Donating to a multitude of charitable causes can get tiresome after a while. For working-class people who are financially burdened with their own daily needs and monthly expenses, there is also a limited amount that may be set aside, and the constant giving could weigh them down.
Additionally, a great deal of money is donated to fund charitable causes, but it is hard to observe how efficient or effective these efforts are, or whether they reach the intended beneficiaries, in some cases. The performance of such organisations is hardly monitored and barely assessed, since good actions are considered blessings, and profits are assumed to be managed as promised. When any foul play or misappropriation is uncovered, it is normally only after most, if not all, of the funds have been pilfered.
These issues can be overcome by a cash waqf (endowment) concept and then utilising the blockchain to fortify the accountability in collections, administration, and distribution.
WAQF INSTITUTIONS AND MODERNISATION
Waqf has historically been an important instrument used for the socio-economic welfare of Islamic communities and jurisdictions. Islamic states, dynasties and empires heavily rely on this instrument to launch a wide range of projects including educational institutions, medical facilities such as hospitals, lodging amenities, and food security programmes. Waqf became an important economic tool for Islamic states to advance socio-economic development and many humanitarian projects have been supported through the various types of awqaf (endowments).
The waqf institution can essentially be divided into three sections, namely the waqf procurement section, the waqf utilisation section, and the income distribution section. It is therefore imperative that waqf institutions recruit highly qualified personnel not only in the management arena, but also in the field of Islamic finance. A waqf institution should be managed by experienced professionals who possess deep investment knowledge and skills to ensure that the assets are well-managed and generate income.
With the increase in data volume used in administration for many industries, digitisation of data constitutes a paradigm shift in transforming workflows and business models. Many legal technologies have emerged, enabling digitisation and automation of these and other legal-work activities. It is possible to automate frequently used contracts into smart contracts so as to facilitate the transfer of ownership and codify the preferences and conditions established by waqf founders for future administrative purposes that must continue in perpetuity.
DISTINCTION OF CASH WAQF FROM OTHER WAQF MODELS
As far as the creation and evolution of the cash waqf is concerned, it dates back to the time of Prophet Muhammad (peace be upon him), when one of his wives, Hafsah (may Allah be pleased with her), bought a piece of jewellery for 20,000 dirhams and set it aside for the women of the Khattam family. Though there was no cash involved, the concept of movable waqf can be derived from the narration.
During the early 15th century within the Ottoman Empire, the concept of cash waqf became very popular throughout Anatolia and spread rapidly to European provinces. Its usefulness makes the cash waqf distinct from other types of awqaf . The following table summarises these characteristics.
As a cash waqf, people from all classes and backgrounds are able to participate in helping others in need, even those with small contributions. Cash waqf has become a popular instrument in Malaysia, Indonesia, and Turkey because of its potential benefits where they have been utilised for a number of schemes in these countries. Traditionally, waqf systems have faced major challenges due to poor management of waqf assets and resulting incomes (or lack thereof), clumsy processes, and cumbersome mechanisms. It is necessary to update and innovate the current models and waqf systems to keep pace with the passage of time. In every age and place, such changes and innovations ensure the continuity of practical social models to serve their purpose, albeit with the aid of various tools, such as digital technology, for enhancement and efficiency. Blockchain can be used to secure cash movements in the traditional waqf collection and distribution. The following section describes the Cash Waqf System first before we move on to using blockchain technology to enhance accountability.
CASH WAQF SYSTEM
Cash waqf is a form of waqf (perpetual endowment) where the income generated from the money collected is to be spent, while protecting the principal amount (Figure 1). In cash waqf for charitable purposes:
- Initial cash waqf is used as an investment to generate earnings and reduces the need for further donations.
- The principal amount collected is run like a fund with experienced fund managers to generate the most possible return.
- The returns are what will be spent on charitable causes.
- The cash waqf fund collects its principal capital from socially-motivated high net worth individuals (HNWIs) and later, the public through donations.
- The principal capital is invested, and the profits made will be disbursed to the beneficiaries.
- The waqf fund will be run as a professionally-managed fund to give the best possible returns.
The cash waqf fund will have independent committees (Figure 2) to ensure proper governance and should be structured as follows:
- Investment Committee: approves where capital should be invested on recommendation from Fund Manager
- Fund Manager (Mutawalli): manages the funds and ensures best returns
- Approval Committee: approves where the proceeds are allocated, e. which beneficiaries, projects, feasibility, etc.
Waqf in cash terms offers much flexibility and liquidity for fulfilling both structural requirements and services for its beneficiaries.
USING BLOCKCHAIN TO STRENGTHEN ACCOUNTABILITY
Through the application of blockchain, the traditional processes of waqf will be improved and more efficient, in comparison to existing cumbersome processes that are prone to moral hazards, agency problems, and leakages. Thus, a blockchained transaction is accessible to the public and safeguards sensitive data against unauthorised access and manipulation. Through greater transparency, a waqf centre is able to track and monitor transactions related to waqf assets and cash endowments collected in the real world, thus building trust with donors, the people it serves (Figure 3). This will improve future collections, and their reputation as a credible mediator and administrator. Automated collection, tracking, and processing eliminates the need for laborious audits and monetary leakage monitoring between collection and disbursement.
As part of the cash waqf collection process (Figure 3), the waqf centre must appoint officials to oversee the transactions according to the requirements that must be assessed by the waqf assessor. Thus, blockchain may be beneficial for preserving waqf transactions in a trustworthy way. Using older methods, it is difficult to obtain a record of a transaction, which can be improved by using the blockchain that can record every transaction without any data loss. Furthermore, the regulators or state authorities may be granted permission to audit the waqf assets when needed, to verify the previous ownership of the waqf assets, or the stated wishes of the waqf founder, if necessary.
New technologies such as blockchain technology can operationalise the transparency and accountability required of important social institutions, such as those that govern the dispensation of endowments and donations, and its management and distribution in order to establish proper provision, distribute wealth, and facilitate small, as well as large scale projects for social and economic development, while sharing prosperity for a more equitable and harmonious social system.⬛
This article is an excerpt rewritten from one of the three new chapters of the second edition of “Blockchain, Fintech and Islamic Finance – Building the Future of the New Islamic Digital Economy”, published by De Gruyter, which is available at all major online and offline bookstores.
1 Hassan, M. K., Karim, M. F., and Karim, M. S. Experiences and Lessons of Cash Waqf in Bangladesh and Other Countries. in Revitalization of Waqf for Socio-Economic Development. Volume I, 2019. pp. 59–83. Retrieved from: https://doi.org/10.1007/978-3-030-18445-2_5
Dr Hazik Mohamed is a multi-skilled professional, whose focus is on business growth strategies for start-ups, tech-related research, and various consulting projects. His past corporate clients include the ASEAN Secretariat, national finance offices, and the United Nations Capital Development Fund. He is also the author of three internationally published books: Belief and Rule-Compliance (Academic Press, 2018), Blockchain, Fintech and Islamic Finance (De Gruyter, 2019) and Beyond Fintech (World Scientific, 2021).