There are ways Baitul Mal can benefit from Islamic capital market instruments. With a more practicable approach, Baitul Mal will play an even greater role to spur Malaysia’s economy. This article discusses the potential use of Waqf properties as asset base for Sukuk and Islamic Real Estate Investment Trusts (i-REITs) to add value to the Baitul Mal income.

Sukuk Ijarah

Ijarah is a manfa’ah (usufruct) type of contract where a lessor (owner) leases out an asset or equipment to a client at an agreed rental fee and pre-determined lease period upon the ‘aqd (contract). The ownership of the leased equipment remains in the hands of a lessor. Ijarah is also viewed as a sale-and-purchase contract where the item sold is the manfa’ah, given that the lessor is able to utilize the manfa’ah asset as was agreed.

In this context, to generate capital for funding economic activities, Baitul Mal needs to identify assets that qualify for Ijarah. Waqf properties can also act as underliers and basic assets in Sukuk Ijarah issuances, provided that these properties (required to support the funding of economic activities) do not affect their status as Waqf properties. Fiqh permits the party taking up the lease to lease the asset to another party. This is an Ijarah to another Ijarah on condition that the second Ijarah contract does not exceed the tenure of the first Ijarah contract.

Baitul Mal requires capital for economic projects such as the construction of strategic and quality assets as depicted in Diagram 1. Baitul Mal leases its asset (long-term) where the rental payment is based on the agreement and at the discretion of both lessor and lessee. The rental provides capital to fund the construction of strategic and quality assets. The special purpose vehicle (SPV) issues Sukuk Ijarah to investors to fund the long-term lease of Baitul Mal’s Ijarah assets. The SPV leases back assets to Baitul Mal for a short-term period. Income from the lease is distributed back to investors and upon expiry of the lease, the assets are returned to Baitul Mal.

However, it is important to note that there are certain issues which need addressing by Shariah scholars if assets consist of Waqf property. Among others, the Ijtihad (reasoning by qualified scholars to obtain legal rulings from the sources of the Shariah) on beneficiaries is to obtain benefits from the property and not from the physical utilization of the property alone. In addition, there are also Ijtihad issues relating to assets that are partially benefited by the beneficiaries and partly for the public.

For example, there exists the perception that the use of Waqf properties is overly complex. Other challenges in developing Waqf assets are capital, management, authority to redeem assets where there are claims staked, and Waqf assets that are already in use. There are also misconceptions that the private sector is not allowed to develop Waqf properties given that Waqf properties cannot be sold.
Waqf properties, particularly the ones that are of prime value and potential after they are developed, cannot be subdivided or sold as this contradicts the concept of Waqf that requires ownership to be maintained to ensure continuous benefits.

Moreover, developing Waqf assets using Islamic finance methods such as Sukuk is viewed as almost impossible to execute. The misconception has arisen as Sukuk involves investment and trading of Islamic securities in the secondary market.

Ijtihad clearly outlines the principles of property ownership, which could occur or exist in the form of al-milkiyyah al-tammah (complete ownership), where the owner has ownership right over the entire asset from the perspective of milkiyyah al-raqabah (the right of ownership using physical assets); and milkiyyah al-intifa’ where ownership right is from the perspective of making use of the physical benefits of an asset. Al-milkiyyah al-naqisah (incomplete ownership) occurs when beneficiaries have the right to utilize the benefits from the physical assets alone, whereas the trustees (in this case Baitul Mal) have the right over the physical assets.

As trustee for a common property of Muslims, Baitul Mal may categorize assets being developed as general Waqf property. By virtue of this, the general benefit of assets is returned towards the public’s interest. Baitul Mal will then obtain the fees via professional asset/property management.

Due to the al-milkiyyah al-naqisah character of Waqf, it can be separated from the perspectives of funding to develop the assets, or from the beneficial rights as soon as the assets are developed. If this is fully understood, Waqf assets can be developed comprehensively using the current Islamic financial methods.
Sukuk Musharakah

Similar to Sukuk Ijarah, modifications have been made to the Musharakah principle to suit the Musharakah Sukuk to the contemporary Islamic financial system. In the context of Baitul Mal, partners need to contribute capital whether in the form of assets or cash to generate income for funding economic activities.

Baitul Mal contributes an asset-based capital, such as a piece of land, and issues Sukuk Musharakah. Investors invest in the Sukuk and, during its tenure, returns from the project are distributed according to what was agreed upon. Baitul Mal then fully owns the Musharakah asset after delivering the possession charges to investors.

Profits that have been distributed to investors are the result of Baitul Mal involvement in developing and improving the quality of assets. In this context, the status of the Waqf property is not compromised.

Strengthening the governance system

It cannot be denied that in empowering the Baitul Mal institution in this country, an efficient and systematic governance system needs a proper guideline that requires strong enforcement. This is to ensure that the Baitul Mal institution runs smoothly and effectively, and is credible on the back of operating within a limited scope and jurisdiction.

To achieve the said objective, professionals of high performance measured by key-performance indicators (KPIs) and key success indicators (KSIs) must be developed. Such yardsticks enable the achievement or performance to be measured and evaluated, thus creating an efficient management strategy which is transparent, trustworthy and accountable.
Islamic asset managers need to broaden their knowledge and understanding of various aspects of the Islamic financial system including financial products, services, legislation, performance and cost. Due to the rapid development of this sector, up-to-date knowledge is important to ensure that managers are more vigilant and prepared in providing value-added investment for the interest of their beneficiaries. At the same time, the management of Baitul Mal would benefit in terms of an increase in the volume of management fees in line with the bigger amount of investments and returns.

Conclusion

In line with the rapid development of the Islamic financial industry, Baitul Mal should not be retarded and efforts towards empowering Baitul Mal are necessary. While the present role of Baitul Mal is not as comprehensive as it used to be during the golden era of Islam, with more progressive and workable efforts, Baitul Mal could become an impetus to spawn the economy of the Ummah. At the same time, Baitul Mal’s stereotype as merely an organization that hands out charity to Muslims through financial aids and one that collects and distributes zakat funds could tone down and ultimately be eliminated.

The success of Baitul Mal will not only provide support, it could also further enhance Malaysia’s financial system with a more developed Islamic financial system that is comprehensive and holistic.

This article was adapted from a paper presented in Bahasa Malaysia titled “Memperkasa Peranan Baitul Mal Menerusi Instrumen Pasaran Modal Islam” at the National Convention held on the 25th June 2009 in Kuala Lumpur, Malaysia. The first part appeared in the June 2010 issue of Islamic Finance Asia.