KUALA LUMPUR, March 28 Malaysia's Islamic endowments may soon move from mostly donated real estate to share and bond funds led by external managers to produce better returns.
The endowments, known as awqaf in Malaysia, operate social projects such as hospitals, mosques and schools with donations received from Muslims usually in the form of real estate. They are run by the religious bodies of each state, but poor financial returns and a lack of economic efficiency prompted a government review of Malaysia's awqaf last year.
Cash awqaf, which instead rely on equities and bonds, promise better returns but would require external asset managers to oversee the use of more risky assets.
"Several states are embarking on cash awqaf concepts. The important aspect is for both state and the private sector to work together," Radzuan Tajuddin, a senior official with the Islamic capital market department of the securities commission, told Reuters.
Malaysia's stock market regulator and the Oxford Center for Islamic Studies held a two-day roundtable to discuss ways to modernize awqaf. "The key assessment was to identify areas for reform," said Tajuddin.
The move into cash awqaf would expand the donor base by welcoming smaller contributions in the form of cash, stocks and bonds, rather than "immovable property" said Aamir A Rehman, managing director at Fajr Capital Advisors. These tradable assets could also improve awqaf returns through more active management of a portfolio.
"The government can still play a key role in terms of strategy and decision-making. But expertise in financial markets is generally not expected from government officials," said Rehman.
Cash awqaf could promise greater returns, but the use of liquid assets means they could also incur significant losses. "If you have financial investments, they can go to zero. That's an issue people have not thought about," said Abdulkader Thomas, chief executive of SHAPE Financial Corp, a Kuwait-based consultancy for Islamic finance.
Cash awqaf may also need a review of the current awqaf laws, which rely on 'ijtihad' or interpretations by religious scholars that need updating to address many new questions and the sector's drive to innovate, said Thomas.
Awqaf globally have been slow to progress with the broader Islamic finance sector, he said, although the modern economies of Malaysia, Singapore and Turkey are in best shape to lead the way.
In Malaysia, awqaf is monitored by a national foundation although decisions are still made by the respective states. "You're dealing with entrenched interests. For any proposal to change how things are governed would require quite a lot of work on a political level to get people to agree," said Thomas.
Only six states in Malaysia have explored cash awqaf, with some requiring minimum contributions as low as 5 ringgit ($1.50). But financial institutions still play a minor role.
Bank Muamalat Malaysia Bhd became the first Islamic bank to manage an awqaf fund , when it was hired by the state of Selangor in 2012. "The first step is achieving greater conceptual clarity on the parameters on which awqaf can operate. Once there's greater conceptual clarity, you can do a lot in terms of reform," said Rehman.
(Additional reporting By Bernardo Vizcaino in SYDNEY; Editing by Eric Meijer)