International Journal of Islamic Economics and Finance Research, Vol. 3, No.

2, 2020
e-ISSN: 2636 – 9419

ENHANCING GOOD GOVERNANCE PRACTICES OF WAQF

INSTITUTIONS: LEARNING FROM SHARIAH GOVERNANCE
FRAMEWORK OF ISLAMIC FINANCIAL INSTITUTIONS

Rusni Hassan
Institute of Islamic Banking and Finance
International Islamic University Malaysia
[email protected]

Adnan Yusoff
Universiti Tenaga Nasional
[email protected]

ABSTRACT

Throughout Islamic history, waqf is proven as an excellent mechanism for the development of
the socio-wellbeing of the Muslim community. Waqf assets can be used for religious and social
welfare purposes like building mosques, public health, transportation and education and others.
However, due to the limited regulatory framework and control over waqf institutions, there are
many undesirable issues regarding the waqf management authority. If these issues continue,
the waqf institutions will have a negative public image and undermine the objective of the
Waqf. This paper highlights the issues on lack of good governance practices in waqf and
proposes that waqf institutions should be learn from the established Shariah Governance
Framework of Islamic Financial Institutions. The Shariah Governance Framework for Islamic
Financial Institutions has been established and well-practiced in the Islamic Finance industry
for nearly 10 years. Throughout these years, the industry has seen the excellent impact of good
Shariah governance practices in terms of enhancing administration and management of the
Islamic financial institutions and thus supporting tremendous growth of the industry. Both waqf
and Islamic Financial Institutions share the common basis that they are Shariah compliant
based institutions. As such, learning from the success of the other is highly advocated. Thus
this paper will examine the governance framework for waqf which is based on trust,
accountability, God consciousness, hisbah, and mutual consultation. These principles will be
examined and analyse in the context of Shariah Governance Framework of Islamic Financial
Institutions to see how Waqf can benefit and learn from the good practices of Islamic Financial
Institutions. It is submitted that having a good governance system is a vital way to resolve the
issues faced by waqf institutions, which leaves governance an unquestionable aspect for the
success of waqf institutions.

Keywords: Waqf, good governance, Shariah Governance Framework, Islamic Financial

Institutions

INTRODUCTION

Waqf is one of the most important institutions that have contributed immensely to the socio-
economic and social development since the early days of Islam. Waqf is defined as “taking the
corpus of any property, out of the ownership of oneself, transferring it permanently to the
ownership of Allah (s.w.t.), and dedicating its usufruct to others” or “the holding of an asset

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(mal) and preventing its consumption for the purpose of re-extracting its usufructs for certain
righteous benefit as predetermined by the waqf founder (waqif)” (Kahf, 1998).
The definitions extrapolate that waqf is an endowment of revenue generating property
for the benefit of public or specific beneficiaries. The revenues are used for the welfare of the
society including social, spiritual, and economical objectives, the revenue of which is
distributed among the poor and the needy, mosques, schools, graveyards, orphans, widows, old
folks, and so on. The list of the beneficiaries is not comprehensive; as long as the donor
determines the need of a group or individual for any Shariah compliant purpose the donation
would be considered valid.
Waqf is a dedication made by one person for the benefit of others, with the intention
that the dedicator be entitled to a continuous reward from Allah the Almighty. As soon as the
waqf is declared by the person it will affect a transfer of his property to Allah the Almighty.
Once a piece of property is given for waqf, the owner is not allowed to have any claims over
it, since the property is said to belong to no one but Allah. A trustee in the form of a single
person or a group of person has the responsibility to manage the property for the generation of
income which is distributed as specified by the founder. This is in lieu of the characteristics of
waqf that are irrevocability, perpetuity and inalienability. As observed by Ismail and Possumah
(2014), both Imam Muḥammad, and Imam Abu Yusuf said that “waqf signifies the extinction
of the waqf`s ownership in the thing dedicated and detention of all the thing in the implied
ownership of God”.
As evidenced in Islamic history, since the time of the Prophet, peace be upon him, until
this day and age, the socio-wellbeing of the Muslim community can be developed by means of
waqf. It is of great importance for the development of the poorer sections of society as waqf
properties can be managed to generate income for distribution or even for further accumulation
of assets (Mohiddin & Nooraini, 2015). In fact, waqf is an important economic and social
institution for the purpose of generating economic activity whilst at the same time ensuring that
benefits will accrue to specific sections of society.
Despite its importance and significant contribution to the Muslim society, waqf faced
serious issues and challenges on its administration and management (Chowdhury et.al,2012;
Nor Aimi et.al, 2014; Hassan R, 2018). Waqf institutions throughout most Muslim countries
have not been managed well and its role having deteriorated slowly. Waqf assets have been
undermined due to lack of maintenance by the trustees, improper disclosure and weak
governance practices. GIFR 2015 reported that these are the issues that faced by waqf
institutions in almost all of OIC countries (GIFR 2015). Specifically, the World Bank, INCEIF
and ISRA (2019) quoted that lack of professional management culture among waqf
administrators has always been a problem in many jurisdictions. However, the notable
exception is found in Kuwait and Singapore where the waqf administrators are managed
efficiently by applying modern management techniques, competent administrators and
transparent report (Report on Maximising Social Impact Through Waqf Solutions, 2019).
This research aims to highlight on the importance of governance for waqf to resolve
issues faced by waqf institutions. Since there is no established governance framework that is
specifically applicable to waqf institutions, it is suggested that the good experience of Islamic
Financial Institutions (IFIs) need to be taken into consideration in proposing a governance
framework for the waqf institutions.
This paper is organized into seven sections. Whilst section one introduces the research,
section two briefly describes the methodology of research adopted in this study. Section three
elaborates the concept of waqf, its importance and issues revolving waqf; section four discusses
waqf governance; and followed by discussion on Shariah governance framework of IFIs in

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section five. Section six provides the discussion and findings of the research and section seven
concludes the paper.

RESEARCH METHODOLOGY

This research is an exploratory research, which was conducted to identify and accumulate
existing literature on the subject matter of waqf, Islamic Finance and Shariah governance.
Based on this information, further analysis and conceptual proliferation was performed in
proposing the Shariah governance framework or model for waqf institutions. Secondary data
collected from articles, books, and online resources are mainly used in this paper. The library
research method is applied in collecting the data.

THE CONCEPT OF WAQF, ITS SIGNIFICANCE AND ISSUES

There is no specific mention of the term waqf or its equivalent in the Qur’an but it’s concept
can be implied from the verse which states:

“By no means shall ye attain righteousness unless ye give (freely) of that which ye love: and
whatever ye give, Allah knows it well” (Al-Qur’an, An-Nisa’ 3:92)

The main objective of waqf is ‘birr’(goodness) ‘khair’(well-being) ‘ihsan (well-wishing

deed) that includes all charitable purposes that are acceptable under the Shariah that benefit
society such as socio-economic, educational, environmental, scientific and the like (Laldin et
al., 2008).
The objectives of waqf can generally be either public (waqf am); specific (waqf khas)
or mixed/combination of both (waqf mushtarak). The public endowment (also known as waqf
khairi) is where the prime purpose of the waqf is for charity and public benefit such as poor
and the needy in society (Mohiddin & Nooraini, 2015). Whereas specific or private waqf is
whereby the beneficiaries of waqf are dedicated or prescribed person. The beneficiaries of waqf
can also be the family members of the founder (waqif), their heirs or relatives (waqf ahli). In
the case where waqf is meant partly for the public and partly serving the family and
descendants, it is known as waqf mushtarak.
There is no dispute on the amazing achievements realized by waqf foundations in
enhancing general welfare and serving the needy, regardless whether they were public utilities
waqf, education waqf, health care waqf, or even research waqf. As observed by Ihsan and
Hameed (2011), following the era of Prophet Muhammad (s.a.w.), and his successors, rich
kings and wealthy Muslims took on the responsibility of establishing waqf assets for the good
of the society. Throughout the history of Islamic civilisation there were numerous records on
the existence of waqf for the purpose of scientific research in field such as astronomy,
pharmacology, physiology, and mathematics. These practices did not cease to exist in Muslim
societies, despite political and social changes over time. As recent as the beginning of the 20th
century witnessed the founding of waqf based establishments in the form of health care centres
and hospitals, such as the Waqf Children Hospital of Istanbul (Habeeb Ahmed, 2011). In fact,
the most prominent type of waqf to be found in Muslim history were those in the sector of
hospitals and medicines.
Indeed, waqf is another Islamic-based method to alleviate poverty in society, serving as
an effective system for poverty alleviation by improving non-income aspects such as education
and health, while increasing access to tangible resources, facilities, and employment (Abul

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Hasan M. Sadeq, 2002). History has witnessed that it was the norm in Muslim societies to rely
upon waqf. The ummah’s social welfare was extensively uplifted as a result of waqf.
Despite the fact that waqf being an incredible tool for the society’s economic and social
upliftment, there are a number of issues surrounding waqf. The issue of accountability is one
of the prime issues in waqf institutions. There is no proper regulatory framework and no strict
legal enforcement on waqf that led to ineffective management, lack of disclosure and absence
of good governance practices. Waqf institutions are not given attention by the regulatory
bodies, as well as not being effectively monitored by the beneficiaries. Waqf assets are not
managed efficiently to generate revenue, even to cover the maintenance cost of the assets. The
shortage of qualified and skilful staff in waqf institutions contributes to inefficient
management. All in all, it can be said that there is no structural administration with the absence
of clear and consistent procedures, making waqf management ineffective.

WAQF GOVERNANCE

Waqf, being an Islamic based institution, must be governed based on the Shariah principles and
objectives. The essential concepts of governance for waqf based institutions should always be
derived from the sources of Shariah such as the concept of amanah (trustworthiness);
mas’uliyyah (accountability); taqwa (God consciousness); hisbah (enjoining good and
preventing evil) and shura (mutual consultation) (Hassan, Musa & Yusuff, 2018). These are
the pillars or principles underlying good governance practices of waqf institutions (Figure 1).

Figure 1: Good Governance Practices of Waqf Institutions

Source: Hassan, Musa & Yusuff, 2018

Waqf is essentially created on the basis of trust (amanah) whereby the trustee’s
(mutawalli) task is to abide, not only the will of donors (waqif) by observing the terms
stipulated, but also the will of Allah whereby he is obliged to manage the waqf according to
the principles ordained by Allah. The trustee is accountable (mas’uliyyah) to manage the waqf
asset for the beneficiaries as prescribed by the donor (waqif). The mutawalli shall always
observe good conduct, due care and conscious that his ultimate accountability towards Allah
(taqwa) in upholding his duty as a mutawalli. Being a responsible and accountable trustee also
means that the mutawalli shall promote goodness and avoid wrongdoing while administering
waqf institution. While managing the waqf institution, the mutawalli should consult the

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management team, experts and relevant authority for guidance and best decision. The practice
of mutual consultation (shura) is an effective mechanism to manage the waqf efficiently.

SHARIAH GOVERNANCE FRAMEWORK OF IFIS

Shariah governance is a management and administrative system that ensures all activities and
business transactions by IFIs are free from non-allowable elements such as riba, gharar, maysir
and other similar attributes. According to IFSB Standards 10 (IFSB 2009) Shariah governance
system refers to the set of institutional and organizational arrangements through which an IFIs
ensures that there is effective independent oversight of Shariah compliance. Pursuant to this
standard, the Central Bank of Malaysia (CBM) has issued a Guidelines on Shariah Governance
Framework of Islamic Financial Institution (SGF) in 2010. The guidelines set out the
requirements on the IFI’s Shariah governance structures, processes and arrangements to ensure
that all its operations and business activities are in accordance with Shariah. There are six (6)
principles underlying the SGF that are (i) robust SG structure, (ii) oversight, accountability and
responsibility, (iii) independence, (iv) competency, (v) confidentiality; and (vi) Shariah
compliance and research function. According to the general requirement of Shariah governance
framework, the essential key functions of key organs in Shariah governance framework are the
board, Shariah committee, management and Shariah compliance and research functions (SGF
2010).
The implementation of SGF 2010 has seen the strong and orderly developments of the
Islamic finance industry in Malaysia through institutionalization of Shariah governance
structures, policies and processes in ensuring end to end Shariah compliance operations in IFIs.
To further strengthen and alleviate Shariah governance exercise in the IFIs, the CBM has issued
a new policy document on Shariah Governance in 2019. Upholding the same principles as
stated in the SGF 2010, with some enhancement and refinement by emphasizing on the Shariah
control functions as well as the features of transparency and disclosure, the new policy
document focuses on the reinforcement of the oversight accountabilities of the key SG organs
in performing their duties as regards to Shariah compliance. The role of board of directors,
Shariah committee and management are intensified and the Shariah control functions (Shariah
risk management, Shariah audit and Shariah review) are further structured to ensure effective
management of Shariah non-compliance risks (SGPD 2019).
Good Shariah governance practices require the IFIs to establish a sound and strong
Shariah governance structure that is aligned to their size, nature and complexity of their
operation and business activities. The emphasis is placed on the oversight, accountability and
responsibility of key functionaries in ensuring effective implementation of Shariah compliance.
Proactive roles of the board, Shariah committee and senior management are expected in
promoting Shariah compliance culture in the IFIs.
To safeguard the independence of the Shariah committee, IFIs shall ensure the sound
Shariah decision-making process in their respective institutions. The board of directors, even
though is the ultimate decision maker in the IFIs, must recognize the independence of the
Shariah committee. The board, with the help of Shariah committee and the management is
expected to perform thorough oversight over the effective operationalization of the Shariah
governance processes (Hilmy, H. M. A. & Hassan, R., 2019).
Any person bearing responsibilities outlined in the Shariah governance shall possess
the necessary qualification and competence by continuously enhance their knowledge and
understanding on the Shariah as well as keep grasp on the latest developments in Islamic
finance (Shamser Mohamed, et.al., 2016). Professional ethics, judgment and consistency shall

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be maintained in Shariah decision making process by the Shariah committee without

undermining the decision of the central Shariah body.
For an effective and efficient Shariah compliance management, the IFIs must appoint
competent Shariah officers to perform Shariah control functions comprising of Shariah review,
Shariah audit and Shariah risk management. Whilst the function of Shariah review is to make
assessment regularly on Shariah compliance activities and operations of the IFIs; Shariah audit
provides an independent periodical assessment to evaluate the IFIs’ degree of compliance in
relation to their business operation (Kasim et.al, 2013; Noor Aimi et.al, 2019). The scope of
Shariah audit shall cover all aspects of the IFI’s business operation and activities, including
audit of financial statement, compliance audit on organizational structure, people, process and
information technology application system, as well as review of adequacy of the Shariah
governance process. Shariah risk management, on the other hand, is to systematically identify,
measure, monitor, control and mitigate any possible Shariah non-compliance events.
Transparency and disclosure are also fundamentals for good and effective Shariah
governance practices. Accurate and complete report must be made to the regulatory or
supervisory authorities but also accessible to the public at large. In the context of IFIs, the
annual report must not only contain financial aspects of the business but must also composed
of Shariah governance statement by the board of directors and Shariah committees, on the
assurance of overall Shariah compliance operations of the respective IFIs (Part G, SGPD 2019).
The disclosure on the state of Shariah compliant operations of waqf institutions is similarly
expected by the waqif, beneficiaries and other stakeholders. Comprehensive, structured and
systematic report not only boosts up the confident of the stakeholders but also inviting the
public to participate more in waqf.
The implementation of a structured Shariah governance framework in the Islamic
finance industry has proven to be a positive factor for the enhancement of religious assurance
vis-à-vis Shariah compliance and thus improved credibility of the IFIs (M. Haridan, 2018).
Consequently, the Shariah governance framework of the IFIs can be the benchmark for
developing the same for waqf institution. Insights will be drawn from the organs of Shariah
governance, namely the board of directors, management and Shariah Committee, albeit
different organs that have to be identified for waqf management. Undeniably, disclosure of
information through good reporting is also one of the fundamental principles of Shariah
governance framework that must be emulated by the waqf related bodies in raising up the bar
for waqf administration and management. Not only the waqf institutions earned trust of its
stakeholders by practicing good Shariah governance practices, but a well-established Shariah
governance framework ensures good performance of waqf institutions and will increase the
confidence of the public to contribute more waqf assets in the future. This in turn will boost the
waqf reputation and functions for the benefit of the ummah (Shafii et. al, 2014).

ANALYSIS AND FINDINGS

Good governance practices are important to ensure that waqf play its role significantly. Ihsan
and Ayedh (2015) and Cajee (2008) have highlighted that the future development of waqf
largely depend on good governance practice of waqf institution. Although the idea of
governance in waqf is still new and its application is limited outside the realms of financial and
economic institutions, the stakeholders in waqf organization should be looking forward to
identify the suitable Shariah governance model that is consistent with the nature of waqf and
its peculiar features (Elasrag, 2017). Governance is one of the principal constituents of good
management that guarantees transparency, disclosure, accountability, limitation of liability,
and making sure that waqf administration adheres to legitimate provisions, applicable laws and

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systems, codes of conduct, and Islamic morals. Such guarantees shall contribute to maintaining
the waqf institution, its assets, properties and beneficiaries’ rights. They generate confidence
in waqf and create a positive image of it to the whole society. Besides, they contribute to
protecting waqf from the risks resulting from mismanagement (Ramli, Salleh, & Muhamed,
2015).
To revive the eminence of waqf, there needs to be a new approach and strategy for good
administrative and well-managed system that is efficient and responsive to the latest
management styles and information technology. There also needs to be a new dimension of
development that can make waqf a major source of economic strength, this will require a
change in society’s perception of traditional waqf practices. Consequently, there is no
compromise on the need of good Shariah governance practices.
Comparatively speaking, it is timely for religious based institutions like waqf to learn
from the IFIs in their good practices of Shariah governance. Having established a well-
structured Shariah governance framework serves the IFIs in upholding overall Shariah
compliant operation and activities which are fundamental to all types of religious based
institutions like the IFIs and waqf. In this regard, the Shariah governance framework for IFIs
can be a suitable model that can be observed as a parameter for good Shariah governance
practices in waqf institutions. As both waqf and IFIs are governed by the Shariah tenets, the
Shariah governance framework of the IFIs is a suitable system that ensures all their activities
and transactions are free from non-Shariah compliant elements.
The assessment on the governance principles of waqf institutions and the Shariah
governance framework of IFIs show that both principles share the same fundamental values
(Figure 2). This is comprehensible due to the fact that both institutions are based on the same
fundamental concepts i.e. the Shariah principles.

Figure 2: Aligning the Principles of Waqf Governance to SGF of IFIs

Source: Authors’ own

Aligning the pillars of Shariah governance framework of both waqf and IFIs, it is logical
and explicit that the principles of amanah, mas’uliyyah and taqwa are reflected in the principles
of oversight, accountability and responsibility as enunciated by Shariah governance framework
of IFIs. Waqf institutions must put in place the accountability and responsibility of every

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internal organ that are involved in the implementation of Shariah governance framework in
their organisations. The roles and functions of the key Shariah governance players, such as the
board of director (or the equivalent), the mutawalli and the management, need to be properly
identified and assigned. To ensure that all decisions made pertaining to waqf comply with the
principles of Shariah, the appointment of independent Shariah Board is inevitable. The
members of Shariah Board shall comprise of qualified Shariah scholars that are capable of
giving Shariah rulings on the relevant Shariah matters. The decision of Shariah Board must be
respected and implemented in the management and operation of waqf institutions. Even though
the members of board of director and the management may comprise of Shariah experts, but
having and independent Shariah Board is importance to ensure that all Shariah decisions are
independently done. Upholding the Shariah principles in waqf institutions is an unyielding task
and thus it is expected that these key organs must discharge their duties in mutual respect
(shura), god consciousness (taqwa) and trustworthy (amanah).
Mutual consultation (shura) is an important element that guides waqf administrator in
their decision making. Waqf administrator or manager must know who and how to consult the
relevant authority in making the decision. As such, a good structure that is suitable based on
the respective waqf institutions need to be developed. The Shariah governance framework for
IFIs may provide general guidance on the process and structure to be adopted whilst the
respective waqf institutions may adopt their own internal Shariah governance framework
according to their need and requirement. What is important here is that the framework must be
robust and suitable to ensure utmost protection of Shariah principles and the specific objectives
of waqf.
The main aim and objective of Shariah governance framework is to safeguard the
objectives of Shariah or Shariah compliance. This objective is embraced in the concept of
enjoining good and preventing evil (amr ma’ruf wa nahy an munkar) or known as hisbah. In
the context of Shariah governance framework of the IFIs, this can be represented in the Shariah
compliance process such as Shariah review, Shariah audit and Shariah risk management. These
functions involve the examination and evaluation of the waqf institution’s level of compliance
to the Shariah, remedial rectification measures to resolve non-compliances and control
mechanism to avoid recurrences of such non-compliance. Effectively, the stakeholders of the
respective waqf institutions shall be convinced that the overall operations of waqf is what it is
supposed to be.
Generally, for an effective Shariah governance and good management of waqf
institutions, the similar arrangement as regards to the key personnel that is accountable to
Shariah governance in both institutions should be reflective of each other. However,
acknowledging the additional unique feature of waqf, the institutionalisation of the mutawalli
is be incorporated in waqf governance (Table 1). The mutawalli, being the authority to decide
matters in waqf should hold the responsibility as the governance caretaker, together with the
board of directors and also the Shariah board. These key organs must be competent
professionals or scholars that are able to make good and independent decision, not only for the
benefit of donor (waqif) and beneficiaries (mawquf), but also to ensure that the waqf is
administered and managed according to the expectation of regulatory authorities and public at
large.

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Table 1: Shariah governance organs in IFIs and Waqf institutions

Functions Shariah Additional Explanation on SG Functions
Governance Shariah (IFIs and Waqf)
Organs in IFIs Governance
Organs in Waqf
Institutions
Governance • Board of Mutawalli/ • Oversight functions on Shariah
Directors Trustee governance
• Shariah Board • Independent view and decisions
• Competence/professionals
Risk • Shariah • Shariah Review/Shariah Audit functions
Management Review • Internal assessment on Shariah
and Internal • Shariah compliance
Control Auditor • Provide mitigating measures to avoid
• Shariah Risk Shariah non-compliant
Management
Compliance Regulatory and • Continuous assessment on overall
Financial compliance
Compliance • Report to regulatory/supervisory authority
• Annual/financial report as part of
compliance
Source: Authors’ own

Human resource is an important factor for good governance practice. All personnel in-
charged of Shariah governance framework of waqf institution, be it the board of director, the
Shariah board, the manager and the officers performing Shariah compliance related functions
must possess the necessary competency and continuously enhance their knowledge and
understanding on the Shariah and waqf in particular. It is recommended that a set of fit and
proper criteria requirement is to be adopted in the recruitment of waqf personnel and
appointment of the board members. The fit and proper criteria may consist of qualification and
disqualification requirements and terms of reference for their appointments. Consequently, this
can be the basis for assessment of their performance.

CONCLUSION

Waqf is an important tool for the community’s socio-well-being throughout Islamic history.
Waqf assets have been used to provide free education, medicine, transportation and so forth.
However, its functions deteriorate due to improper management of waqf assets, lack of
accountability and adequate disclosure, ineffective management, insufficient regulatory
framework, and other various issues. Consequently, this demands that the waqf institution to
be fairly regulated and closely monitored, and its governance to be strengthened.
It is believed that introducing good Shariah governance practices will minimize these
issues to certain extent. Nevertheless, there is no guidance or model for Shariah governance
framework for waqf institutions that have been established. To establish effective governance,
we must further ensure that all waqf governing bodies have the experience and expertise
required in this asset-management role. This includes ensuring that waqf authorities possess
the necessary understanding of the Islamic principles and laws which govern waqf.
This framework may include a clear specification of the roles and responsibilities of
the waqf trustee and the waqf authority, as well as a code of conduct outlining the need for the

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trustees to act in good faith, with prudence and financial care, and in the best interest of the
donors and beneficiaries. The role of Islamic corporate governance is to promote corporate
fairness, transparency, accountability and maintain good relationship between different
stakeholders as well as the relationship with Allah (Ahmed, Omar, & Faosiy, 2015). The
internal governance of the waqf authorities must not be neglected, and that there should be an
adequate internal control put in place, including risk management protocols and regular audits.
In this context, this paper suggests that the Shariah governance framework for IFIs can
be a good model for waqf since both institutions are Shariah compliant based. Whilst Islamic
Finance has proven its excellence and global leadership through effective implementation of
their Shariah governance framework, it is pertinent for waqf institutions to adopt and adapt the
Shariah governance framework of IFIs without the need to reinvent the wheel.
Implementing and maintaining a robust governance framework for the management of
waqf may seem a daunting and difficult responsibility, but it is an absolute overbearing if waqf
authorities are to gain and strengthen stakeholders’ trust and confidence, thereby ensuring the
sustainability of waqf as a key component of Islamic social finance, and of the social economy
as a whole.

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