Venture Capital Strategies in Waqf Fund Investment and Spending

99ISRA International Journal of Islamic Finance • Vol. 4 • Issue 1 • 2012
VENTURE CAPITAL STRATEGIES
IN WAQF FUND INVESTMENT AND
SPENDING
Tunku Alina Alias*
Abstract
The cash waqf (endowment) has come into prominence in recent
years since many Malaysian state Islamic religious councils and the
Federal government (through a foundation) began promoting cash
waqf schemes. However, unlike the Ottoman form which spent its
income―derived from simple money-lending and istighlÉl (purchase
and lease-back) practices―on the provision of services to meet public
needs or for alms-giving, the modern cash waqf invests in low return
savings or is converted through the process of istibdÉl (substitution)
into low-income generating assets. This conceptual paper discusses
the application of certain venture capital strategies in both the
investment and spending decisions of the cash waqf. In its investment
decisions, the cash waqf might utilise some of the tools employed by
venture capital firms for choosing its investments and for mitigating
risks. In fact, there is also a possibility for the cash waqf to consider
certain venture capital opportunities as an alternative asset class in
which to invest a portion of its corpus. In its spending decisions, the
cash waqf may choose its beneficiaries in much the same way as a
venture capital firm would choose its investees; that is, by putting
together a portfolio of non-profit organizations (NPOs) with proven
track records for delivering social results and which are seeking to
grow their organizations to achieve financial sustainability. This
paper therefore proposes an Enterprise Waqf Fund (EWF) model that
combines the cash waqf model with relevant concepts from venture
capital to enhance the dynamism of cash waqf. Policy and legal
reforms are also recommended at the end of the paper that would
provide an enabling environment within which the Enterprise Waqf
Fund can operate.
* Tunku Alina Alias is a consultant with the Malaysian legal firm Wong Lu Peen &
Tunku Alina. She may be contacted at tunkualina@gmail.com.

Venture Capital Strategies in Waqf Fund Investment and Spending
100 ISRA International Journal of Islamic Finance • Vol. 4 • Issue 1 • 2012
Keywords: Cash waqf, Venture philanthropy, Venture capital.
I. INTRODUCTION
Practitioners in the Islamic finance industry have been overlooking
the potential of the cash waqf (endowment) as a source of funding. A
cash waqf is an endowment of cash by a founder with the intention
that the corpus or principal should be managed by a trustee so as
to earn an income that could be spent towards righteous purposes
as designated by the founder. Previously, this institution would lend
money to households and merchants in the Ottoman Empire in order
to earn income, by which it could provide public services such as soup
kitchens for the poor, inns for travellers, water fountains, places of
worship, educational services and other basic infrastructural facilities.
Today, the cash waqf has been supplemented by other institutions and
is underperforming. In this conceptual paper, the cash waqf is studied
through a critical junctures framework―a framework that examines
the possibility for institutional innovation due to a formative moment
(through crisis or ideational change) (Hogan and Doyle, 2009). The
paper argues that more dynamism in waqf funds management and
waqf performance can be achieved by applying certain strategies
learnt from venture capital in the areas of investing and spending
decisions.
Cizakca (1992: 408; 2011: 270) proposed that waqf funds may
be invested in venture capital, and this possibility will be discussed
in this paper. As there has been no previous research on the risk-
reward profile for waqf investments or waqf spending strategies and
the choice of beneficiaries in relation to social impact, there is some
significance in the proposition that the business strategies of venture
capitalists may provide a new role for the cash waqf.
It is also necessary to re-examine how cash waqf income is spent.
Funding challenges affect non-profit organizations (NPOs) as much
as they do commercial entities and individual households. Most
NPOs struggle to survive institutionally, as any donation, support or
grant received is channeled into program spending and very little into
institutional sustainability. Therefore, NPOs provide a natural fit for
the cash waqf, in that a well-chosen portfolio of these organizations
would exponentially expand on the waqf’s public and charitable
purposes. The outcome of this paper is a model for a modern cash
waqf, called the Enterprise Waqf Fund (EWF). The EWF is a cash
waqf that employs venture capital thinking and strategies at its
founding and during its operations, specifically in its investing and
spending decisions.

Tunku Alina Alias
The paper is structured as follows: Section II provides an overview
of the legal requirements of the waqf and a brief summary of the state
of cash waqf and NPOs in Malaysia. This provides the context for a
formative moment that can catalyse an innovation for the cash waqf.
Section III draws from the venture capital literature and deliberates on
three concepts used for building the new model: cash waqf, venture
capital and venture philanthropy. Section IV discusses the operational
aspects of the EWF and its investing and spending decisions in
line with the investment methods employed by venture capitalists.
Section V examines some challenges faced by the proposed model
and the reforms necessary to facilitate its proper functioning. Section
VI summarises and concludes the paper.
II. CASH WAQF SCHEMES IN MALAYSIAAND
NON-PROFIT ORGANIZATIONS
Since 2001, many Malaysian state Islamic religious councils as
well as the Federal government (through a foundation) have been
promoting cash waqf schemes. In this way the states could channel
Muslim philanthropic funds towards building and developing Islamic
buildings and facilities as considered necessary. However, unlike
the Ottoman form of cash waqf which spent its income―derived
from simple money-lending and istighlÉl (purchase and lease-back)
practices―on the provision of services to meet public needs or for
alms-giving, the modern cash waqf invests in low-return savings or
is converted through the process of istibdÉl (substitution) into low-
income generating assets. Without sufficient income, the financial
sustainability of the waqf is sacrificed― resulting in continual
dependence on state assistance. This section discusses the concept of
waqf as a background and looks at the state of cash waqf schemes in
Malaysia. It also examines the important role of the non-profit sector
and the link between waqf and NPOs as the basis for developing the
EWF model proposed in this paper. This EWF model would also rely
on additional concepts further explained in Section III of the paper.
A. The Waqf
The word waqf (pl. awqÉf) literally means “restraining” and
“prevention”, although in Islamic literature and in the SharÊÑah
(Islamic law) it means the endowment of property whose usufruct
would be put towards righteous purposes. “Righteous purposes” in

turn has commonly been understood to mean religious, charitable
or public purposes but may also include the maintenance of one’s
family (Abdel Mohsin, 2009).
Although there is no specific evidence for waqf in the Qur’ān,
its legal genealogy in Islamic history is traced back to the advice
of the Prophet (peace be upon him) to ÑUmar, who wanted to give
his date-palm orchard in charity. Allah’s Messenger (peace be upon
him) instructed him to assign the fruit for spending in charity while
the orchard itself could not be sold, given away or inherited (ØaÍÊÍ
al-BukhÉrÊ, n.d.). Building on those basic guidelines, the fiqh or law
on waqf developed organically over hundreds of years through the
efforts of jurists responding to the exigencies of their times and the
customs of their cultures (Barnes, 1987: 17-18; Hennigan, 2004:
107). A contemporary legal scholar defines waqf as follows:
In the context of the SharÊÑah…it implies a form of gift
where the corpus is detained and the usufruct is set free.
The meaning of ‘detention’ of the corpus is its prevention
from being inherited, sold, gifted, mortgaged, rented, let,
etc. As to dedication of the usufruct, it means its devotion
to the purpose mentioned by the donor (wÉqif) without any
pecuniary return. (Bakhtiar, 1996)
There are four legal elements (arkÉn) for the creation of a waqf
(Bakhtiar, 1996: 253; Abdel Mohsin, 2009: 16), namely:
i. the founder (wÉqif);
ii. the property to be endowed (mawqËf alaihi);
iii. the endowment (consisting of giving and consequently detention)
by will or by deed or by act of endowment (waqafiyyah); and
iv. the beneficiary or beneficiaries (mawqËf lahË).
Either moveable or immoveable property may be endowed, provided
it is capable of retaining a perpetual form and being self-sustaining
(Abdel Mohsin, 2003). Under the Ottoman waqf, endowments had
two components: charitable or public purpose property, such as
mosques, schools and hospitals, and income-producing property
(Yedyyildiz, 1996). The income-producing property was assigned for
the continuation and support of the public purpose property (Barnes,
1987). Both types of property can take the form of cash, real estate,
which can be land or building or a right related to a building (Íaqq
al irtifÉq), a diffused share (ÍiÎÎah mushÉÑah), moveable assets (al-
manqūlÉt) or a mixture of different assets.

Tunku Alina Alias
There are many differing opinions amongst the four madhhabs
(schools of thought) regarding the various conditions that are
required to make a waqf ÎaÍÊÍ (valid). However, the majority opinion
(Bakhtiar, 1996; Abdel Mohsin, 2009) is that the conditions (shurËÏ)
for a valid waqf are that:
i. the endowment must be for perpetuity (majority opinion, except
the MÉlikÊs);
ii. the waqf corpus is inalienable;
iii. the endowment is irrevocable;
iv. the endowed property is to be made over to a trustee (mutawallī);
v. the objective of the endowment must be a general or specific
purpose of a charitable nature in the form of pious works,
provision of public goods, or provision for one’s family members;
vi. the endowment must be unconditional and effective immediately
(except where it is made by a will, effective upon death).
The condition that the waqf corpus must be inalienable has posed a
challenge to many jurists in the past as well as the present.As the waqf
is an endowment of property that becomes “stopped” or “frozen”,
the default position is that the property may not be the subject of
sale, transfer or any form of disposition whatsoever, including any
dealings that may jeopardize its inalienability, for example, subjecting
it to foreclosure proceedings under a mortgage action (Abdel Mohsin,
2003). However, from a study of the ×anafÊ position, this stipulation
is not as rigid as it appears. Exceptions to the inalienability concept
have been introduced by ×anafÊ jurists through the exercise of istibdÉl
(substitution) and ibdÉl (sale). These are two of the ten stipulations
or express powers granted to mutawallīs (trustees) by the wÉqif
(founder) in the waqafiyyah (trust deed), subject to the approval of
a qÉÌÊ (judge).
In the past, as the endowed property must be transferred to an
actual person, the legal personality of the waqf lay with the mutawallī
(trustee) (Barnes, 1987). Although the Ottoman waqf was a legal
institution, it did not have legal personality. However, today it may
be possible to incorporate a waqf, subject to the law of the land.
B. Cash Waqf Schemes in Malaysia
Under states law, all awqÉf in Malaysia are managed and supervised
by the respective State Islamic Religious Council (SIRC). The assets
of each waqf are statutorily vested in the SIRC, which is, by operation
of law, the sole trustee. It is not surprising that the objectives of the

SIRC tend to be aligned towards ‘national’ interests, in particular
Malay/Muslim social welfare, with its activities geared towards the
development of urban waqf lands (Alias, 2011).
The National Fatwa Committee (NFC), at its conference on 10-
12 April, 2008, resolved that endowments in the form of cash are
permissible. However, implementation of the NFC’s resolution
requires that the Islamic Religious Council of each of the Malaysian
States issue its respective fatwa (legal opinion) regarding the
permissible areas in which funds received under the cash waqf can
be spent or invested.1
Cash waqf and waqf share schemes are promoted and managed
by seven of the SIRCs, although the value of these cash waqf and
waqf shares are small compared to total awqÉf land values (Abdel
Mohsin, 2009: 50). A waqf share scheme is a scheme whereby the
SIRC sells shares to a fund, and the donor in turn endows the shares
as waqf. The share certificates are commonly of small denomination
such as RM10 per share. The ultimate effect of a waqf share scheme
is the same as that of a cash waqf. According to Abdel Mohsin
(2009), two Federal Government foundations, Yayasan Pembangunan
Ekonomi Islam Malaysia (YAPEIM) and Yayasan Dakwah Islamiah
Malaysia (YADIM), have launched cash waqf schemes. Currently,
a third foundation, Yayasan Waqaf Malaysia, has an ongoing cash
waqf scheme. There is also the unique corporate stock-cash waqf
hybrid whereby Johor Corporation had transferred its shareholding
in several publicly traded companies to its subsidiary Waqaf An-Nur
Berhad and declared it as waqf with the permission of the Johor SIRC.
Furthermore, Waqaf an-Nur Berhad is permitted by its corporate
constitution to invite the public to purchase stock in the company by
way of cash waqf certificate (saham wakaf), thus adding cash to its
waqf assets of publicly traded shares.
After 2008, SIRCs concentrated on developing awqÉf properties,
mainly in the form of land (through federal government grants or
joint-ventures with developers). Additionally, cash from cash waqf
and waqf shares schemes were converted into religious facilities
such as mosques that were built on waqf lands. Some cash was also
1 For example, on 5 September, 2006, the Fatwa Committee of the Selangor Mufti’s
Department resolved that the proceeds of the cash endowments are only to be applied
towards 22 purposes, including the state budget, the poor, scholarships, hospitals,
mosques and schools. On 22 September, 2008, the same committee decided on the
permissible types of investments or assets that monies from the Cash Waqf Scheme
and income of any general purpose waqf could be spent on, including purchase and
maintenance of fixed and moveable assets as well as equipment (Alias, 2011).

Tunku Alina Alias
channeled towards mixed commercial and social-purpose buildings
to generate income and to develop the Muslim community by giving
the Malays/Muslims access to affordable business and residential
premises in urban areas. However, based on a research conducted
by the author, it was found that many of these assets generate low
returns. This pattern was demonstrated in Selangor, Pulau Pinang,
Terengganu and Perak (Alias, 2011).
C. The Non-Profit Sector
The non-profit sector is a vital section of a country’s social-economy
as it provides public services that cannot be efficiently supplied
by either the market or the state. If properly supported, the sector
provides stability and resilience to the society by giving it multiple
options to survive. Indirectly, the sector gives rise to diversity and
self-reliance of the people.
The Organization for Economic Co-operation and Development
(OECD, 2003: 11) estimated that the non-profit sector taken as a
whole would be the sixth largest economy in the world. Between 1968
and 2008, total giving in America was estimated to be between 1.7%
to 2.2% of Gross Domestic Product (GDP). In 2004, Malaysians gave
in kind and monetary terms a total of RM 15 billion, of which RM
14.9 billion was contributed by businesses (Department of Statistics
Malaysia, 2004). This represented 3.16% of GDP, of which household
monetary contributions accounted for 0.02% of GDP (Department of
Statistics Malaysia, 2008).
The non-profit sector, as suggested by evidence in the United
States and Malaysia, has become important, employing and engaging
large numbers of people. However, with the exception of a few
very large international human relief organizations―such as the
International Red Cross and Red Crescent, Médicins Sans Frontières,
Mercy, United Nations High Commission for Refugees (UNHCR)―
and foundations such as the Bill and Melinda Gates Foundation, most
non-profit organizations (NPOs) tend to be small.
The broad characteristics of a NPO are: it is run as a private
organization (that is, it is institutionally separate from the state); it
is self-governing; and its distributions are on a non-profitable and
voluntary basis (Anheier and Salamon, 2006). Therefore, the term
non-profit does not include any government or privately managed
social or employee’s provident funds, organizations, or any other
bodies that are eligible to pay mandatory taxes, social security or
other forms of compulsory contributions or impositions.

Generally, few NPOs have access to funding in order to grow into
large self-sustaining organizations. They rely on the continuous
support of donors and government, with a focus on donations and
contributions to be spent on specific activities (program spending).
As funds are limited, NPOs try to keep administrative costs minimal
and focus on short-term financial performance. Building up their
internal capabilities and strengths as an institution is generally low
on their list of priorities (Kaplan and Grossman, 2010).
D. Connecting the Concept of
Waqf to Non-Profit Organizations
The objective of this paper is to combine the cash waqf with venture
capital processes to achieve philanthropic ends. The result is a new
model, the EWF, whose social purpose is venture philanthropy
and whose chosen business process is venture capital, applied in
accordance with the SharÊÑah. In addition to utilizing the methods
used by venture capital firms when choosing investments and when
mitigating risks, there is also the possibility for the waqf to invest
in venture capital opportunities as an alternative asset class. The
objective of investing is of course for the waqf to earn sufficient
income to ensure its own sustainability as well as to spend towards
its purposes. Finally, when spending its income, the waqf can adopt
venture capital techniques in the choice, funding and management of
NPO beneficiaries.
As the waqf corpus must be kept intact, only the income of the
EWF can be spent or channelled to selected NPOs in the form of
hibah (gift) grants or qarÌ Íasan loans (loans without interest). These
NPOs will then use the funds to strengthen their internal set-up, both
operationally and financially, so that their existence would not be
so fragile. Along with providing funding to NPOs, the EWF will
also provide advice and business support, so that eventually, after a
specific duration, the NPOs will be able to wean themselves off the
financial and technical support given by the EWF and “exit” as a
sustainable organization.
However, before going into detail, the paper will first explore the
basic concepts underlying the EWF in the next section.

Tunku Alina Alias
III. IDEAS REFERRED TO IN CONCEPTUALISING
THE ENTERPRISE WAQF FUND
The EWF model that is conceptualized in this paper will derive its
structure from the following three ideas:
a. Cash Waqf;
b. Venture Philanthropy; and
c. Venture Capital.
A. Cash Waqf
The earliest indication of usage of the cash waqf in the Ottoman
Empire was at Edirne, recorded in 1423 CE (Mandaville, 1979). AbË
al-SaÑËd, the supreme religious authority of the Ottoman Empire in
the 15th
century, stepped in to settle a controversy about the legality
of cash awqÉf. He adopted the view of ImÉm Zufar (as summarized
by QÉdÊkhÉn) (Imber, 1997) that cash awqÉf are lawful, based upon
public custom, and because they provided the only readily available
source of credit to the society, so it was clearly not in the public
interest to abolish them. This ruling was confirmed by an Imperial
decree in 1548 CE (Imber, 1997; Ozcan, 2006). According to Imber
(1997), AbË al-SaÑËd called on the literature of stratagems (Íiyal) or
legal devices to deal with doubts about interest in the transactions of
these institutions. He declared them muÑÉmalÉt sharÑiyyah (SharÊÑah-
compliant transactions) and issued a fatwa (legal opinion) confirming
the rate of 15% per annum to be applicable on all lending transactions,
except in the case of loans by a waqf, where he imposed a standard
rate of 10% per annum.2
Later, the Ottoman scholar Birgevi Efendi (1523-1573 CE)
questioned whether the sources of income for the cash waqf were
licit or not (Mandaville, 1979). During this latter period the corpus of
the cash waqf was invested through short-term lending arrangements
known as istighlÉl (sale and lease-back), which involved the
borrowers transferring their own houses or buildings to the waqf in
what was called a sale, but was effectively collateral for a loan, and
2 Of 1563 sample cash awqÉf in the Ottoman city of Bursa, most had constant
returns of between 9 to 12% per annum (Cizakca, 2000: 46). Cizakca also cited
Gerber (1988), who found that the “rent” return on istighlÉl (sale and lease-back)
arrangements, which were common investments by cash awqÉf in Ottoman Bursa,
was 10% per annum.

paying ‘rent’ for the use of a house or building until the loan was
repaid (Cizakca, 2004: 1).3
The income generated from the istighlÉl arrangements were
channeled to three uses: to finance the charitable purposes for which
the waqf was established, towards administrative purposes and the
remainder added to the original corpus in order to build-up the waqf
asset (Cizakca, 2004: 2). By the end of the 17th
century, the use of
cash waqf had gained legitimacy in the Ottoman lands (Mandaville,
1979; Pamuk, 2005).
B. Venture Capital
Venture capital “is typically provided to new, high potential, growth
companies in the interest of generating a return through a realization
event, such as an initial public offering (IPO) or a trade sale of the
company. Venture capital investments are generally made in the form
of cash in exchange for shares of the venture company (invested
company).” (Securities Commission Malaysia, 2008: 122).
On a macro level, Gompers and Lerner (2001) argue that venture
capital constitutes an important intermediary in the financial system
as it provides financing and advisory services to companies that might
otherwise encounter difficulty in attracting capital. These companies
are typically of high risk and are unable to obtain financing from the
traditional financial institutions as they are young and do not possess
sufficient assets that would be eligible as collateral.
The nature of venture capital as an investment asset class is unique
as it has an option-like character in that it has limited downside (the
investor cannot lose more than the amount invested) and substantial
upside gains (Swensen, 2000).
Despite the higher risk that it carries as compared to publicly
traded equities, the empirical evidence is mixed as to whether the
former outperforms the latter or not. Ewens (2009) maintains that
despite the failure of the venture capital industry to neatly outperform
the publicly traded equities, investments in the former do offer some
risk and return features unavailable in the latter. This implies that
venture capital provides the investors with an avenue for portfolio
diversification.
The following describes the common strategies of a venture
capital firm. In addition to providing money, venture capital firms
3 Whether this method fulfills the SharīÑah prohibition against ribÉ (interest) is still
debated by scholars (Cizakca, 2004).

Tunku Alina Alias
provide three critical services to investees: (i) building the investee
as an enterprise; (ii) reviewing and formulating a business strategy;
and (iii) filling in the management team (Al-Suwailem, 1998; Shaikh,
2007).
Hege, Palomino and Schwienbacher (2009) document the
outperformance of theAmerican venture capital industry as compared
to its European peer. First, the degree of involvement and the size of
the investment appear to be a determining factor. The authors found
that US venture capital firms play a more active role, engage in more
sophisticated cooperation with portfolio companies besides investing
more funds than their European counterparts. These activities not
only increase the likelihood of success, they also protect the interests
of the venture capital firm against the negative effects of information
asymmetry.Secondly,sincethefinancingactivityisstaggered,making
a larger portion of funding contingent on the successful completion
of the initial round of funding, this will create the right incentive
for the investee company, as the venture capital firm will then have
the option of completely abandoning the investment midway should
management misbehave. Finally, the use of syndication has also been
identified as an effective way for risk sharing and achieving better
return as compared to standalone investment. Other studies have
corroborated these results (Brander, Amit and Antweiler, 2002).
The key to abnormal positive returns is the special characteristics
of the venture capital firm itself. A top-tier venture capital firm
normally has the pick of quality investors (Swensen, 2000). It is
important for a venture capital firm to ensure quality and reliability
of investors, as the investment horizon is long-term. As the mortality
rate of investees is high (conservatively, more than 50% in the United
States), investors must be able to understand the high-risk nature of
the investment (IHS Global Insight, 2009; Sahlman, 2010).
In the venture capital landscape, all stakeholders are aligned
around one objective: growth of the investee company. The challenge
is to find good companies to grow. In order to gain abnormal returns
to the investment fund, the venture capital firm will carefully select
a portfolio of investees (a typical venture capital firm invests in
approximately 20 to 40 different ventures under various funds
(Sahlman, 2010)). This large portfolio enables it to spread its risks.
It then proceeds over the holding period (between 5 to 7 years) to
provide business guidance to the investee companies in order to
increase value upon exit.
Tomitigatethehigh-risknatureofinvestinginstart-upcompanies,
allventurecapitalfirmsconductaprocessofduediligencetodetermine
the suitability of the market and industry in terms of potential growth

for the prospective investee (Roberts and Barley, 2004). They also
weigh whether the company has a competitive edge in business, the
product development time to market and if the founder and his team
are capable of behaving as entrepreneurs. A financial analysis is also
used to demonstrate the business opportunities, and more importantly
to test the credibility of the entrepreneur.
C. Venture Philanthropy
The use of a philanthropic fund run on business principles to act as
an intermediary which connects donors to beneficiary NPOs is not a
new idea. It essentially aims at combining the principles of venture
capital with those of philanthropic businesses. It began with a
Harvard Business Review article in March 1997 in which Letts, Ryan
and Grossman (1999) suggested that foundations should emulate the
business practices of venture capitalists in building companies when
providing grants to other NPOs. This led to the founding of a number
of philanthropy funds such as New Profit Inc. (Elias, 1999; Kaplan,
2000) and Venture Philanthropy Partners (one of its founders, Mario
Morino coined the term ‘venture philanthropy’) followed by many
others such as the Silicon Valley Social Venture Fund, the Social
Venture Partners and the Nonprofit Finance Fund. By 2004 there
were 42 venture philanthropy funds in the United States totaling US$
400 million (Pepin, 2005). Philanthropists who wish to engage with
charities over a long term establish these funds and, effectively, their
donations act as their investments, for which they expect a social
return instead of a financial return. NPOs that have been supported
by these funds are expected to “exit” the venture philanthropy fund
(in other words, formally terminate their relationship with the venture
philanthropy fund by mutually agreed methods) once the NPOs
demonstrate they can operate on a sustainable basis.
From the venture philanthropy funds’ point of view, the
involvement and partnering of their capital providers have resulted
in improved organizational performance and growth (Letts and Ryan,
2004). Nevertheless, there are still challenges faced by the venture
philanthropy funds in the form of higher costs to the donors due to
their engagement; the making of only incremental gains that fall
short of achieving large scale solutions to societal problems such
as poverty; and the difficulty of defining when exactly the NPO has
reached the point of ‘sustainability’ (Morino and Shore, 2004).

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IV. OPERATIONALISING THE
ENTERPRISE WAQF FUND
The promoters of the EWF would typically be individuals or
parties who are experts or well-versed with social-entrepreneurship
activities. The objective is to establish a cash waqf with endowments
from several selected high-net-worth individuals, companies or the
government (by way of collaboration with the waqf founders). So that
the local community will benefit most from its formation, the original
founders of the EWF should be from the local community so that they
can engage with local NPO beneficiaries.
In order to invite and convince prospective donors to invest in
the EWF (from here on, they will be interchangeably referred to as
donors or investors), the promoters must be able to persuade them
that this would be a more efficient and impactful method to undertake
their philanthropy or corporate social responsibility activities instead
of carrying it out themselves. The success of the EWF will be subject
to the careful selection of donor investors whose philanthropic
interests align with the causes of potential NPO beneficiaries (Kaplan,
2000). The key is to match the competencies of the donors with the
expectations and goals of the beneficiaries.
The stated purpose of the EWF is to assist NPOs or charitable
organisations to become sustainable in order to achieve large-scale
social or public benefit through the provision of qarÌ Íasan (interest
free loan) financing or through grants made on the basis of hibah
(gift). It must be remembered that this funding can only be made from
waqf income and not from its principal.
Therefore, the EWF will involve a three-phase life cycle: the
first phase is asset building (which may take between five to ten
years), during which time the EWF will concentrate on fund raising
and earning income. Once there is a large enough corpus, the second
phase will start (and may overlap with the first phase) with the
management and investment of the funds. The third phase is when
program spending occurs, with the income from investments and
earnings being used for the intended purposes. Over and above the
three phases will be the administration of the waqf. The following
sub-sections elaborate on these phases of the life cycle of the EWF.

A. The Assets Side: Building the Endowment and
Investing the Fund
In this sub-section, the first and second phases of the lifecycle of
the EWF are discussed. What is to be kept in mind is the financial
objective for the EWF to ensure sufficient capitalization of its asset
base so that it can generate the necessary income for eventually
meeting its own operating costs, catering for the future sustainability
of the waqf and spending for program purposes.
i. Asset Building and Fund Raising
Endowments from donor investors to the EWF should be of sufficient
scale to meet the short- to medium-term requirements of the EWF’s
operating and investment needs, as well as to generate sufficient
income for the payout for enterprise financing to beneficiary NPOs.
Assets will be in the form of cash and attributed to two accounts.
A large portion (97%) will form the corpus of the waqf, and the
remaining portion (3%) will be a gift to the EWF allocated to initial
operations and unrestricted spending requirements. The EWF should
be incorporated, with its own board of directors (as trustees), if
permitted by the laws of the country, and shall apply for tax-exempt
status. If the EWF is not permitted to be incorporated due to a lack of
legal framework, then the trustee shall be an incorporated body, that
is, either the relevant statutory body or an incorporated trustee. In any
event, it is crucial for tax-exempt status to be obtained.
In addition to any state grants or casual donations that it receives,
the EWF must diversify its income sources to include other forms
such as earned fees from services rendered, sales of goods, involving
itself directly in social business and managing an investment
portfolio. Overreliance on State or government support only leads to
‘clientelistic’ behavior in the sense that waqf policies will be more
and more aligned with State or government policies (such as what is
occurring with awqÉf managed by SIRCs in Malaysia).
Simultaneously, the EWF can organise fundraising activities,
which might attract three different types of funds, depending on the
strategic model adopted by the EWF. The usual type is unrestricted
donations which can be applied either towards building up the
endowment corpus or towards program purposes. The second type of
fund is donor-advised fund, introduced in the United States whereby
community foundations are given funds by donors to manage,
with directions as to how the income are to be applied – whilst the

Tunku Alina Alias
foundation has no legal obligation to observe the directions, they are
often morally bound to do so. Income is earned through management
fees of these donor-advised funds. The third type of fund is further
endowment funds, received from new or the same founder donors
from the community, which are to be added to the original endowment
corpus to earn more income.
ii. Investment of Cash Waqf Funds
This phase of the EWF lifecycle assumes that a certain critical mass
of waqf funds has been accumulated.
It is usual to begin with an investment policy for the EWF. The
traditional asset classes for investment include income generating
real estate, shares of publicly listed or traded companies, ÎukËk
and other fixed income generating assets. Possible alternative asset
classes for waqf investment include private equity (Lahsasna, 2010),
venture capital (Cizakca, 2011) or Islamic microlending (Ahmed,
2007; Sabit Mohammad, 2011). For each of these asset classes there
are separate considerations for the variability of returns and volatility
of investments.
The primary question is how the waqf managers can safeguard
the waqf principal against loss whilst still investing it to earn optimum
income. Should the waqf funds be invested only in zero or minimal
risk investments equating to zero or minimal returns?
The OIC’s Fiqh Academy in Resolution No. 140 (International
Council of Fiqh Academy, 2004) gave its opinion pertaining to
investment of waqf assets. It is considered compulsory for waqf
funds to invest in SharÊÑah-compliant sectors according to SharÊÑah-
compliant terms. The Fiqh Academy supported diversification and
risk management in the form of taking guarantees and other securities
and suggested that when considering investment strategies, waqf
managers should consider the sustainability of the waqf, as well as
actualizing the benefits to beneficiaries. However, waqf funds are
asked to avoid high-risk investments and not jeopardize the waqf
corpus. With regard to cash waqf, the OIC Fiqh Academy suggested
that it may be invested in contracts such as muÌÉrabah, murÉbaÍah
and istiÎnÉÑ.
In the United States, section 4942 of the Tax Code provides a
payout rule whereby foundations must distribute a minimum of
5% of the average fair value of the foundation’s assets annually,
which clearly draws out the expectations for the performance of
foundational investments. The Uniform Management of Institutional

Funds Act 1972 allows endowments the power to invest pursuant to
the “prudent man” rule and implement investment policies based
on the ‘total return investing’ concept (Kochard, 2008). Similarly,
the United Kingdom Charities Act 2001 contains a provision which
allows the trustees of a charity to apply for an order allowing them to
make investment decisions on the basis of total returns, which is an
approach of setting a certain benchmark for total returns (for example,
a certain percentage above inflation for both capital and income
investments) wherein the form in which the investment income is
received is irrelevant. A series of seminars that were conducted by the
Nuffield Foundation in Britain further demonstrated that trust funds
must balance between spending policies and investment policies
(Nuffield Foundation, 2007; Nuffield Foundation and LBS Charity,
2005a, 2005b, 2005c).
In the context of cash waqf funds, the issue therefore arises
whether the relevant religious authorities or scholars will permit the
total returns approach. Assuming that it is acceptable, the investment
policy must also take into account the risk framework within which
the EWF operates. One difficulty with investing waqf funds is the
principle of inalienability of the corpus; therefore the EWF must
always apply cost-benefit and risk-returns considerations. Risk
management is part of good governance and is important so that
significant risks are known. In this way, trustees and managers may
make informed decisions and take timely action or make the most of
opportunities to develop them with confidence (Charity Commission
for England and Wales, 2010).
This question―whether waqf should assume risk in order to earn
income―is not new and has been asked since the early Ottoman
period. Clearly, awqÉf are not zero-tolerant to risk as evidenced by
cash waqf practices of outright lending or on istighlÉl basis during the
Ottoman period. AbË al-SaÑËd, in permitting cash waqf in his “Risale
fî Vakfi’l-Menkûl” (as quoted by Özcan, 2006), obviously weighed
the risks of lending (and therefore loss of corpus) against the benefit
to the public in the form of provision of credit. According to Cengiz
Toraman et al. (Toraman, Tuncsiper and Yilmaz, 2007: 11), who
studied the Accounting Registries of awqÉf of kadiasker Mehmed
Vahid Effendi, şeyhülislam Esbak Omar Husamuddin Effendi and
şeyhülislam Mehmet Asõm Effendi in Ottoman Turkey involving
records of 1698 cash awqÉf covering the period 1221 – 1806 CE,
monies were lent by these awqÉf on the basis of “huccet (with
deed) or istighlÉl (with guaranty), or both by huccet and istighlÉl,

Tunku Alina Alias
or by istighlÉl and guaranty (or bail)”. For larger loans, it appears
that obtaining guarantees or collateral minimized the risks of loss
(Cizakca, 1992) although small loans were unsecured and merely
evidenced by registration in court (Jennings, 1990).
How does the risk profile of the waqf compare to the risk profile
of a typical venture capital investor? Indeed, they have very different
risk profiles, and it is not suggested here that a waqf should adopt
the same risk profile. However, in managing waqf cash funds, it is
prudent to adopt some of the tactics of the venture capital firm. In
this regard, Swensen (2000) provides a good discussion on managing
foundation asset portfolio. From an institutional perspective, an
American foundation has many similarities to the waqf in terms of
structure, founding and purposes, and much can be learnt from their
investment strategies.
Swensen (2000) notes “[while] fiduciary principles generally
specify only that the institution preserve the nominal value of a
gift, to provide true permanent support institutions must maintain
the inflation-adjusted value of a gift.” His argument is that it is not
sufficient to merely maintain a dollar figure value of the endowment,
but it is incumbent on the trustees to achieve an inflation-adjusted
value. In handling cash waqf funds in particular, doing nothing or
investing in low-return deposits may be counter-productive as this
may actually result in jeopardizing the waqf, due to inflation, taxation
or administrative expenses.
Although the long term or perpetual perspective enables the
waqf to diversify and invest in riskier assets, each waqf must
consider what is acceptable risk under the circumstances and take
into account the various risks―including volatility risks; risk of
tracking error; liquidity risk; and the risk of being uninformed about
the true downside of an investment (Kochard, 2008). Other aspects
such as collateralization, securitization requirements, monitoring of
investments for rebalancing purposes and transaction costs should
also be considered by the waqf.
The next few paragraphs focus on the possibility of investing the
waqf corpus in venture capital, as suggested by Cizakca (1992: 408;
2011: 270), with anticipated profits derived from exits by the investee
companies. Cizakca (1992) suggested that it is possible for a cash
waqf to invest its capital in venture capital firms. In his model, he
postulated that a waqf may appoint several venture capital companies
(VCC), each in the capacity of a muÌÉrib (manager), for a portion
of the waqf corpus funds; and in turn, each VCC would invest in a
portfolio of carefully selected entrepreneurs. He also suggested that

to overcome the problems that Ottoman cash awqÉf faced with regard
to sustainability, income from the venture capital investments should
initially be clawed back towards building up the assets of the cash
waqf to a critical mass. Only afterwards should income be spent on
charitable purposes. However, Cizakca (2011) acknowledges one
difficulty stemming from the riskiness of venture capital investments.
Swensen (2000), who at the time of writing his book was Chief
Investment Officer of the Yale University Endowment, considers
venture capital a viable alternative asset class. He is of the view that
a foundation’s long-term horizon enables it to invest in relatively
illiquid alternative investments. Not only does this reduce risks by
diversification but also it allows capital to be preserved for the future
by allowing growth to catch up with inflation. However, he cautions
that this is suitable only for very large sufficiently liquid foundations
with the ability to meet short- to medium-term operational demands.
Others may not be able to take this approach.
Therefore, venture capital can only be considered one of the
many asset classes into which a waqf fund can invest for purposes
of providing diversification. It should not be the exclusive and sole
investment for a waqf. In order to minimize risks, waqf funds should
only invest in venture capital through experienced top-tier venture
capital firms who have the experience and deal flow and, therefore,
superior access to capital markets. Additionally, a reputation for well-
established connections, business wisdom and insights will ensure
that the best quality start-ups are willing to accept the venture capital
proffered by the venture capital specialist (Swensen, 2000).
The conclusion, therefore, is that the EWF must have a critical
mass of cash or assets, and its trustees are duty bound to devise an
investment policy which should take into account short, medium
and long-term requirements as well as risks. To do this, it may be
necessary for the EWF to have a total-returns approach to investing,
which will enable it to diversify its portfolio and perhaps include
venture capital as an alternative asset class, if considered suitable.
B. The Liabilities Side: Choosing Portfolio Beneficiaries and
Spending the Income
Once there is sufficient income for the EWF, the trustees must decide
on their spending policies in line with the purposes for which the
EWF was established.

Tunku Alina Alias
i. Choosing Portfolio Beneficiaries and Program Spending
Using venture philanthropy ideas, the purpose of the EWF is to assist
NPOs in becoming stable enterprises so that they can meet their
mission. Determining a small (between three to five organizations),
but suitable, portfolio of NPOs before approaching donor investors
for funds will give potential donor investors an indication of the
kind of organizations that the EWF will support. The criteria for
constructing the portfolio would be organizations with a proven track
record of delivering social results and which are seeking to grow their
organizations in order to expand the social impact and to achieve
sustainability. The NPOs should also have the capacity to grow
(Elias, 1999). Potential NPOs making up the portfolio must fulfil
any charitable or public benefit acceptable to SharÊÑah. Programs
involving microfinance, social justice, education, health, civil society
or volunteerism, development and small-medium enterprises are
examples of suitable activities. Moreover, NPOs which are already
carrying out such activities will be able to demonstrate the existence
of structure and thus viability and potential long-term sustainability.
Since the purpose of the EWF is to provide enterprise level financing,
its commitment towards beneficiaries would involve a horizon of
between three to five years for each NPO in the portfolio. Funding
disbursement to portfolio NPOs will only be made in tranches, which
will have a bearing on the investment management strategy to be
employed. Disbursement may take two forms: grants (hibah) and
program-related interest-free loans (qarÌ Íasan), depending on the
beneficiary.
Having a portfolio of beneficiaries is also useful for the promoters
to estimate the level of funding that will be required for the enterprise
level financing to the NPOs and the exit plan for each. Exit occurs at a
targeted stage when the portfolio NPO has attained the goal or target
of sustainability based on a pre-agreed scorecard, at which point the
qarÌ Íasan loan (if one is given) is fully repaid or discharged. Returns
to the EWF would be measured in terms of social impact rather than
in financial terms.
To summarise, using venture capital processes in this manner
to choose effective beneficiaries will provide efficiency and ensure
more social impact for the EWF, as compared to simple distribution
of alms or human relief.

C. Administration
The overarching task which needs to be taken care of throughout the
lifecycle of the EWF is its day-to-day administration. One important
factor is the tax status of the EWF, which may make the difference
between sustainability and jeopardy. Typically, in the United States,
foundation managers ensure a 9% per annum return as a hurdle rate or
benchmark in order to meet payout requirements and administrative
expenses. The challenge for the EWF is whether it will be able to
perform as well.
i. Professional Waqf Management
Once the EWF is formed, its promoters may be appointed as managers
to carry out day-to-day operations, in consideration for which the
manager(s) may be paid a fee. The manager’s duties include managing
and investing the corpus of the cash waqf in order to generate
sufficient income for program spending purposes, monitoring the
performance of the portfolio NPOs, and providing regular reporting
to the donors. Since endowments to the EWF can also be made on a
call basis, the manager (wakÊl) is also required to manage the rate of
endowments being made by donors. In addition, they will support
the NPOs through arranging engagement with the donor investors, or
with third party experts. They will oversee the grants or loans to the
NPOs and monitor their performance.
V. POSSIBILITIES FOR
THE ENTERPRISE WAQF FUND
As mentioned at the beginning of this paper, American foundations
have been involved in venture philanthropy (thereby using venture
capital strategies) when spending on program purposes, and the
larger foundations have invested their assets using the total returns
approach, enabling them to diversify their investments by including
alternative asset classes such as venture capital. These ideas are
common in the United States, and Muslim countries can adopt some
of these practices in order to generate growth and development in
civil society and the social economy. However, before all that can
happen, some ideational changes must occur and these are discussed
in the next few paragraphs.

Tunku Alina Alias
A. Credibility and Measuring Performance
When seeking funds from the community, the most outstanding
challenge is that of gaining and keeping credibility. This is such a
delicate matter that failure to measure and produce evidence of
performance will irrevocably damage the credibility of the EWF.
Measuring results will enable the organization to calculate the benefits
delivered relative to cost (Porter and Kramer, 2011). These will take
into account what needs to be achieved by the relevant organization
in terms of financial performance, what the expectations of its
stakeholders are, what internal organizational changes are required,
and what needs to be done in order for the organization to attain full
benefits.
One of the most important tasks for the wakÊl is to devise a set
of metrics which will assist in measuring the results of the EWF and
of each of the portfolio NPOs. Donor investors will be interested
in the social returns generated by both the EWF and by each of the
portfolio NPOs and will demand a concrete method by which this can
be shown. In the author’s view, examples of the possible metrics are
as follows:
i. Financial goal involving the increase in the discounted present
value of the NPO beneficiary’s lifetime income stream;
ii. Financial efficiency such as low administrative expense to
income ratio or low fundraising expenditure to funds raised ratio;
iii. The satisfaction level of donor investors;
iv. The NPO beneficiary achieving a steady state of operations
without need of capital funds to keep its activities fully sustained;
v. The public awareness created;
vi. The amount and type of intellectual capital accumulated;
vii. The success of programs in terms of number of public served or
extent of public benefit delivered; and
of an adopted index.
B. Governance, Ethics and Law of Fiduciaries
A waqf governance framework is necessary to check potential agency
and moral hazard issues. Public interest must drive the areas that are
to be included in waqf governance. It is important that the directors
of the waqf are guided by a Code of Governance, and possibly
(depending on the size of the waqf) a Code of Ethics, which would
enable the directors and trustees to understand their role, ensure the
deliveryofthewaqf’spurposeormission,workingeffectivelyinshËrÉ

(consultative committee or body) as a team as well as individually,
exercising control over the property and assets of the waqf, behaving
with integrity and being open and accountable.
It is also necessary to develop the fiqh (law) on fiduciary
responsibilities. In addition to basic rules against misappropriating
trust property, the injunction to return property to the rightful
beneficiary and not to squander trust property, the ambit of fiduciary
duties of a trustee under fiqh should be expanded to state categorically
the expected duties of care, loyalty and obedience. The law should
reflect a policy against conflict of interest. This will ensure that all
directors, trustees and managers will act in loyalty to the organization,
and will disclose any personal interest or self-dealings.
Examples of practices to deter self-dealing and conflict of interest
include policies prohibiting directors/trustees from managing the
investment funds of the waqf or ensuring that the board of trustees
would not engage any financial services professional without first
conducting due diligence, including understanding the professional’s
investment strategy (Leslie, 2010).
Public confidence is further encouraged by transparency, which
can be met by fulfilling financial reporting requirements as well as
by allowing public access to such accounts at any time. One simple
method of doing this is by establishing a website and reporting the
activities of the organization.
Accountability, which in Islam falls under the purview of Íisbah
(regulatory institution), shall require properly drawn up accounts that
set out exactly the financial activities of the waqf. This will enable
all stakeholders―whether donors, beneficiaries, managers, trustees,
the public or the government―to measure the performance and
effectiveness of the waqf organisation. The appointment of external
and independent auditors to regularly audit accounts filed with a
public oversight or regulatory body will be crucial to the credibility
of the institution. This will also work as a check-and-balance on the
behavior of trustees and managers.
C. Oversight
The role envisaged for an oversight body of awqÉf could be rule
making, enforcement, mobilization, agenda-setting or information
gathering. However, in the beginning, the oversight body might
concentrate on rule making, standards setting and enforcement.
The analytical framework involves a consideration of the level of
authority to be conferred on the body, that is, whether it ought to be

Tunku Alina Alias
the Federal level or State level authority (Mayer and Wilson, 2010).
The factors to be taken into consideration in its rule-making role
include: availability of expertise, ability to coordinate and resist any
“capture” or influence from any interested parties, accountability and
funding. For enforcement role, the factors involved are: its ability
to be effective, the burden of ensuring compliance, the availability
of other arbitrage opportunities (through other laws or authorities)
and funding. Finally, transaction costs of ensuring compliance of
governance must be tracked against the benefits.
A further dimension ought to be looked into, i.e., this oversight
body can be given the authority to commence legal action against
any trustee or director for breach of legal duties. Since the situation
of the waqf is similar to that of a trust, whereby the donor no longer
has any financial or legal estate in the endowed property, and most
beneficiaries are uncertain and undetermined, the locus for enforcing
waqf purposes should be reposed in the oversight body.
D. Policy and Legal Reforms Required
The Enterprise Waqf Fund is only a concept but can be made a reality
if the environment permits and enables it.
Prospectivedonorinvestorscanbeincentivizedthrougheconomic
measures, the first order of the day being a review of taxation
policies, followed by a liberalization of rules on investments and
income sources for the waqf. However, this must be done in tandem
with certain other strategies to provide a holistic framework. These
include the introduction of an incorporated form of waqf (Cizakca,
2000; Alias, 2011) and an expansion of its role beyond collecting
alms and charity. It also provides the waqf and its stakeholders with
legal rights, which were assigned by the SharÊÑah from the outset but
were eroded over time. These legal rights include the reinstatement
of the family waqf (as a wealth management tool), the return of the
independence and autonomy of the waqf to private management, and
(in Malaysia) release from the restriction of the one-third asset rule
for endowments made during the life of a donor. In this connection,
it is also important to manage the historical legacy to show that
there is no harm and only benefit if changes are allowed to occur.
These benefits include the introduction of professionalism and clear
value basis for governance such as transparency, accountability and
measurable results.

VI. SUMMARY, RECOMMENDATIONS
AND CONCLUSION
A. Summary
The paper can be summarized as follows:
1. Cash awqÉf in Malaysia have under-delivered in terms of
economic performance due to lack of strategic investments and
spending goals;
2. Theycanbemademoredynamicbyapplyingstrategieslearntfrom
venture capital in both areas of investments as well as spending,
i.e., the choice, funding and management of beneficiaries;
3. The objective is to establish a cash waqf whose original founders
will be from the community. The stated purpose of the waqf is
to assist local NPOs to become sustainable in order to achieve
large-scale social or public benefit through the provision of qarÌ
Íasan financing or hibah grants.
4. According to venture capital philosophy, the success of the
Enterprise Waqf Fund rests upon careful selection of donor
investors whose philanthropic interests are in alignment with
the selected NPO beneficiaries’ causes. The key is to match
competencies of the donors with the expectations and goals of
the beneficiaries.
5. The Enterprise Waqf Fund must have a critical mass of cash or
assets, and its trustees are duty bound to devise an investment
policy and strategy that take into account short-, medium- and
long-term requirements. To do this, it may be necessary for
the Enterprise Waqf Fund to have a total-returns approach to
investing, which will enable it to invest in various classes of
assets in order to diversify its portfolio for risk-management
purposes. One of these could be venture capital opportunities;
6. Based on venture philanthropy ideas, the purpose of the Enterprise
Waqf Fund is to help NPOs become stable enterprises so that they
can fulfil their mission. Using its income, the Enterprise Waqf
Fund will channel funds and intellectual capital from donors to
NPOs that have the capacity for and past record of delivering
social returns.
7. In order to make this a reality in the Muslim socio-economy, it is
important to be able to measure performance of the waqf, develop
professionalism, introduce a governance framework―including
developing the ethics and the law on fiduciaries in accordance
with Islamic values―establish an oversight body and introduce
certain legal reforms.

Tunku Alina Alias
B. Recommendations
In conceptualizing the Enterprise Waqf Fund, it is evident that more
research needs to be done, especially in studying the risk profile of
the waqf and its connection to the concept of inalienability of waqf
corpus. This subject has been so sensitive that most scholars prefer
to take a conservative position and default to zero-tolerance towards
assumption of risk. The question to be asked is: What would be
considered the true acceptable risk that a waqf can undertake? In this
connection, would the total return approach to investing awqÉf assets
be permissible? If so, under what conditions would it be acceptable?
It is also timely for another area of fiqh to be developed: the law
on fiduciaries. There are ample examples and authorities pertaining
to the law affecting trustees and trust property, but there are none
regarding the position of fiduciaries, which is very important in
situations where people are placed in charge of funds belonging to
others. Unless this law is developed, too much room is given for
conflict of interest situations to occur.
Perhaps this paper might also catalyse the relevant authorities
into considering reforms so that the waqf can fulfil its original role
as provider of community and public services to the under-served, or
even participate in the provision of capital to those organizations that
are unable to obtain funding in the normal financial markets.
C. Concluding Remarks
The true contribution of the Enterprise Waqf Fund is to the
development of human capital through creating a new category of
professional managers, building up intellectual capital through
business support given to non-profit organizations and enhancing
connectivity between donors and their community. In achieving
these results, the waqf itself will become a social enterprise and fulfil
its core objectives.

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