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In its “call to action” published in August 2022, IFAC asked professional accountancy organisations (PAOs) and stakeholders to identify how Islamic financial instruments have been used to advance Sustainable Development Goals (SDGs). Malaysia, one of the pioneers of Islamic Finance, is the first case study in this series reporting on government, regulatory and industry efforts to support the SDGs with Islamic Finance principles.

The first part of the Malaysian case study published on 7 September 2022 focused on sukuk, which provides the means to deliver more infrastructure investment to emerging economies.

The second part of the Malaysian case study looked at the concept and purpose of Value-Based Intermediation (VBI) and how VBI advances the attainment of the SDGs.

The third part of the Malaysian case study highlighted the Islamic Fintech landscape in Malaysia and the potential benefits and challenges faced in mobilising Islamic Fintech to achieve SDG goals.

This fourth and final part of the case study surveys how Islamic social finance innovations are being harnessed to help achieve the SDGs.

Synergising Islamic Social Finance and Sustainable Development

Islamic Finance and sustainable development are naturally synergistic as they share a common purpose and values. In particular, compassionate Islamic social finance instruments such as waqf (endowment), sadaqah (voluntary donations), and zakat (mandatory alms-giving) are by design geared to help ameliorate inequalities and uplift the most vulnerable populations.

Another key benefit of harnessing Islamic social finance: further diversification and strengthening of Islamic social finance tools can lessen the financial strain on governments, by fulfilling societal needs through private donors’ self-sustaining contributions rather than tax revenue or government borrowing to fund development spending.

This article highlights how Malaysia’s innovations in Islamic social finance can enable social well-being and fiscal health while also furthering the SDGs.

 Waqf

Waqf is a form of continuous charity that specifically involves the voluntary and irrevocable giving of assets to a trust, with its returns in perpetuity used solely for societal good or the trustees’ benefit. 

Waqf asset pools are quite sizeable. A 2019 joint report by the World Bank, INCEIF and ISRA on Maximising Social Impact Through Waqf Solutions valued waqf assets globally at between USD700 billion to USD1 trillion. If effectively tapped, waqf could contribute significantly to minimising the annual USD2.5 trillion SDG funding gap.

When thinking about waqf, land endowments and immovable properties—for the purposes of building mosques, for instance—are usually what comes to mind. About a third of waqf assets globally are in the form of cultivable lands. Even in Malaysia, waqf lands were estimated to total 300 square kilometres or around the size of Langkawi Island as of 2018, according to then Assistant Governor of Bank Negara Malaysia, Marzunisham Omar.

As in other categories of Islamic finance, Malaysia continues to pioneer changes in the waqf space too. Many of Malaysia’s Islamic financial institutions (IFIs) have experimented with different forms of waqf throughout the years that are geared to different SDGs, resulting in a diverse waqf landscape:

  • Cash waqf: Malaysia issued a national fatwa permitting cash waqf in 2007, because cash allows for a wider pool of donors and is more affordable than property. The Malaysia Wakaf Foundation (Yayasan Wakaf Malaysia) uses cash endowments to develop waqf land into productive assets such as hotels and the Terengganu Culinary Academy (SDG 1: No Poverty, SDG 8: Decent Work and Economic Growth). More recently, at least eight banks collaboratively developed the ‘mywakaf’ digital platform, which enables the public to contribute cash waqf to various socioeconomic projects.
  • Corporate waqf: Johor Corporation (JCorp) pioneered corporate waqf in Malaysia by donating 12.35 million shares of its public listed subsidiaries, valued at RM200 million, and appointing its subsidiary Waqaf An-Nur Corporation as the mutawalli or trust administrator. Waqaf An-Nur currently manages a number of waqf medical facilities, which are operated by another JCorp subsidiary named KPJ Healthcare Berhad (see SDG 3: Good Health and Well-Being). 
  • Microfinance: In 2021, the country’s central bank, Bank Negara Malaysia (BNM), added cash waqf as a source of its iTEKAD programme funding. Under iTEKAD, BNM and its partner Islamic banks offer seed capital, microfinancing and training to microentrepreneurs (see SDG 1: No Poverty, SDG 8: Decent Work and Economic Growth, SDG 10: Reduced Inequalities).
  • Waqf shares: In 2015, Malaysia launched the first waqf initial public offering in the world. Waqaf An-Nur offered 85 million shares, with the proceeds used to upgrade the Larkin Sentral Terminal and help low-income, single mothers pay for rent at the transport hub’s shop-lots (SDG 9: Industry, Innovation, and Infrastructure, SDG 10: Reduced Inequalities).
  • Waqf Boat Initiative: Provision of boats and equipment to fishermen by the waqf authorities in the state of Perak, which boosts Malaysia’s blue economy (SDG 1: No Poverty, SDG 8: Decent Work and Economic Growth).

Strengthening Waqf Governance and Impacts

Malaysia is recognised for its global leadership in Islamic finance, which is attributed in part to its strong governance and supportive regulatory ecosystem for Islamic finance.  In addition to centralising waqf management and governance at the federal level, Malaysia’s 14 State Islamic Religious Councils (SIRCs) act as the sole trustees on waqf matters, with agencies such as the Wakaf, Zakat and Haji Department (JAWHAR) and Yayasan Wakaf Malaysia assisting states in developing waqf assets.

Furthermore, Malaysia—through the Economic Planning Unit (EPU) in the Prime Minister’s Department—has a track record for integrating Islamic social finance into its national development planning. In addition to incorporating waqf development strategies in the Five-Year Malaysia Plans, Putrajaya earmarks funds for waqf development in the country’s annual budget. Recently, it also released the National Waqf Blueprint 2022 in collaboration with Yayasan Wakaf Malaysia.

Recognising the potentials of Islamic social finance as an enabler for wealth and well-being, the Securities Commission Malaysia (SC) launched the Islamic Fund and Wealth Management Action Plan (IFWMBP) in 2017 to promote waqf asset development through Islamic collective investment schemes. Thereafter, in 2020, it launched the Waqf-Featured Fund Framework, which enables investors to channel income generated from unit trusts and Islamic wholesale funds to welfare projects. In 2023, the Framework was expanded to include exchange traded funds and real estate investment trusts.

By the end of 2022, six waqf-based funds had been registered with the SC, totalling approximately RM47 million in assets under management. “However, no waqf sukuk has yet been issued,” stated INCEIF Associate Professor Ziyaad Mohamed.

Unleashing Waqf’s Full Potential

Despite the conducive environment, several key challenges must be overcome to unleash waqf’s full potential for the SDGs.

1. Modernising Waqf

One of the biggest challenges, according to Yayasan Wakaf Malaysia former CEO, Professor Dr Amir Shaharuddin, is that “the majority of wakif (donors) still have a traditional understanding of waqf.”

Perhaps the biggest misconception is that waqf can only be donated by and/or be of benefit to Muslims. According to a 2020 Organisation for Economic Cooperation and Development (OECD) policy paper on Islamic finance’s contributions to the SDGs, waqf for religious purposes (such as for building mosques) globally far outnumbers waqf for social purposes (such as for building hospitals). 

Mindset change is thus an imperative to fulfil waqf’s higher purpose of redistributing wealth and reducing socioeconomic inequalities. Assoc Prof Ziyaad recommended awareness programs to help shift the focus of waqf establishment from mosques, schools and cemetery endowments to social entrepreneurship development, scientific and technological innovation, vaccination production and the financing of disaster recovery assets, among others.

2. Building Trust

Voluntary contributions drive waqf. Adoption of financial and legal technologies can be key to enhancing the convenience, transparency and trustworthiness of waqf solutions and management in the public interest.

Malaysia’s Finterra, for instance, uses its blockchain-based WAQF Chain platform to track waqf flows effectively and efficiently from the inception of donation until project completion. “Automated collection, tracking, and processing,” noted Dr Hazik Mohamed in his blog post Using Cash Waqf to Combat Donor Fatigue and Blockchain to Improve Accountability, “eliminates the need for laborious audits and monetary leakage monitoring between collection and disbursement.”

Using legal technology, “it is possible to automate frequently used contracts into smart contracts”, which are computer programmes or algorithms that automatically execute themselves once a set of pre-defined conditions are met. In this manner, smart contracts can facilitate the transfer of ownership by codifying the preferences and conditions established by waqf founders for future administrative purposes, explained Dr Hazik. Since smart contracts only come into force when donors’ terms are met, this technology may help avoid instances of waqf endowments being used against the stipulations of the donor.

Nonetheless, the Malaysia Digital Economy Corporation’s 2020 Fintech Dialogue Report observed that religious authorities who oversee zakat and waqf are “being held back by legacy systems, bureaucracy and persisting reluctance and willingness to fully embrace and execute digital strategies.”

3. Professionalising Management

Waqf management and development fall under the purview of SIRCs and are thus often managed by religious officials and not professionals with the requisite expertise and experience in investment, Islamic finance and capital markets, real estate and asset management. Consequently, waqf assets may underperform in generating economic returns and underserve the SDGs in the long run.

To address this mismatch, SIRCs such as Perbadanan Wakaf Selangor and Pusat Wakaf – Majlis Agama Islam Wilayah Persekutuan (MAIWP) Sdn Bhd have corporatised their waqf management arms. In 2022, MAIWP appointed FELDA, PNB and TNB as corporate mutawalli to administer their waqf assets based on the regulations of MAIWP. This new approach that is similar to Islamic finance regulation will increase the value of waqf assets in Malaysia, as evidenced by the accumulation of RM50.0 million in assets within FELDA and PNB management within one year.

To further strengthen the management of waqf, the World Bank has recommended that waqf authorities partner with Islamic financial institutions to develop waqf assets productively. The SC meanwhile has advocated for waqf authorities to undergo regular training programs on developments in Islamic capital markets.

4. Optimising SDG Impact

Waqf can generate a greater impact if its coverage is expanded to better contribute to SDGs goals. For instance, waqf can be mobilised for strategic sectors such as health, transportation, green development, and climate change resilience in Malaysia and globally.

Prioritising Waqf

Under the current government, waqf is likely to be further harnessed to achieve the national goals in alignment with the SDGs. In the recent Budget 2023, Prime Minister Anwar Ibrahim announced that waqf will be prioritised through the ‘Madani Waqf’ initiative, along with civil endowments in the form of RM1 billion worth of assets and private ventures.

The private sector is also taking the lead to empower waqf. In March 2023, CIMB Islamic Bank Berhad allocated RM100,000 to Yayasan Wakaf Malaysia for the Waqf Cultivation and Socialization Program aimed at raising waqf awareness and supporting welfare projects.

As an excellent example of cross-collaboration, several local universities, including INCEIF, are jointly developing a database and crowdfunding platform with Yayasan Wakaf Malaysia. The initiative, which is based on the benefidonor approach that encourages beneficiaries of waqf to eventually become contributors, will act as a national repository for all waqf assets in Malaysia.

Finally, other developments on Shariah decision-making around the waqf asset substitution, sale and collateral are gaining ground but with limited implementation, shared Assoc. Prof Ziyaad.

These initiatives signal a promising upturn in the mobilisation of waqf for achievement of the SDGs in Malaysia. The crux of the matter is whether the current hurdles in waqf management and governance can be overcome to sustain this momentum.

Potential Gamechangers for SDGs: Sadaqah and Zakat

Along with waqf, both sadaqah (charity) and zakat (alms-giving) could be catalysts for attainment of the SDGs if mobilised effectively. While the total value of sadaqah globally is harder to track, a 2022 United Nations and Islamic Development Bank report on International Dialogue on The Role of Islamic Social Financing in Achieving the SDGs estimated the total amount of zakat collected globally by both official and unofficial zakat institutions at USD550-USD600 billion per year.

In Malaysia, both Islamic social finance tools have contributed to the SDGs in various ways:

  • Through Sadaqa House, Bank Islam Malaysia Berhad’s charity crowdfunding platform, voluntary donations have been used to provide financial assistance to malnourished children (with Mercy Malaysia) and heart disease patients (with the National Heart Institute), educate underserved and underprivileged children (with Buku Jalanan Chow Kit), and to protect orphan welfare (through the Sadaqa House Orphan Fund). Sadaqa House also runs BangKIT Microfinance, which assists eligible unbanked and underbanked microentrepreneurs in obtaining capital and building credit records (see SDG 1: No Poverty, SDG 3: Good Health and Well-Being, SDG 8: Decent Work and Economic Growth, SDG 10: Reduced Inequalities).
  • Using funds from zakat authorities, the Malaysia Professional Accountancy Centre (MyPAC) helps talented students from low-income families to qualify as professional accountants to break cycles of poverty (see SDG 1: No Poverty, SDG 8: Decent Work and Economic Growth, SDG 10: Reduced Inequalities).
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Zulfa Abdul Rahman

Team Lead of the Islamic Finance Unit in the Professional Practices and Technical Division of the Malaysian Institute of Accountants (MIA)

Zulfa Abdul Rahman is a Team Lead in the Professional Practices and Technical Division of the Malaysian Institute of Accountants (MIA), where she leads the Islamic Finance Unit. Previously, Zulfa was attached to a commercial bank where she worked in the Trade Finance Division for eight years. She is also the secretariat to the Islamic Finance Committee of MIA, which aims to promote Islamic finance through various initiatives such as collaboration with relevant stakeholders and accountancy bodies. Some of her notable involvement include projects such as the World Congress of Accountants (WCOA) 2010 where Islamic finance topics were first introduced at its platform, organising the National Zakat Symposium, conducting the Islamic Finance Pupillage Programme, publication of the Accounting for Islamic Finance textbook, stakeholders’ engagements through roundtable discussions and more recently working on a collaboration with a local university to publish shariah audit reference materials. Zulfa is a Chartered Accountant of MIA (C.A.) and a Chartered Global Management Accountant (CGMA).

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Dana Jensen
Dana Jensen

Senior Manager, IFAC

Dana Jensen is a Senior Manager with more than 10 years of experience working at IFAC to support the development, adoption, and implementation of high-quality international standards. She is primarily responsible for managing engagement with the Middle East North Africa (MENA) and Caribbean regions at IFAC. She is also the lead staff responsible for managing the IFAC Professional Accountancy Organization (PAO) Development & Advisory Group, which actively contributes to IFACs strategic objectives by raising awareness on PAO development, facilitating adoption and implementation of international standards and best practices, and empowering PAOs with guidance, leadership, and technical assistance. Since 2021, Dana has led IFAC’s Islamic Finance thought leadership program to support the United Nations Sustainable Development Goals (SDGs) as it promotes socially responsible development and links to economic growth and social welfare.

Prior to her time at IFAC, Dana was a Policy Coordinator at the United Nations (UN) in the Department for Peacekeeping Operations. She holds an MSc from Columbia University (2011); Prince Sultan University-Banque Saudi Fransi Graduate Fellow in Islamic Finance (2021-2023); and holds a Diploma in Islamic Finance from the Chartered Institute of Management Accountants (CIMA) (2023).