Bank Indonesia (BI) announced recently its plan to issue waqf (Islamic endowment) based bonds as a social welfare mechanism to support struggling commercial assets.
The Indonesian Muslim Intellectual Association (ICMI) will also launch the very first waqf venture bank this June. Can waqf become next best thing in Islamic finance?
Islamic economics and finance projects initiated in the early 20th century aimed for the “elimination of poverty and reduction in inequalities in the distribution of income and wealth” (Siddiqi, 2006).
This project was then actualized in the form of Islamic banking and finance. Indeed, Islamic finance and banking has played a role in achieving the above vision of the founding fathers, being alternative institutions and instruments chosen by the previously untapped market.
Why should we expect waqf become the new trend in Islamic banking?
The first reason is the fact that in the history of Islam, waqf has played a great role in achieving welfare for the people. It is vital, to the extent that Hodgson ( 1974 ) postulated that the successes and the failures of the economy in the Muslim world depended on the efficiency of waqf.
Waqf was the main vehicle for financing both commercial and public ventures, a role that has been replaced by banks and other financial institutions (Hodgson, 1974; Kuran, 2001).
Secondly, waqf funds can be utilized for equity-based financing, a financial structure considered ideal for Islamic values, but undervalued in the current Islamic banking and finance architecture. A waqf bank will enable us to actualize the “ideal” mode of financing, namely mudharabah and musyarakah.
Shinsuke Nagaoka of Kyoto University, Japan, once attributed the early emergence of Islamic finance as the “Murabahah syndrome” due to its dominant use in the current Islamic banking practices. This contract is structured in a manner in which an Islamic bank finances the borrower by buying the capital goods needed and selling it at a marked-up price.
Although still labeled as new horizon 1.0 by the Japanese academic for Islamic Economics and finance movements, more profound criticism was that many Islamic products were derived from conventional financial practices. They are “sharia-compliant” but fail to uphold Islamic values above the legalistic form.
To cope with this, Mehmed Asutay ( 2011 ) and…