ISLAMIC ENDOWMENTS: The weight of tradition

KaraouineDespite controlling billions of dollars of assets, Islamic endowments have not yet become clients of the asset management world. George Mitton finds out if this will change.

It is a tradition in the Muslim world for a rich person to give a portion of his or her wealth to support the community after death. The resulting endowment, or waqf, could be a farm, a plot of land or an apartment block. The income would fund public goods such as mosques or universities.

Due partly to the oil boom in the Gulf, the value of these endowments – the plural is awqaf – has risen astronomically, and they now encompass not just land and property but pots of cash. The consultancy Ernst & Young estimated in 2010 that awqaf in the Gulf Cooperation Council (GCC) were worth $105 billion.

Could these endowments become customers of asset management firms? It seems a win-win situation. Modern investment methods could increase returns for beneficiaries, while earning fees for asset managers – yet it has not happened.

“I cannot think of a larger pile of money anywhere on the planet that is completely virgin, never having been exposed to incessant bankers selling their wares,” says John Sandwick, founder of Safa Investment Services, an investment firm that aims to serve the endowments.

Tradition, fear of risk and, in some cases, legal and policy obstacles all play a role in keeping awqaf apart from the asset management world. Yet several people believe now is the time for that to change, and they say there are good business opportunities as this market opens up.

The first thing to note about the Islamic endowment sector is that data is patchy and unreliable. People consulted for this article say they believe Ernst & Young’s estimate of $105 billion for the awqaf sector is too low and that the real figure could be in excess of $300 billion. Some individual  endowments, such as the Al Rajhi Foundation, set up by the founder of Saudi Arabia’s largest bank, are thought to control as much as $20 billion.

Another point to note is that there have been attempts to open up this market before. Waqf Trust Services was incorporated in the Dubai International Financial Centre in 2007 but is no longer in business; its commercial licence expired just two years later.

The proponents are not discouraged by the challenges. They say the market is now more favourable for such ventures because of the growth in sharia-compliant funds. Awqaf must invest in accordance with Islamic principles, but according to Sandwick, they had few options in the past because there were not enough sharia-compliant funds available.

Today, the sharia-compliant fund market is estimated to be worth $60 billion.

Moving endowments’ money into sharia-compliant funds could help to spread risk and ease the endowments’ large exposure to real estate. But can awqaf administrators be encouraged to make the change?

This shift in attitude could happen if a government-sponsored initiative in Dubai achieves its aims. At the start of the year, Noor Awqaf, a joint venture between Noor Investment Group and the Awqaf and Minors Affairs Foundation, a Dubai government department, launched with the aim of providing endowments’ clients and donors with industry-benchmarked asset management services.

Hussain Al Qemzi, chief executive of Noor Investment Group, says he hopes the project “will result in competitive returns on investments that will provide a pipeline of sustainable revenue”. He adds: “Awqaf need to revisit their policy frameworks. Noor Awqaf can play a major role in revising these policies by bringing different thinking to the management of awqaf.

The challenge is to make the policy frameworks globally accepted.”

The challenges, though, are significant. In a sense, the problem is one of adapting an old system supported by centuries of Islamic law to a modern system of financial management imported from the West, a system that is unfortunately tainted by association with the financial crisis.

The challenges start with the contracts themselves. For many existing awqaf, a donor has committed property in a contract that extends forever into the future. There is some uncertainty as to whether it is permissible to sell that property and put the money into mutual funds, as many asset managers might like.

Another problem is that according to tradition, awqaf administrators are not allowed to take risks with the assets they manage, but are supposed only to administer the income.

“One of the main issues with waqf is that the corpus has to be preserved and only the return is used,” says Sohaib Umar, executive manager of Ernst & Young’s Global Islamic Banking Centre of Excellence. “The fear is that if you put it into equity funds, [you may lose money]. That is a legitimate fear.”

As a result, even endowments that include cash holdings often keep their money in bank deposits or money market funds that yield low returns.

It may be difficult to convince awqaf administrators to take on the risk that their investments could go down in value given that many of these administrators are “old school, not sophisticated investors”, according to Umar – not the kind of people likely to embrace rapid change.

What is more, many awqaf administrators lack an incentive to embrace new investment techniques given that their investment performance is not often scrutinised.

However, there may be pressure in future to achieve better returns. Younger generations in the Arab countries, who may have experience in Western financial institutions, will become the awqaf administrators of the future.

Meanwhile some awqaf administrators do seem keen to adopt international best practices inspired by the likes of the Bill & Melinda Gates Foundation.

New practices could lead to better returns­. Umar says he knows of some publicly owned awqaf in Bahrain that have about $50 million in cash, which is in accounts with two or three Islamic banks earning returns of about 4%.

“What stops an asset management company from contacting these guys and saying, give me 10% of your bank placement, and see what happens in a year’s time?” he asks.

The best place to start with an awqaf would be with very low risk products, he says. An investment reporting service could also be valuable. It is important to communicate, sensitively, that there is what economists call an opportunity cost in sticking with the old ways. By not investing in a mixture of assets including sharia-compliant funds, awqaf administrators effectively deny their beneficiaries several percentage points of investment return each year.

Governments could also play a role by introducing regulations and accountability for endowments, perhaps even setting a performance benchmark that would give administrators an incentive to improve their returns.

These targets may not be so far away. In the wake of the revolutions in the Arab world, there has been greater scrutiny of the public finances of Middle Eastern countries.

Even the wealthy Gulf states have begun to pump more money into domestic development. Umar Moghul, a partner in the Dubai office of law firm Stephenson Harwood, says this trend could bring more transparency to publicly owned awqaf, which could filter down to private endowments.

“With the events of the Arab Spring there is some pressure to have government assets continue to be used in a productive public fashion,” he says.

©2013 funds global MENA

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