they want. They may also choose whether they would like their profits to be paid to charities or re-invested. The Applications of the Product Example 1: Responsible Consumption and Production A venture capital can select new ideas, businesses and initiatives that promote new solutions for the sustainable management and efficient use of natural resources. Targets

Indicators

Practices

12.2 By 2030, achieve the sustainable management and efficient use of natural resources 12.A Support developing countries to strengthen their scientific and technological capacity to move towards more sustainable patterns of consumption and production

12.2.1 Material footprint, material footprint per capita and material footprint per GDP 12.2.2 Domestic material consumption, domestic material consumption per capita and domestic material consumption per GDP 12.a.1 Installed renewable energy-generating capacity in developing countries (in watts per capita)

In terms of investment • The funds raised can serve to support new innovative ideas to reduce consumption and efficient use of natural resources In terms of support mechanisms • In this case, the income generated can serve to support associations, research centers and other entities in their innovation initiatives. Moreover, the income generated can just be re-invested to have more impact

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It is true that a venture capital would not be able to find a broad investment universe if it is targeting a specific Sustainable Development Goal, especially in developing countries where the startup ecosystems are at their infancy stages. Therefore, for Venture Capital funds, all the startups and businesses that achieve an impact can be targeted and included in the investment universe.

The Implementation Methodology The implementation of cash waqf venture capital fund meeting Sustainable Development Goals requires five different steps (Fig. 12.2). Identify the Investment Universe in Line with Shari’ah and Sustainable Development Goals’ Requirements The capital venture fund manager shall identify its investment universe and strategy in terms of: • Geographic coverage: A first step towards Sustainable Development Goals is to include in its scope the developing countries. Indeed, in most targets and indicators, a priority is given to developing countries. Moreover, enlarging the geographic coverage would automatically provide more investment opportunities for the fund. • SDG exposure: A capital venture capital fund can focus on a single Sustainable Development Goal, but it seems not practical for two reasons: First, some ideas and businesses can target more than one Sustainable Development Goal, and second, it would tighten the investment universe in a way that there will be a lot of missing opportunities for the fund to achieve higher rates of return and impact. • Sectors: It is very important for the capital venture fund to diversify its risks by not investing in a single sector or in a single region. Define the Categories of Shares in the Venture Capital Fund In this product, there would be three categories of shares in the venture capital fund:

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1 Identify the investment universe in line with the Shari’ah and SDG

The capital venture fund manager identifies its investment universe (geographic coverage, SDG exposure, Sectors)

2 Define the categories of shares in the Venture capital fund

3 Identify the charities and other entities to support

There are different categories of shares in the venture capital fund such as the ordinary shares and the cash waqf shares (permanent and temporary)

The venture capital fund manager can identify the charities and other entities achieving or not the same Sustainable Development Goals targeted in the investment activity.

4 Define the re-investment mechanisms

5 Define the conversion mechanisms

The venture capital fund manager shall define the re-investment mechanisms to ensure the fund sustainability in line with Shari’ah principles

For investors wishing to convert their ordinary shares to cash waqf shares, the Capital venture fund manager shall define the conversion mechanisms in a smooth way.

Fig. 12.2 Implementation methodology of cash waqf Venture capital fund (Source Author’s own)

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1. Ordinary shares: These shares are oriented to regular investors interested in impactful investments while looking for profits. 2. Permanent cash waqf shares: These shares would be permanently serving the waqf purpose. Indeed, an average investment cycle in Capital venture funds is 10 years. Therefore, the permanent cash waqf shares will be allocated to projects for 10 years, and once the exit option in these projects is activated, the income would be paid to charities and other entities while that the capital needs to be reinvested automatically. 3. Temporary cash waqf shares: These shares would be temporarily serving the waqf purpose. Indeed, the funds can be invested for 5 years and be replaced by other categories of funds. This temporary cash waqf shares can be used for a one-shot transaction. Identify Charities and Other Entities to Support A waqf donor as well as an investor that will decide to renounce to part or all of their profits shall define the entities or charities that would benefit from their financial support. As per other products and structures, the charities and entities to be supported can contribute to the achievement of the same Sustainable Development Goals or not. The Venture Capital fund management can just inform the waqf donor or the investor of the list of entities to be supported or to let them pick an entity or more. Identify the Re-investment Mechanisms For permanent cash waqf shares, every time the exit option from a project is activated, the profit is paid to entities supported by the Venture Capital fund or picked up by the waqf donor himself while that the capital needs to be re-invested. In this case, the two options presented in the re-allocation mechanisms of the invested funds after the s.uk¯uk issuance termination are still valid. Indeed, the venture capital fund shall be endorsed by the waqf authority to ensure the smooth re-allocation of funds at the end of the investment period. Otherwise, it is possible to keep the funds within the venture capital to re-invest them in similar projects.

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Identify the Conversion Mechanisms In this product structure, there are three types of conversion mechanisms: 1. Converting temporary cash waqf shares to permanent cash waqf shares. This is the easiest conversion to make. Indeed, it consists of converting the waqf from being temporary to permanent. It means that the funds shall be re-invested on a continuous basis in the Capital venture fund. Moreover, the Venture Capital fund shall implement re-investment mechanisms as defined in the previous paragraph. 2. Converting ordinary shares to temporary/ permanent cash waqf shares. An investor can decide to convert his shares to temporary or permanent cash waqf shares. In this case, the investor shall sign a new legal documentation, identify the charities and other entities to support and define the re-investment mechanisms if the cash waqf is permanent. 3. Converting the cash waqf shares to be re-invested in other financial instruments. In some cases such as the liquidation of the Venture Capital fund, the cash waqf shares shall be re-allocated to other financial instruments such as cash waqf investment accounts, Mutual funds, social s.uk¯uk or any similar financial instruments. In this case, the fund shall reimburse the price of the cash waqf shares that would be re-invested in other financial instruments. In this case, the re-investment would be under the supervision of the waqf authority or the fund manager itself if he has the adequate governance system to do so.

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Chapter Conclusion Using cash waqf structures in Venture Capital funds while targeting Sustainable Development Goals is a way to: • Target higher profits while bearing higher risks. • Supporting new innovations, businesses and enterprises that are bringing real impact to society. • Diversifying financial instruments based on cash waqf to make any waqf-based investment portfolio easy to diversify and target higher profit rates to support charities and various entities. From another perspective, if the Venture Capital funds are based on cash waqf, it does not mean that in terms of profitability requirements, the managers would be more tolerant. Indeed, it is the opposite for two main reasons: • Charities are expecting the income generated to make more impact. • Waqf donors are targeting higher returns to expect higher rewards. Finally, this structure can face many challenges such as the absence or the smallness of the startup ecosystem, the absence of exit options such as a highly liquid stock market and the total absence of government support in terms of taxation and exemption for newly created startups. Moreover, in many countries, social businesses or enterprises do not have a special statute with incentives and a specific framework. Nevertheless, one of the expected added value of Venture Capital funds is to accompany small businesses, startups and social enterprises in defining their business model and achieve sustainable growth for their activities.

PART III

From Instruments to Ecosystems

In order to increase the impact of individual initiatives and financial schemes based on cash waqf, this part presents two concepts: • The national waqf ecosystem that puts together all the national initiatives based on social finance and targeting Sustainable Development Goals (Chapter 12). • The waqf offshore center that creates bridges between the national waqf ecosystems and waqf donors all around the globe (Chapter 13).

CHAPTER 13

The National Ecosystem of Cash Waqf Meeting Sustainable Development Goals

This chapter aims at: • Presenting the concept of national ecosystems of cash waqf meeting Sustainable Development Goals. • Identifying the main stakeholders and categories of initiatives involved in the ecosystem. • Presenting the implementation methodology of the national ecosystems of cash waqf meeting Sustainable Development Goals.

Chapter Introduction All the products and structures presented in the Chapters from 5 to 12 are ecosystems that encourage cash waqf practices and Sustainable Development Goals through different financial schemes and instruments. In this chapter, we will try to bridge all these ecosystems in one unique and global cash waqf financial system targeting Sustainable Development Goals. This national ecosystem consists of providing support and financing to all the innovative and impactful projects, businesses and initiatives regardless of their size. Moreover, it aims at balancing the for-profit and the nonprofit activities in a way that contributes effectively in achieving the Sustainable Development Goals. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6_13

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Furthermore, Islamic financial institutions are expected to contribute to the provision of appropriate funding and to set up adapted financial instruments and investment vehicles to all the stakeholders. From another perspective, the creation of this national ecosystem requires a coordinator that has the necessary capabilities and vision to involve all the different stakeholders, to educate the market and investors and to upgrade the various components whenever it is relevant. This national coordinator can be the waqf authority that initiates the ecosystem and its various sub-ecosystems. It provides assistance and expertise. In the absence of a national waqf authority, it could be a financial group that can create sub-ecosystems in each of its subsidiaries. Then, the financial group can bridge the various sub-ecosystems and hence, create its own cash waqf ecosystem. This chapter presents the main features of this national ecosystem and the recommended steps to plan and set up the sub-ecosystems and bridge them.

The Main Features of the National Cash waqf Ecosystem Meeting Sustainable Development Goals Feature 1: Gathering Different Profiles of Investors The national cash waqf ecosystem meeting Sustainable Development Goals and its various financial instruments and products provides a range of options to investors: 1. The investors can select one of the instruments of the national ecosystem and get a profit as per ordinary instruments. Indeed, as presented in the previous chapters, investors can chose not to make a waqf donation. Moreover, the underlying instruments are not supposed to meet the Sustainable Development Goals. The weight of such investors can be important at the beginning of the ecosystem implementation, but it has to decrease gradually throughout time to let more space for other categories of investors. Nevertheless, it is important to mention that this category of investors contributes to the effective construction of the ecosystems even if they are profit oriented. 2. The investors can select one of the instruments of the national ecosystem that are meeting the Sustainable Development Goals

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while getting a profit at the end of the investment. Indeed, this category of investors has the will to encourage and promote impactful projects while getting a profit. To increase the weight of this category of investors, many Sustainable Development Goals literacy campaigns shall be conducted. It is also important to stipulate that this category of investors contributes to the differentiation of the ecosystem instruments. 3. The investors can chose to invest their funds for a period of time and renounce to the profit for charities or any other social purpose. At the end of the period, the investors get back their funds. In this case, it is a temporary cash waqf. Moreover, these investors (cash waqf donors) can be selective in terms of financial instruments and charities (or any other type of entities working in the social field) targeting or not the Sustainable Development Goals. 4. The investors can chose to donate the funds to be invested permanently in financial instruments and the generated income would be paid to charities or any other social purpose on a regular basis. In this case, it is a permanent cash waqf. The investors (cash waqf donors) can be selective in terms of financial instruments and charities to support and the Sustainable Development Goals to target. For the ecosystem to be differentiated, to attract more investors and to achieve more impact, the weight of cash waqf donors has to grow until it represents an important share of the collected funds. Figure 13.1 summarizes the categories of investors involved in the national ecosystem: In terms of impact and contribution to the ecosystem constitution, the Fig 13.2 classifies the different categories of investors: Finally, there are two important aspects to keep in mind when talking about investors: 1. An investor can belong to a particular category or can belong to more than one category. For instance, an investor can invest 75% of his funds in financial instruments targeting Sustainable Development Goals while 25% of his funds are donated based on temporary cash waqf and 5% based on permanent cash waqf. Moreover, an

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Permanent cash waqf donors targeting Sustainable Development Goals

Temporary cash waqf donors targeting Sustainable Development Goals

Regular investors targeting Sustainable Development Goals

Permanent cash waqf donors not targeting Sustainable Development Goals

Temporary cash waqf donors not targeting Sustainable Development Goals

Regular investors not targeting Sustainable Development Goals

For profit Non profit

Fig. 13.1

Less impact

Matrix of investors in the national ecosystem (Source Author’s own)

More impact

Fig. 13.2 Classifying the different categories of investors based on their impact (Source Author’s own)

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investor can change its position throughout time starting with regular investment, and then, he can make cash waqf donations. 2. The investor can select a cash waqf financial instrument targeting or not Sustainable Development Goals. For instance, a cash waqf Mutual fund meeting Sustainable Development Goals can invest a share of its resources in investment accounts meeting Sustainable Development Goals (this investment is not supposed to be a cash waqf). The main challenge facing the initiators of these sub-ecosystems is to have a balance in terms of profiles of investors and move gradually to a dominant component of cash waqf-based investments/donations. Feature 2: Supporting Different Categories of Businesses, Projects and Initiatives The national cash waqf ecosystem meeting Sustainable Development Goals and its various financial instruments and products provides support to a wide range of businesses in different stages of their lifecycle. Indeed, there are five profiles of businesses and institutions: 1. Startups and new innovative projects Many suggested instruments provide financial assistance to startups and new innovative projects such as Venture Capital funds, Crowd funding platforms and Microfinance institutions. The main objectives of the national cash waqf ecosystem are to provide the necessary funding to new businesses bringing new innovative ideas that can contribute to the welfare of the society and contribute more effectively to the achievement of the Sustainable Development Goals. The entities supported by the ecosystem can be technology startups or social businesses providing new answers to social or environmental issues. The support can also include startups with high growth potential and therefore a high profit rate to target. In this case, the financial institution shall ensure that the activities of these startups are harmless to the society and the environment.

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2. Very small businesses Very small businesses may need to raise funding when expanding their activities or fill a treasury gap. Depending on their purposes, Microfinance institutions, crowd funding platforms, Venture Capital funds and banks can all provide the necessary financial support and assistance to these businesses. The ecosystem shall prioritize very small business fulfilling the following criteria: – Innovation: In this ecosystem, funding and assistance shall be allocated to very small businesses with new innovative ideas and business models. Indeed, the ecosystem shall prioritize innovation over profitability. – Potential growth: An additional criterion is the potential growth. Indeed, the ecosystem shall encourage innovative small businesses with high potential of growth. In the absence of businesses fulfilling these criteria, the ecosystem shall at least make sure that the very small businesses funded are harmless to society and the environment. 3. Small and medium-size businesses expanding their activities Small and medium-size businesses can be served through venture capital funds and banking products. Indeed, the funding provided can serve the small and medium-size businesses to expand their activities or to transform their business model to be in line with Sustainable Development Goals. Therefore, the priority is for businesses that are transforming their business models to be sustainable since it is the main purpose of the ecosystem. The small and medium-size businesses supported in previous phases of their lifecycle (startup phase, very small business) shall have the priority to obtain the necessary funding to expand their activities and move a step further to become a large company.

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4. Large companies launching their new activities Large companies generally raise funds through banking products and capital markets’ instruments such as s.uk¯uk. Indeed, the availability of funding committed to Sustainable Development Goals can serve as a sound argument to large companies and corporations to invest in activities achieving Sustainable Development Goals or to start at least their business model transformation journey. In this book, we did not talk about the stock market, but large companies involved in achieving the Sustainable Development Goals can see the demand on their stock grow as well as their price which can make the fund raising operations in the stock market easier to achieve. 5. Governments and public institutions Governments and public institutions take the lead on many projects and initiatives that can have a transformative impact on the whole economy. Indeed, governments and public institutions need to raise funds to support their programs and projects. In this context, s.uk¯uk seems to be the most appropriate vehicle to raise the necessary funding. Moreover, the Mutual funds can allocate a share of their assets to encourage the governmental initiative through the investment in sovereign s.uk¯uk. The ecosystem can implement a collaborative framework to assist growing businesses that were first supported by the ecosystem itself. For instance, a startup that was funded by the ecosystem has the priority to get funding to grow and achieve more impact and more profit. Indeed, this accompaniment in itself constitutes a real benefit provided by the ecosystem to the community and to the economy. Moreover, instruments such as Mutual funds, Takaful funds and Guarantee funds support indirectly businesses since they are investing in Microfinance institutions, Islamic banks and s.uk¯uk. Figure 13.3 summarizes the intervention of financial institutions and instruments to support businesses and entities throughout their lifecycle:

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Venture capital fund

Very Small businesses

Startups

Small and Medium businesses

Microfinance institution

Crowdfunding platform

Large businesses

Guarantees funds Islamic Banks

Ṣukūk

Fig. 13.3 Financial assistance and support throughout the lifecycle of businesses (Source Author’s own)

Feature 3: Supporting Charities and Social Purpose Entities Apart from investing in businesses contributing to the achievement of Sustainable Development Goals, the ecosystem provides three additional services: 1. Free loans to support businesses A cash waqf donor can decide to allocate his funds to be used as free loans without any expected return but the impact generated by the supported projects and initiatives. This practice was suggested in Chapter 9 of this book related to cash waqf crowd funding platforms meeting SDGs and in Chapter 7 addressing the Microfinance institutions. Indeed, the ecosystem uses the free loans as an instrument to support innovative projects and very small businesses with impactful models.

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2. Direct aids to support associations, NGOs, social businesses and governmental initiatives. Most of the instruments enumerated in this book would pay part or all of the income generated to support associations, NGOs, social businesses and governmental initiatives. As discussed in the different chapters, the priority is for entities that are achieving the same Sustainable Development Goals targeted by the investment activity. Otherwise, it is possible to provide financial aids to entities that are targeting different Sustainable Development Goals. 3. Income generated by investments is paid to the ecosystem financial instruments and institutions to support their activities. The income generated by investments can be paid to the ecosystem itself to support its activities and reinforce its social impact. For example, in Chapter 7, the cash waqf fund is comprised of donations from the Takaful fund and the income generated from the investments of the cash waqf fund is paid to the Micro-Takaful fund as an initial contribution or to the Takaful operator as a compensation for its management efforts. The same support mechanisms are used in Chapter 5 in the Guarantee fund to make its size grow in a sustainable manner. In some cases, as per the crowd funding platforms, the zakat collected can serve to safeguard the funds. Feature 4: Diversifying the Risk Profile of Instruments and Their Underlying Formulas. The cash waqf national ecosystem provides a variety of instruments that meet the expectations of investors and fundraisers. This variety takes into account the purposes of each sub-ecosystem and its beneficiaries. The ecosystem comprises two categories of financial instruments: – The fundraising instruments These are instruments that serve to collect cash waqf funds or investment funds that are SDG-oriented or simply profit-oriented investment funds in line with the investors’ profiles as presented in feature 1.

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Moreover, these fundraising instruments can be divided into three main categories. The first category includes the instruments that are directly invested in diversified investment portfolios (investment accounts, Venture Capital funds), indirectly invested in diversified investment portfolios (Mutual funds, Takaful funds) or directly invested in a particular project (s.uk¯uk). From another perspective, the ecosystem provides businesses with funding (with a markup or free loans) and guarantees. – The investment instruments In terms of investment instruments, there are three categories of formulas admitted in the cash waqf national ecosystem. The first category is debtbased financing instruments with a markup provided by Islamic banks and s.uk¯uk. The second category is free loan-based financing instruments provided by Microfinance institutions and crowd funding platforms. The third category is the profit sharing formula used by the Venture Capital funds and s.uk¯uk.

The Methodology to Set Up the National Cash waqf Ecosystem Meeting Sustainable Development Goals General Scheme of the National Cash waqf Ecosystem Meeting Sustainable Development Goals Before discussing the methodology to implement national cash waqf ecosystems meeting Sustainable Development Goals, it is important to have a global idea about how these ecosystems are expected to work. The following scheme presents the components of this ecosystem: • • • •

The The The The

investors and cash waqf donors. financial instruments and institutions. businesses. charities and beneficiaries to support.

In the ecosystem, there are three types of flows:

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• The fundraising flows: From the investors and cash waqf donors to financial instruments and institutions. • The investment flows: From financial instruments to other financial instruments or/and businesses to whom the funding is provided. • The charities flows: From financial instruments to associations, NGOs and various beneficiaries. The ecosystem as presented in this book and in the Fig. 13.4 is composed of eight sub-ecosystems based on Chapters from 5 to 12: • • • • • • • •

The The The The The The The The

investment accounts sub-ecosystem. Mutual funds sub-ecosystem. Guarantee funds sub-ecosystem. social s.uk¯uk sub-ecosystem. Microfinance sub-ecosystem. Takaful sub-ecosystem. Crowd funding sub-ecosystem. Venture Capital fund sub-ecosystem. Classification of the Sub-ecosystems

As presented in the Fig. 13.4, there are four categories of sub-ecosystems: First category: Sub-ecosystems raising funds, allocating them to businesses and sharing profits with social-oriented entities. These are the most complete sub-ecosystems that raise funds, allocate them to impactful businesses and share profits with charities and socialoriented entities. Examples of such sub-ecosystems are the cash waqf investment accounts as presented in Chapter 5, the cash waqf Capital venture funds as discussed in Chapter 12 and the cash waqf s.uk¯uk meeting Sustainable Development Goals as per Chapter 11. Second category: Sub-ecosystems raising funds, investing in other financial instruments and sharing profits with social-oriented entities. These are sub-ecosystems that raise funds and invest in other financial instruments—that are providing direct support to impactful businesses

Mutual funds sub-ecosystem Very Small businesses

Mutual funds

c a t e g o r i e s

Small and Medium businesses

i n

Takaful funds

e c o s y s t e m

Large businesses

t h e

Guarantees funds

i n v e s t o r s

Sukūk

o f

Venture capital funds

Crowdfunding platform

Fig. 13.4 Global cash waqf ecosystem achieving Sustainable Development Goals (Source Author’s own)

Microfinance sub-ecosystem

Venture capital sub-ecosystem

Crowdfunding sub-ecosystem

Takaful fund sub-ecosystem

Guarantee fund sub-ecosystem

Social sukūk sub-ecosystem

Microfinance

Startups

Investment accounts

Investment accounts subecosystem

Charities flows

Investment flows

Fundraising flows

Various beneficiaries

Associations & NGOs

A l l

Permanent Cash Waqf donors targeting Sustainable Development Goals

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and projects—and the profit is shared with charities and social-oriented entities. An example of this category of sub-ecosystems is the cash waqf Mutual funds (Chapter 10). These sub-ecosystems constitute additional channels to sub-ecosystems from category 1. For instance, Mutual funds can provide more funds to investment accounts. Third category: Sub-ecosystems raising funds, investing them in financial instruments, allocating the income to support businesses and specific beneficiaries. These are sub-ecosystems that raise funds, invest them in financial instruments and re-allocate the profit and the income to support businesses or specific beneficiaries. Examples of this category of sub-ecosystems are Guarantee funds and Takaful funds. As per category 2, these sub-ecosystems constitute additional channels to sub-ecosystems from category 1. For instance, a Guarantee fund invests all the cash waqf funds collected in financial instruments to provide liquid guarantees to businesses in order to raise the necessary funds for their growth. Moreover, the Takaful operator creates a cash waqf investment fund that generates an income to support a particular Micro-Takaful fund. Fourth category: Sub-ecosystems raising funds and investing in businesses and social projects. These sub-ecosystems raise funds and invest them directly in impactful businesses and social projects. Generally, the main purpose of these subecosystems is to provide a zero or at least a very low cost funding. These sub-ecosystems are meant to assist startups and very small businesses with innovative and impactful ideas. Examples of these sub-ecosystems are cash waqf-based crowd funding platforms meeting SDGs as discussed in Chapter 9 and the cash waqf Microfinance instruments as in Chapter 7. Indeed, Table 13.1 summarizes the four categories of sub-ecosystems and the underlying parameters:

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Table 13.1 Categories of sub-ecosystems and classification parameters

Category 1: sub-ecosystems raising funds, allocating them to businesses and sharing profits with social oriented entities. Category 2: sub-ecosystems raising funds, investing in other financial instruments and sharing profits with social oriented entities.

Category 3: sub-ecosystems raising funds, investing them in financial instruments, allocating the income to support businesses and specific beneficiaries

Category 4: sub-ecosystems raising funds and investing in businesses and social projects.

Raising funds

Direct Investment in Businesses

√

√

Investment in impactful financial instruments

Support to businesses

√

√

√

√

√

√

Support to social oriented entities

√

√

√

Source Author’s own

Priorities in Terms of Sub-ecosystems Implementation In building the cash waqf national ecosystem, three priorities have to be considered: Priority 1: Starting with the necessary infrastructure to ensure the effective implementation of the national ecosystem. This infrastructure includes the national coordinator such as the national authority of waqf or any other stakeholder that can play a similar role. Moreover, the ecosystem including its various components can target the same Sustainable Development Goals or allow each ecosystem to target its own Sustainable Development Goals. It is understood that if the whole ecosystem including each component targets the same Sustainable Development Goals, it will see its impact grow steadily.

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Priority 2: Starting with independent sub-ecosystems. Indeed, an independent sub-ecosystem is the one that does not require the implementation of any other sub-ecosystem. Moreover, depending on the availability of instruments, it is possible to start with—quick win—sub-ecosystems that are available and can be implemented easily. For instance, a cash waqf Mutual fund meeting SDG requirements (category 2) cannot be implemented in the absence of investment accounts and social s.uk¯uk (category 1). Therefore, the cash waqf Mutual fund constitutes a dependent sub-ecosystem while the investment accounts meeting SDG requirements is an independent sub-ecosystem. Priority 3: Implementing a national cash waqf ecosystem is not limited to the sub-ecosystems. Indeed, literacy campaigns shall be conducted to raise awareness towards these instruments. Steps to Implement a National Cash Waqf Ecosystem Before presenting the steps for the implementation of a national cash waqf ecosystem, it is important to define the necessary assumptions: Assumption 1: The national authority is the sponsor of this project. Otherwise, a financial group can back this initiative. Assumption 2: All the financial instruments are available in this market and the financial authorities are backing this initiative too. Assumption 3: There are social businesses and sustainable businesses in the market. Figure 13.5 presents the five steps necessary to implement the national cash waqf ecosystem: Step 1: Define a road map for the ecosystem implementation. Prior to drafting a road map for the ecosystem implementation, it is important to conduct a feasibility study to identify the available financial instruments, the Sustainable Development Goals to serve, the charities and entities to support. Based on the conclusions of the feasibility study, the road map defines the milestones of implementing the national ecosystem (sub-ecosystems, players, Sustainable Development Goals, key performance indicators, etc.)

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Step 1: define a road map for the ecosystem implementation

Step 2: Start implementing pilot sub-ecosystems from categories 1 and 4

Step 3: Start implementing pilot sub-ecosystems from categories 2 and 3

Step 4: Multiplying the players and the sub-ecosystem in each category

Step 5: Upgrading the whole ecosystem Fig. 13.5 The Five steps methodology to implement a national cash waqf ecosystem (Source Author’s own)

Step 2: Start implementing pilot sub-ecosystems from categories 1 and 4. The ecosystem should start with quick wins to move from concept notes to reality. The sub-ecosystems from categories 1 and 4 are easy to implement and do not require the existence of financial instruments or any prior sub-ecosystem. In this context, the implementation of sub-ecosystems belonging to these categories should be prioritized in pilot projects. The ecosystem coordinator shall ensure that for each type of the feasible sub-ecosystem, at least one pilot is implemented. Step 3: Start implementing pilot sub-ecosystems from categories 2 and 3. Once the pilot sub-ecosystems from categories 1 and 4 are implemented in a satisfying manner, the coordinator shall start implementing pilot projects related to sub-ecosystems from categories 2 and 3.

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As per step 3, at least one pilot project in each feasible sub-ecosystem shall be implemented in this step. Step 4: Multiply the players and the sub-ecosystems in each category. To have a more important impact, in each sub-ecosystem, there should be new players. For instance, the ecosystem coordinator shall test the cash waqf investment accounts meeting Sustainable Development Goals with one Islamic Bank and then duplicate it as many times as possible with other Islamic banks. Moreover, the ecosystem coordinator shall encourage social s.uk¯uk issuances with a cash waqf component and Sustainable Development Goals as targets. Step 5: Upgrade the whole ecosystem. The list of products and financial structures presented in this book is not comprehensive. Indeed, the ecosystem components can create new instruments that belong to the four previous categories or create new categories that are based on waqf and targeting Sustainable Development Goals.

Chapter Conclusion ‘Working together for a better impact’ is the golden rule underlying all the products and instruments presented in this book. Indeed, the main idea consists of creating small ecosystems—what we called subecosystems—that achieve real impact. This chapter brought an additional layer by creating a national ecosystem gathering and bridging all the subecosystems to create more impact and contribute to the achievement of Sustainable Development Goals in a more effective manner. Sub-ecosystems can be private initiatives of financial groups and their partners. Nevertheless, for a national ecosystem to be effective, the involvement of the national authority of waqf is more than important. Obviously, in the absence of national initiatives, private financial and banking groups can take the lead and implement an ecosystem with its different components. Other competitors would follow this path. If national ecosystems seem to be—at least from the theoretical perspective—an interesting suggestion to bring more impact, bridging the different national ecosystems could be more interesting to create a global cash waqf ecosystem.

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This global cash waqf ecosystem has two principal components. First, the national ecosystems as described in the current chapter including the different sub-ecosystems (from chapter 5 to 12). Second, special offshore waqf centers that are connecting these national ecosystems with international investors and cash donors as well as with other national ecosystems.

CHAPTER 14

Waqf Offshore Centers and Cross-Border Waqf Operations

This chapter aims at: • Presenting the concept of waqf offshore centers and cross-border waqf operations. • Identifying the main stakeholders and categories of initiatives involved in waqf offshore centers. • Presenting the implementation methodology of the waqf offshore centers.

Chapter Introduction Implementing national waqf ecosystems is a huge step to revive the practice of waqf in the Moslem societies. One-step further would be connecting these national waqf ecosystems and giving the opportunity to people wishing to make an endowment to have access to the most impactful ecosystems and financial instruments. This chapter addresses the idea of waqf offshore centers to encourage cross-border waqf operations. Such initiative can be duplicated in different locations and hubs in the Islamic world (Malaysia, Qatar, Dubai, Istanbul, Casablanca and Astana.)

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Waqf offshore centers would play the role of strengthening the relationships between Moslem communities, encourage impactful investments in different places of the Islamic world and provide the necessary funding to regions in difficulty. This chapter presents in detail the components of the waqf offshore centers, the policies and incentives as well as the methodology of implementing a waqf offshore center in a way that connects national cash waqf ecosystems with international donors and investors and with investment opportunities that could reinforce the attractiveness of its institutions and financial instruments. Moreover, a waqf offshore center can be implemented without the need of a comprehensive national cash waqf ecosystem and to be focused on cash waqf practices. In this case, the waqf offshore centers would be focused exclusively on cross-border operations. It is worth noting that such concept has been already deployed in an offshore financial center (Labuan in Malaysia) but using a different approach and adopting different rules.

Waqf Operations in an Offshore Center Definition of an Offshore Financial Center To define the concept of ‘offshore financial centers,’ most of the authors and experts shed light on three main aspects: • Offshore financial centers provide services to non-residents. For instance, offshore banks would take deposits from non-residents and would provide financing to non-residents. Offshore financial services include fund management, insurance, trust business, asset protection, corporate planning and tax planning (Dufey et al., 1978). • Offshore financial centers have special regulations in terms of taxation and controls. Indeed, they are generally free of taxes and exchange controls that are imposed on domestic financial markets. (Park, 1994) • Offshore financial centers can be separated from major regulating units (states) by geography or legislation or both. (Hampton, 1996)

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These three main features of offshore financial centers constitute sound arguments for politicians and international organizations against these centers. Indeed, they are seen as a way to facilitate criminal activities such as money laundering, tax evasion and tax avoidance (Dwyer, 2002). Based on the IMF 2000 report on offshore financial centers, there are eight centers in the Islamic world: • • • • • • • •

Bahrain Malaysia Qatar United Arab Emirates (UAE) Kingdom of Saudi Arabia (KSA) Brunei Lebanon Maldives

These offshore financial centers can create a network of waqf centers to connect different national cash waqf ecosystems or at least potential international waqf donors to national cash waqf ecosystems. Waqf Operations vs. Offshore Financial Centers Offshore financial centers are deemed harmful to the formal economies due to the criminal activities that they facilitate such as laundering drug money, tax evasion and tax avoidance by residents of high-tax welfare states. Dwyer (2002) mentioned that if this idea is correct when it comes to criminal activities that must be fought, it is not when it comes to taxes. Indeed, this notion of ‘Harmful tax competition’ has no foundation in the economic theory. Indeed, competition in tax is beneficial for everybody and enhances the world welfare. In most Islamic countries, waqf operations are tax-free. Therefore, incorporating them in offshore financial centers would be harmless to onshore economies. In fact, it would create more opportunities for waqf donors to achieve real impact on other Moslem societies or at least invest in financial instruments with higher returns. At first sight, it could seem harmful to other Islamic countries that will see their waqf donors preferring waqf offshore centers instead of local operations. Nevertheless, these waqf offshore centers would provide the

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opportunities to waqf donors to select financial instruments with higher returns and allocate the returns to charities or social-oriented projects in their homeland. Moreover, these centers can allocate waqf funds to invest in highly impactful projects in countries where funding is not available or sufficient. Indeed, a waqf donor can prefer to invest in waqf offshore centers for many reasons and with different intentions. The different profiles of waqf investors can be summarized as follows: • Profile 1—Opportunist waqf donors: These are waqf donors that would like to select financial instruments with higher profit rates to be paid to charities in their homeland. • Profile 2—Global Impact seekers: These are waqf donors that would like to provide their financial support to highly impactful projects and businesses while paying the revenue to charities achieving high impact at a global scale that would include or not the homeland. • Profile 3—Pure supportive waqf donors: These waqf donors would like to support other nations and countries in terms of investment and charities. Their priority is to contribute to the development of other countries. • Profile 4—Hybrid waqf donors: These waqf donors would like to invest in financial instruments with higher profit rates and allocate the revenue to global charities or to developing countries. Finally, waqf offshore centers would connect national cash waqf ecosystems and would multiply their global impact. Indeed, they will respond effectively to the needs of different profiles and categories of waqf donors.

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Labuan International Waqf Foundation The waqf offshore operations do not constitute a new practice or paradigm. Indeed, the Labuan International Financial and Business Center has already introduced the concept of waqf in the form of a foundation in line with the Labuan Foundations Act 2010. The Labuan International Waqf Foundation is an Islamic private foundation that holds and manages properties for identified beneficiaries in line with Shari’ah principles governing the waqf operations. The Labuan International Waqf Foundation (LIWF) guarantees that the waqf property cannot be sold, mortgaged, given away as a gift or inherited. Indeed, only the income or usufruct can be distributed to the beneficiaries. The LIWF honors the conditions of the waqf donor in accordance with the Shari’ah principles of waqf. The benefits are distributed regularly to beneficiaries as long as they exist. Otherwise, they shall be distributed to charitable purposes as agreed by the Shari’ah adviser of the waqf foundation. The LIWF is a legal entity established based on legal guidelines of the Labuan Financial Services Authority (Labuan FSA). These guidelines are endorsed by Labuan FSA Shari’ah Supervisory Council. In Labuan, both non-Malaysians and non-Muslims are allowed to set up a Labuan International Waqf Foundation as long as it is in line with Shari’ah principles. There are two categories of LIWF: Private ones where the founder (waqf donor) endows assets into the waqf foundation and the generated income is allocated as per his/her conditions and there are public ones that solicit donations from the public and the endowment of assets can be done either by the founder or by the public. Figure 14.1 presents briefly the structure of the LIWF. The Labuan International Financial Center experience is very innovative. It set up a legal framework for waqf operations and defined the Shari’ah governance system that ensures its compliance to the spirit of Islam. Based on this experience, this chapter suggests two minor adjustments:

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Fig. 14.1 Structure of the LIWF (Source The Labuan International Financial Center website1 )

– Promoting cash waqf and making it a priority. – Encouraging offshore financial institutions to launch their own financial instruments or to deal with cash waqf national ecosystems in different jurisdictions. The next section will describe the main features of the waqf offshore centers as imagined in this book. Waqf Offshore Center Main Features Waqf offshore centers, as suggested in this book, have the following features: • Waqf offshore centers are initiatives led by offshore financial centers with a clear vision and a sound positioning Waqf offshore centers are not independent financial centers, but they are initiatives led by offshore financial centers with a particular regulation including the Shari’ah principles and governance requirements.

1 WAQF_FINAL [https://labuanibfc.com].

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The waqf offshore initiative relies on the resources of the offshore financial center in terms of financial institutions, regulators, connections and collaboration frameworks with other financial centers. When talking about an initiative, it is necessary to define the underlying vision and the key performance indicators to measure the achievements and assess its relevance and impact. Therefore, before launching such initiative, the offshore financial center authority shall define the expected outputs and outcomes and the road map for its implementation. For instance, the waqf offshore center can launch global initiatives with predefined objectives and targets such as contributing to the education improvement in Africa, reducing the number of malaria-related death in the world and achieving gender equality. Moreover, the waqf offshore center needs to have key performance indicators in terms of impact investment such as the number of financial instruments that are issued and the Sustainable Development Goal projects funded through the cash waqf. Other than that, the waqf offshore center can be assessed based on the number of NGOs implemented, the number and size of the financial institutions involved in the center and the number of global donors. • Waqf offshore centers require a legal framework and a Shari’ah governance system As per the Labuan experience, waqf offshore centers require a legal framework that defines the legal status of each stakeholder and the requirements to be recognized as a waqf offshore institution or entity. Moreover, in these waqf offshore centers, Shari’ah principles are prevailing. Generally, offshore centers are dealing exclusively with non-residents. Nevertheless, residents can deal with waqf offshore centers in their residence country unless such contribution is deemed tricky to get rid of taxes or any other controls. In such case, the legal framework shall eliminate all the waqf operations that would seem to be fraudulent or vicious. Finally, a legal framework and a Shari’ah governance system would reinforce the credibility of the waqf offshore center and attract more waqf donors, more projects targeting Sustainable Development Goals and more philanthropic organizations.

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• Waqf offshore centers require specialized institutions to promote and run the waqf operations The Labuan experience in terms of offshore waqf consists of creating a legal form for waqf operations (LIWF including the public and the private forms) while being under the supervision of the Shari’ah Board of the Labuan International Financial Center. From this book perspective, a waqf offshore center requires the following institutions and entities to achieve its vision: – The waqf offshore center authority or department undertakes the regulation and the Shari’ah supervisory of the waqf operations and institutions. It also undertakes the definition of strategic orientations and positioning at a global scale such as partnerships with other offshore financial centers and jurisdictions to ensure tax-free transactions. – The cash waqf asset managers: These special entities working under the supervision of the waqf offshore authority or department deal with waqf donors, draft a global investment roadmap, collaborate with financial institutions offering cash waqf investment and support global charities organizations depending on the intentions and needs of waqf donors. – The global investment roadmap gathers all the national cash waqf ecosystems with whom the offshore waqf center has partnerships and agreements. – The global philanthropic entities are global NGOs contributing to the achievement of specific Sustainable Development Goals. Their presence in the waqf offshore center would reinforce their role and their proximity to the waqf donors’ orientations. Moreover, these entities can collect funds and invest them in the waqf offshore center. – The consulting and auditing firms and research centers are necessary to guide asset managers, global philanthropic entities and the waqf center authority in upgrading the global business model and enhancing their innovativeness. Moreover, auditing firms would ensure the compliance of the financial instruments to the standards and waqf donors’ expectations.

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• Waqf offshore centers are regional or global hubs A waqf offshore center can be either: – A regional hub that is connecting national cash waqf ecosystems with each other in a specific region or connecting global waqf donors and regional waqf donors with the national cash waqf ecosystems of the region. – A global hub that is connecting national cash waqf ecosystems from other regions directly or in partnership with other global or regional hubs. • Waqf offshore centers and the development dilemma The major dilemma that all the developers and investors are facing is the rhythm of investments. Indeed, do we have to execute the entire investment project from the beginning in order to unlock the potential and achieve all the goals and targets? Or shall we do it gradually and increase our investments according to the growing potential? Likewise, to develop the waqf offshore center, the same questions arise. Indeed, does it require the implementation of all the components or is it possible to do it gradually? As per national cash waqf ecosystems, the waqf offshore centers are based on ecosystems and not components. Indeed, if a waqf offshore center develops the impact investment activity without implementing the charities’ component, the center would not be impactful nor attractive. Therefore, the necessary infrastructure needs to be entirely implemented and the first ecosystems shall be already in place before the official launch of the waqf offshore center. Then, the development would focus on creating new ecosystems and integrate them with the existing ones.

The Methodology to Implement a Waqf Offshore Center The implementation requirements of a waqf offshore center may differ from a market to another. Nevertheless, a waqf offshore center shall have the appropriate infrastructure in terms of regulations and incentives, the

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connections with other hubs and jurisdictions and the necessary knowledge and expertise to accompany all the stakeholders in achieving their goals. Indeed, each waqf offshore center may constitute its differentiation elements based on the three main prerequisites (infrastructure, connections and expertize). This section will also discuss the differentiation strategies of waqf offshore centers. The implementation methodology suggested in this book is composed of five steps summarized in the Fig. 14.2.

Fig. 14.2 own)

1

Creating a waqf Offshore authority in the offshore financial center

2

Endorsing the appropriate regulations and Shari’ah governance system

3

Connecting with national cash waqf ecosystems when relevant

4

Signing partnership with other jurisdictions and financial offshore centers to generate more deals

5

Drafting a global investment and waqf donation map

Methodology to implement a waqf offshore center (Source Author’s

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Creating a Waqf Offshore Authority or Department in the Offshore Financial Center As presented in this book, the waqf offshore center may be a part of an offshore financial center and rely on its resources, connections and institutions. Nevertheless, a government can decide to create an offshore financial center dedicated to cross-border waqf operations. In both cases, the waqf offshore center needs to be under the supervision of an authority or a department in the offshore financial center authority. The aim of this requirement is to provide the waqf offshore center with its own strategic vision. From this perspective, the waqf offshore authority or department has to answer the following questions (not a comprehensive list of questions): – Is the waqf offshore center a regional hub or a global hub? – If it is a regional hub, does it have any connections with jurisdictions and financial institutions from the region? – If it is a regional hub, does it have an investment map and sustainable development gaps in the region? – If it is a regional hub, does it have any connections with other regional hubs? – What are the Sustainable Development Goals that the waqf offshore center is targeting? – What are the profiles of financial institutions targeted by the center? – What are the global philanthropic organizations to host? The answers must take into account the current competitive advantage (if there is any) or at least the strengths that can contribute to the achievement of the strategic vision of the waqf offshore center. Example: An offshore financial center (XYZ) decided to create a waqf offshore center according to the following vision: – Serving as a platform for the region to raise funds and invest in agricultural projects and clean energy projects through impact-oriented financial instruments.

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– Allocating the income generated from these investments to the health sector in the region. From this perspective, the waqf offshore center is interested in: – Hosting venture capital funds investing or willing to invest in agriculture and clean energy projects in the region. – Hosting NGOs working in the region. – Drafting an investment and charities map in the region. – Providing aids to governments to conduct the necessary reforms to promote waqf as well as agriculture and the clean energy. – Hosting specialized consulting firms to assist governments in the region to constitute ecosystems. – Having global connections to attract more waqf donations to serve the region and the vision of the waqf offshore center. Endorsing the Appropriate Regulations and Shar¯ıah Governance System The waqf offshore center needs to draft specific regulations to implement effectively the strategic vision as set by the authority. When it comes to waqf, the authority needs to include the Shari’ah governance dimension. The necessary regulations for a waqf offshore center are as follows: – Licensing process and requirements for waqf asset managers and financial institutions These are guidelines related to the process of licensing asset managers who would like to be part of the waqf offshore center. The waqf asset managers (WAM) are providing donors with the necessary assistance to define their objectives and to achieve them. For instance, the waqf asset managers are meant to be vehicles that raise waqf funds and allocate them to investments that satisfy the donor’s expectations. Then, the generated income is paid to charities in line with the donor’s wishes. The guidelines define the requirements in terms of expertise, connections and resources to allocate to the project and the activity development perspectives.

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– Adherence process for consulting and auditing firms These are guidelines related to the process of adherence of consulting firms that would help financial institutions and philanthropic organizations in implementing new innovative solutions and review their strategic orientations. Moreover, auditing firms are expected to ensure the fullcompliance of financial institutions and instruments to the operational and Shari’ah requirements. Before granting the waqf offshore center stamp to any consulting or auditing firm, the authority must ensure that the requirements in terms of expertize and professionalism are fulfilled. Moreover, the authority must check whether there is any conflict of interests between auditing firms and the financial institutions to guarantee their objectivity and neutrality. – Hosting conditions for global philanthropic organizations This is the policy related to hosting global philanthropic organizations and associations. It defines the conditions and the requirements in terms of governance, professionalism and capacity to conduct social and environmental projects in the region or globally. The authority must ensure whether these philanthropic organizations are in line with the objectives of the waqf offshore center or not. Moreover, the authority is supposed to attract the major players in this sector and shall create a social impact index to classify all these organizations. For the philanthropic organizations, being part of the waqf offshore center would provide them with a higher visibility and hence, with the possibility to raise more funds and join more sustainable ecosystems to improve their impact. – Waqf donations tax policy and anti-money laundering processes The waqf offshore center needs to have a specific regulation related to the cross-border waqf operations in terms of taxation. Moreover, the regulation must define the rules related to operations between the waqf offshore center and the national cash waqf ecosystems. From another perspective, the waqf offshore center authority must draft the anti-money laundering regulation. Nevertheless, the waqf perspective is different from the financial system one. For instance, if a

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waqf donor gives away his funds to a family waqf so that his family gets the revenue of his investments, this may be considered as a trick leading to money laundering. In this case, the anti-money laundering controls must be rigorous. At the opposite, if the waqf donor gives away his funds to a global waqf, then, since the revenue is paid to charities, it cannot be considered as a money laundering situation or tax evasion (the screening of charities is conducted correctly). Indeed, the waqf offshore center may take into account the specificities of waqf in the current regulation in order to safeguard the reputation of the waqf. – Shari’ah governance system and requirements The rules governing waqf are all based on the Islamic law, Shari’ah. Therefore, all the investments shall be in line with Shari’ah principles as well as the philanthropic organizations. Moreover, the waqf offshore center authority must define the requirements in terms of governance to ensure the full-compliance of operations to the Shari’ah principles issued by the central Shari’ah board of the financial center. In addition to this, the authority shall also define the governance requirements in terms of sustainability development goals. Obviously, each institution or organization needs to have an internal governance system that oversees all the activities and ensure the full-compliance to the strategic orientations and the Sustainable Development Goals. Connecting with the National Cash Waqf Ecosystem Once the waqf offshore center authority sets the necessary infrastructure and the first players are implemented, the first cash waqf cross-border operations need to be concluded. In this context, a quick win would be connecting with the national cash waqf ecosystem institutions and players to recruit international cash waqf donors. The national philanthropic organizations can have a subsidiary in the waqf offshore center to have more visibility and raise more funding through the waqf formula or any other formula.

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From this perspective, the first institutions to join the waqf offshore center would be local financial institutions and players involved in the waqf sector and in the Sustainable Development Goals—part of the national cash waqf ecosystem. Indeed, the first achievement would be globalizing the national cash waqf ecosystem. In the second stage, these local financial institutions and players (including consulting firms, philanthropic organizations and other players) can export their expertize to other jurisdictions. For instance, financial institutions can develop investment instruments at a global or a regional scale. The philanthropic organizations can extend their services to other segments and geographic locations. The consulting firms can also accompany other countries and financial institutions to duplicate the national experience. Indeed, the waqf offshore center authority has the duty to attract local and international players from different horizons, to achieve real impact and make the ecosystem grow gradually through international partnerships as presented in the following sections. Finally, the waqf offshore center authority has to accompany the local players to have subsidiaries in other financial centers (offshore hubs or waqf offshore centers) to ensure the growth of the industry throughout the world.

Signing Partnerships with Other Jurisdictions and Financial Offshore Centers to Generate More Deals The main objective of creating a waqf offshore center is to connect different systems and entities with each other. Therefore, the waqf offshore center authority shall sign agreements and memorandums of understanding with financial centers and governments to ensure the smooth flow of funds. – Signing agreements with governments The waqf offshore center authority shall sign agreements with governments to guarantee the tax-free treatment of the various operations and lighter controls (but effective) to encourage the smooth flow of funds. Such agreements would be beneficial for both parts:

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For governments: • If the country has already a strong waqf ecosystem, connecting it with a waqf offshore center would drain more donations and cash flows and would reinforce the credibility of the ecosystem. • If the country does not have a mature waqf ecosystem, the waqf offshore center can raise donations, invest them in financial instruments with higher returns in other markets and allocate the revenues to the country to support charities and social initiatives. • If the country is having leading initiatives and projects in terms of Sustainable Development Goals, the waqf offshore center can raise funds to these projects and allocate the profits to charities in this country or in any other region. For the waqf offshore center: • The agreements would exonerate the cash waqf incoming and outcoming financial flows from any taxes. They would also make controls lighter and faster while being effective. • The risk of non-transfer would be mitigated with the support of the government. • The agreements would encourage financial institutions to develop adequate investment instruments to attract cash waqf funds, which would improve the attractiveness of the center. Indeed, it will provide more investment opportunities. – Signing agreements with other waqf offshore centers The waqf offshore center authority shall sign agreements with other waqf offshore centers for the following reasons: • Sharing the knowledge with each other in a way that contributes to the development of additional investment vehicles, increasing the impact and achieving more effectively the Sustainable Development Goals. • Creating bridges between financial institutions and players in both centers in order to create more opportunities while having similar

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regimes. Indeed, such agreements constitute a way to strengthen the practices and ensure the credibility of both centers. • Launching global and common initiatives to achieve Sustainable Development Goals. With such agreements, regional hubs can grow and become global increasing hence their impact and their performance. – Signing agreements with other financial offshore centers The waqf offshore center can rely on the financial offshore center where it is located to get the right connections with other global and regional financial offshore centers. The collaboration between a waqf offshore center and a financial offshore center can take many forms: • Connecting offshore customers with cash waqf opportunities or projects targeting Sustainable Development Goals with an acceptable return. • Connecting cash waqf funds with adequate investment opportunities in the financial offshore center. • Assisting the financial offshore center to set a waqf offshore center.

Drafting a Global Investment and Waqf Donation Map The waqf offshore center is meant to connect waqf donors with national cash waqf ecosystems all over the world. Indeed, the more connections a waqf offshore center has, the more opportunities it provides. The waqf offshore center authority needs to draft a global investment map to identify all the financial instruments based on cash waqf and achieve Sustainable Development Goals that can be offered through the center. For instance, a cash waqf-based s.uk¯uk issuance targeting Sustainable Development Goals in Turkey can be listed in the global investment map of the waqf offshore center in Dubai and vice versa. Indeed, all the connections and partnerships initiated by the waqf offshore center authority and the collaboration agreements concluded by

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the waqf asset managers can enrich the global investment map of the center. The global investment map provides the investors with the following information: – The nature of the financial instrument (s.uk¯uk, investment account, Mutual funds, Venture Capital fund, etc.). – The issuance includes cash waqf-based instruments, investment instruments targeting Sustainable Development Goals, both or neither. – The financial institution backing the financial instruments. – The targeted rate of return. – The conversion from an investment instrument to a cash waqf-based instrument. – The underlying projects achieving Sustainable Development Goals (number of projects, size of funding). – The SDG contribution of the financial instrument. – The rates of return during previous years if available. – The amounts paid to charities if available. – The geographical coverage of the financial instrument in terms of investment. – The geographical coverage of the financial instrument in terms of financial support to charities and social purposes. From another perspective, the cash waqf-based financial instruments are supposed to provide financial assistance to charities and philanthropic organizations. Therefore, the waqf offshore center authority has to list all the charities, social purposes and the Sustainable Development Goals supported by the various philanthropic organizations. The global waqf donations map provides the waqf donors with the following information: – The philanthropic organization, its location and its geographical coverage. – The social and environmental initiatives conducted by the organization. – The Sustainable Development Goals targeted by these initiatives.

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– The funds raised through the waqf offshore center and through other sources of funding. – The number of beneficiaries and the outcomes of such initiatives. These maps provide cash waqf donors with more visibility about the waqf offshore center achievements and attractiveness. Therefore, the center authority has to pay a particular attention to enrich these maps and attract more players to bring real impact.

Chapter Conclusion A waqf offshore center is just an extension of national cash waqf ecosystems. It is linking local investment projects, financial instruments and philanthropic organizations with international waqf donors and vice versa, and it is connecting local waqf donors to global initiatives based on cash waqf and achieving Sustainable Development Goals. A waqf offshore center is generally part of a financial offshore center and under the supervision of the authority (or a specific department). It requires a comprehensive regulation to ensure the compliance of all the transactions to Shari’ah principles but also to eliminate all the tax avoidance and money laundering practices. A waqf offshore center aims at attracting financial institutions providing financial instruments with high returns and impacts, philanthropic organizations launching global, regional or even local initiatives to tackle specific social or environmental issues and all the supportive entities such as consulting and auditing firms. Therefore, the key performance indicators of any waqf offshore center would be the number of cross boarder waqf operations, the number of ecosystems implemented and the impact generated from all the center initiatives at a global scale. From another perspective, the waqf offshore centers shall contribute to the dissemination of the waqf culture and the related knowledge and experiences. They shall also contribute to building national cash waqf ecosystems in different jurisdictions by providing the necessary assistance to draft legal and regulatory frameworks and by connecting all the local initiatives with international opportunities in the waqf sphere. Finally, the waqf offshore centers are impact-oriented hubs but can revitalize the economic activity in different locations by providing the necessary funding to innovative projects and businesses while sharing part

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or all of the benefits with philanthropic organizations that would improve the quality of life and the purchasing power of people as well as their ability to reach economic opportunities.

References Dufey, G. (1978), Giddy I., “The international money market”, Prentice-Hall: New Jersey. Dwyer, T. (2002), “‘Harmful’ tax competition and the future of offshore financial centres”, Journal of Money Laundering Control, Vol. 5 No. 4, pp. 302–317. https://doi.org/10.1108/eb027311. Hampton, M. (1996), “The offshore interface, tax havens in the global economy”, St. Martin’s Press: New York. Park, Y.S. (1994), “The economics of offshore financial center in: Offshore financial centres”, Roberts, R. (ed). E. Elgar: Aldershot.

Summary

The Sustainable Development Goals are not just wishes to make the world a better place for all of us, and if we do not achieve them, our situation would not change or worsen. Indeed, sustainability is an imperative to tackle issues that threaten our lives and our planet. For instance, climate change is a reality and the world as we have known it during the last 10 millenniums will change dramatically in the next few decades with an increasingly turbulent climate (more drought, floods, hurricanes, etc.), a significant raise of sea levels (due to thermal expansion and melting glaciers and ice sheets) and the ocean acidification phenomenon. All these natural changes and phenomena would have serious consequences on people, animals and our entire balance. These changes are all due to human activity that started to have a significant impact on the planet’s climate and its various ecosystems. Some scholars declared that the planet entered into a new era called the Anthropocene that started during the great acceleration in the 1950s with more wealth, more energy use but also more harm to the planet. Climate change is not limited to environmental challenges, but its impact is extended to demographic, economic and social aspects in a way that would worsen the poverty and famine levels, the health issues, the inequalities, the access to clean water and sanitation and the fair distribution of wealth among societies. Indeed, tackling climate change requires the adoption of regenerative and restorative approaches to fix the harm accumulated during © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6

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the last seven decades due to greenhouse gas emissions and excessive consumption of the planet resources. In this context, the global awareness towards climate change challenges and issues gave birth to the Paris Agreement on climate change adopted by 196 Parties at COP 21 in 2015. This agreement aims at limiting the global warming to below 1.5 degree Celsius compared to pre-industrial levels according to an agenda that defines two milestones (2030 and 2050). Therefore, contributing to the achievement of climate action objectives and all the other Sustainable Development Goals does not constitute an option but a duty towards people, the planet, the other creatures and the next generations. All the stakeholders should integrate sustainability to their business models and contribute positively to the achievement of the United Nations’ goals in terms of sustainable development. Indeed, implementing sustainability covers various aspects such as strategy, management, transparency and governance as recommended by the SDG impact standards. From another perspective, the Islamic world should be involved actively in the achievement of the Sustainable Development Goals for three major reasons: • First, the Islamic world region is highly exposed to the climate change risks in terms of global warming and its consequences as well as to the various challenges such as inequalities, poverty, hunger and a younger population requiring quality education, economic growth and decent work. • Second, the Qur’an (Surate Ar-rah.m¯an) stipulates that God created man and that the sun and moon move according to a plan. Moreover, the same surate stipulates that God raised the sky and set up a balance in earth and orders us to not transgress this balance and not violate it. Climate change is actually a transgression of the balance in the planet’s environment and ecosystems. • Third, the budget of many Islamic countries is relying mainly on the oil and gas revenues. Hence, the economic transition seems to be urgent as per the energy transition to renewable sources.

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Indeed, all the resources, efforts and innovative solutions in the Islamic world should be oriented to achieve the Sustainable Development Goals and ensure their effectiveness. The financial sector in the Islamic world can adopt the Islamic social finance instruments and formulas to mobilize more resources and contribute effectively to the achievement of Sustainable Development Goals. This book presented eight different financial schemes that involve banks, Takaful, Microfinance, asset managers, venture capital fund managers, crowd funding platforms and s.uk¯uk issuers. It is worth noting that other cash waqf-based schemes can be implemented. In addition to the innovative financial schemes that constitute small independent sub-ecosystems, the book addresses the principle of a national cash waqf ecosystem that can set appropriate synergies and improve the effectiveness of the different solutions, schemes and subecosystems. Indeed, a national ecosystem would bring all the sub-ecosystems together to have more complementarity under a unique legal and regulatory framework. Such approach would enable the ecosystem components to provide the appropriate financial assistance to all the categories of sustainable businesses (from startups to large corporations and from social enterprises to pure businesses) while providing the necessary funding and assistance to NGOs and associations. Building a national social finance (or cash waqf) ecosystem would require the involvement of the waqf authority, the zakat fund (if there is any), the financial authorities, the ministry of finance (or the tax authority), the community development ministry or authority and the financial center authority (if there is any). All these stakeholders would participate in building the necessary infrastructure to facilitate the private initiatives. Moreover, financial institutions, financial technologies startups, businesses and large corporations should be involved in building this ecosystem in a way that would multiply the impact and encourage businesses and social enterprises to launch new ideas and new activities in line with Sustainable Development Goals. In the last chapter, the book discusses the idea of establishing a waqf offshore center to connect national cash waqf ecosystems with each other but also with individuals and businesses that are looking for more impact or better financial returns.

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In both cases (national waqf ecosystems and waqf offshore centers), there are many aspects that require particular attention and need to be handled: • Building the capabilities of the waqf authorities. As per Chapter 3 of the book, waqf authorities need to be managed as impact investment banks requiring skills in asset management, impact management and measurement, social marketing and technology adoption in various fields. Moreover, in different countries, waqf authority is associated with Islamic affairs department while the latter requires different capabilities. • Developing the capabilities of the zakat funds in order to attract more donors and accompany the sub-ecosystems when relevant. The zakat funds need to turn into a digital platform, to partner with financial institutions to diversify the collection channels and to adopt the latest trends in marketing. • To increase the impact of waqf authorities and zakat funds, it is important to adapt and amend laws in order to facilitate the transition. For instance, waqf operations should be tax exempted while zakat donations can be deducted from payable taxes. Waqf and zakat practices can be revived to contribute effectively to the reduction of the climate change risks and inequalities in the Islamic societies. This revival should take into account the latest trends in terms of technologies, business models, marketing practices and so on. At the end, the book presents a particular vision of setting up a sound partnership between Islamic social finance institutions and Islamic financial institutions including financial technologies startups and businesses in a very particular context where the world is facing very challenging issues that threaten the planet and the people. Raising awareness, adopting the right reforms and law amendments, incentivizing the private initiatives while implementing the most appropriate infrastructure to host such ecosystems would be the key success factors to mobilize more resources and achieving more impact. The impact of such ecosystems is not limited to the funds collected and the initiatives supported but is also extended to the investors and donors who see their understanding of the global challenges deepened,

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and therefore, their daily behavior can change positively and impact other people as well and this impact dimension is very important. Finally, I tried to make the concepts and schemes as clear as I could wishing that in a near future, the creation of a national waqf ecosystem and a waqf offshore center would become a reality and I hope that I would be part of such initiatives and that this book would help on that.

References

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Index

C Climate change, 9, 12, 13, 16, 25, 227, 228, 230 anthropogenic, 1 climate action, 228 COP 21, 228 environment protection, 24 extreme weather, 1, 25 global warming, 1, 228 greenhouse gases, 1 oceans’ acidification, 1 renewable sources, 228 rise of sea levels, 1 I Islamic finance Asset manager, 146, 148, 149, 154, 157 Bank, 42, 48, 51, 77–84, 86–93, 96–100, 102, 104, 172 crowdfunding, 36, 133–135, 137, 138, 140–144, 193, 194, 196–199, 201, 229 financing products, 77, 83, 89–92

guarantee, 4, 88, 95–100, 102, 105, 138, 178, 219, 221 investment accounts, 5, 21, 40, 64, 77, 79–81, 83, 84, 86, 87, 89–93, 103, 115, 120, 137, 150, 159, 172, 184, 199, 201, 203, 205 investment portfolio, 54, 77–80, 83, 89–93, 95, 121, 127, 154, 172, 185 investment universe, 93, 96, 98, 99, 123, 131, 151, 154, 156, 157, 181 Islamic mutual funds, 148 Microfinance, 25, 34, 107, 108, 110, 112, 113, 115, 229 Mutual funds, 5, 40, 93, 98, 103, 145, 147–152, 154–159, 161, 172, 184, 195, 198, 199, 201 offshore financial centers, 208, 209 profit rate, 79, 80, 90, 193 profit waiver, 63, 92

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Tahiri-Jouti, Financial Instruments and Cash Waqf, https://doi.org/10.1007/978-3-031-04337-6

237

238

INDEX

S.uk¯ uk, 5, 35, 93, 98, 148–150, 154, 161–165, 168, 171, 184, 198, 223, 224 Venture Capital funds, 5, 175, 176, 178, 185, 198 Islamic social finance, 3, 4, 31, 33–36, 41, 57, 61, 62, 64–67, 73, 93, 133, 135, 229, 230 beneficiaries of Zakat, 36, 38 Cash Waqf, 4–6, 40, 51, 53, 54, 56, 57, 77, 80–82, 84–87, 90–93, 95–105, 107–114, 116, 117, 119, 120, 122, 124, 125, 127, 128, 130–134, 137, 138, 143, 145, 146, 148, 150, 151, 155–159, 161, 162, 168, 170–172, 175, 176, 178, 180, 181, 183–185, 189–191, 193, 182, 196–199, 200–205, 206, 210, 212–215, 219, 220, 222–225 charities, 4–6, 40, 56, 57, 66, 77, 78, 80, 82–84, 89, 92, 93, 124, 143, 146, 148–150, 155, 156, 158, 162, 165, 166, 171, 172, 176, 178, 180, 183–185, 191, 196, 199, 201, 203, 210, 214, 215, 218, 220, 222, 224 family waqf, 39 free loans, 5, 40, 109, 111, 112, 115–118, 134, 143, 167, 172, 196, 198 Islamic affairs, 51, 52, 230 Islamic capital markets, 33, 36 Islamic Microfinance, 33, 36 Islamic social banking, 33 Kafala, 35 Microfinance, 5, 33, 35, 107–109, 111–118, 193–196, 198, 199, 201 Micro-takaful, 120, 124 Nissab, 36, 37

Philanthropic waqf, 39 providers of social finance, 35 Qard, 35 Religious waqf, 39 Sadaqat, 35 social banking, 33 social banks, 34 social finance, 33 social finance ecosystem, 35, 36 social welfare initiators, 36 Takaful, 5, 33, 35, 93, 119–132, 166, 195, 197–199, 201, 229 waqf, 3, 4, 21, 23, 28, 31, 33, 34, 39, 40, 62, 64, 66–68, 77, 80, 83, 84, 96, 102–105, 107–109, 111–113, 115–118, 120, 124, 136, 140–142, 145, 146, 148, 149, 152, 153, 156, 158, 161, 164–167, 169, 170, 172, 173, 179, 180, 183, 184, 189, 196–198, 205–208, 213, 215, 221, 222, 225, 229–231 waqf administration, 50–57, 91 waqf assets, 51, 52, 54 waqf authority, 128, 129 waqf institution, 36, 50 waqf investment fund, 5, 96, 100, 102–104, 119, 120, 122, 124, 125, 127, 128, 132, 143, 201 waqf literacy policy, 51, 56 waqf loans, 133, 134, 136, 137, 140, 141, 143 waqf offshore center, 208, 212–225 waqf operation, 56, 155 waqif, 39 zakat, 3–5, 21–24, 28, 31, 33, 34, 38, 39, 41, 43–50, 62, 64, 66, 67, 229, 230 zakat literacy policy, 48

INDEX

S Sustainable development, 1–6, 9–14, 16, 17, 23, 24, 31, 34, 55, 61, 64–73, 77, 80, 81, 120, 133, 136, 145, 146, 148, 161, 164–166, 168, 173, 175, 176, 178, 181, 189–191, 193–198, 202, 203, 205, 213, 214, 217, 220, 221, 223–225, 228, 229 2030 Agenda, 1, 11, 12 clean energy, 9, 13, 15, 152, 168, 217, 218 clean water and sanitation, 9, 227 decent work, 9, 13, 26, 228 economic inclusion, 24 financial inclusion, 5, 95, 105, 107, 122, 123, 129, 132, 137 financial literacy, 93, 151, 159, 173 gender equality, 9, 13, 213 good health, 9, 15 impactful projects, 65, 66, 78, 82, 89, 111, 133, 149, 162, 189, 191, 210 impact investing, 61 life below water, 9, 16 life on land, 9 Millennium Development Goals (MDGs), 10–12 No poverty, 9, 13, 15, 25, 28, 87

239

outcomes, 26, 69, 70, 73, 84, 87, 89, 158, 159, 168, 170, 213, 225 outputs, 87, 89, 155, 158, 159, 168, 170, 213 quality education, 9, 13, 15, 26, 87 reduced inequalities, 9 SDG impact standards, 61, 62, 67, 68, 73, 84 social businesses, 78, 82, 93, 138, 185, 193, 197, 203 social impact, 34–36, 53–55, 57, 64, 66, 118, 142, 150, 165, 197, 219 socially responsible corporations, 36 social projects, 49, 56, 57, 201, 202 social return, 34 strategic alignment, 71, 86, 130 sustainable communities, 24 Sustainable Development Goals (SDGs), 1–6, 9–13, 16, 17, 23, 24, 31, 55, 61, 65–73, 77, 80, 81, 120, 133, 136, 145, 146, 148, 161, 164–166, 168, 173, 175, 176, 178, 189–191, 193–198, 202, 203, 205, 213, 214, 217, 220, 221, 223–225, 228, 229 United Nations, 1, 3, 9–11, 14, 16, 61, 67, 228 zero hunger, 9