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Islamic endowments to accelerate growth of Islamic finance


Shari’a compliant philanthropy is on the rise with the Waqf sector (Islamic endowment) estimated at around USD105bn globally, according to research conducted by Ernst & Young.

Ashar Nazim, director and head of Islamic financial services at Ernst & Young, says: "The Shari’a compliant endowment sector provides a unique impetus for the growth of Islamic finance including the nascent asset management industry. While Waqf has always been an integral part of Islamic countries’ economic system, it is only now that a more formal structure is evolving for professional investment management of this pool of money, with an emphasis on making a sustainable impact. More investment firms are eyeing this opportunity, adding a new dimension to the Islamic asset management industry."

A significant majority of the Waqf assets are in the form of real estate, and could be as high as 70 to 80 per cent of the total sector assets.

"The remaining money is deployed in Shari’a compliant money markets mostly with regional financial institutions. Between Awqaf institutions (organisations that manage Waqf assets) and other entities, the cash Waqf alone is estimated at USD35bn," says Nazim.

Investment management of Waqf pool, now a substantial amount globally, has not traditionally been the strength of Waqf administration entities. The institutions command good donor loyalty and are also strong in disbursing to the relevant social causes. However, the historical returns on managing these investments have been dismal, with the cash Waqf mostly earning bank savings return.

"The opportunity cost in terms of foregone wealth is staggering. The cash Waqf sector would potentially generate an incremental USD2-3bn annually, simply by aligning with professional investment managers. The need is most critical given the high fiduciary responsibility of the trustees to manage the wealth in the best possible manner," Nazim says.

The Islamic funds industry is still evolving, having been able to tap only 11 per cent of the estimated USD480bn wealth pool at its disposal. Most of the products relate to vanilla equity markets and there is an urgent need to innovate and diversify to new asset classes. Islamic endowments, both real estate and cash pool, is likely to be the next breakthrough opportunity for the Islamic fund managers.   

Tapping into the multi-billion dollar Waqf pool first requires ensuring a credible governance and operational infrastructure to safeguard the sanctity of the Waqf charter. In addition, understanding the donor segment and their unique touch points is critically important to raise endowment funds. For Islamic financial institutions their existing investor base, comprising of high net-worth individuals and family offices, makes for a good starting point. 

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