Part 2: In this series of articles on IslamicBanker.com, renowned economist Murat Çizakça explores Waqf – one of the greatest institutions in Islamic history and how it can be revitalised.
Some readers will have noticed by the similarity between the historical cash awqaf and modern Islamic banks: both were designed originally to operate through mudarabah and both ended up utilizing, from the Islamic perspective, less preferable instruments. This cannot be a mere coincidence. What then were (are) the reasons behind this undesirable situation?
Although risk aversion must be a trait shared by both the trustees of the cash awqaf and modern Islamic bankers, the causes of risk aversion in history and today differ. Whereas the trustees in history were precisely instructed in the waqf deeds by the founders of cash awqaf how to utilize the capital, modern Islamic bankers apply murabahah on their own initiative. It has been shown elsewhere that there are two basic reasons why modern Islamic bankers insist on applying murabahah despite all the criticism they have been subjected to; managerial and financial . As far as the former is concerned, Islamic banks have found it very difficult to supervise and guide the individual entrepreneur in a mudarabah situation. This is quite natural, since mudarabah demands close, personal and continuous contacts  between the principal and the agent. Moreover, this is not merely a moral problem and is not limited to monitoring the agent’s activities. Such contacts in the form of mutual co-operation and assistance should constitute the very essence of any partnership. However, we have learnt from experience that, unless seriously reorganized, the large and bureaucratic Islamic banks are simply not suited for this task. Experience, again, has taught us that such co-operation is best provided by the relatively small, specialized companies as observed in the American venture capital sector.
Concerning the latter, Islamic banks encounter a mismatch of funds; whereas the deposits they collect are of short term nature, mudarabah investments usually involve long term commitments . It is precisely at this point, i.e., the problem of mismatch of funds, that cash awqaf represent an exciting potential. Let us imagine for one moment that it were possible to combine cash awqaf and Islamic banks. Since waqf capital that is entrusted to an Islamic bank would represent a long term, even hopefully a perpetual fund, the problem of mismatch of funds would be definitively solved. We will now concentrate on how this combination can actually be realized in reality.
If cash awqaf and Islamic banks could be combined, the financial problem mentioned above would be solved leaving only the managerial problem unsolved. Consequently, the merger of these institutions should be designed such that the managerial problem is also solved. Put differently, providing cash waqf /long term capital to the banks would not suffice, we must also see to it that this capital is invested with close, continuous, personal management that mudarabah demands. This necessitates that the management of mudarabah funds is totally separated from the bank management. This can be done in one of two ways: either Islamic banks establish associated companies with autonomous management which specialize in mudarabah investment or completely independent mudarabah companies are established by third persons and the capital of the cash awqaf is entrusted to these companies. Actually, this is not an either/or situation; these alternatives need not be mutually exclusive.
Let us see how a cash waqf would be linked to an Islamic bank. Assume that a person wishes to establish a cash waqf with his savings. Assume further that the purpose of this waqf is to help finance entrepreneurs who wish to establish their own businesses. The founder approaches an Islamic bank and informs them of his intention. Then he deposits his savings in a special account and establishes a waqf attached to the bank. The bank would thus become the trustee (or mudarib) of the waqf. Next, the bank would transfer the endowment capital to various specialized mudarabah companies. The bank may have provided equity finance to some of these companies or they may be completely independent. In any case, by transferring the waqf capital to a multitude of such companies, the bank actually creates a portfolio. In this process the bank signs a mudarabah contract in the name of the waqf with each of these specialized companies. Thus, each mudarabah company becomes in fact the mudarib of the waqf and agrees in advance that it can invest the awqaf funds only through mudarabah or musharakah. This solves the managerial problem mentioned above. Islamic bank is not any more involved in the management of waqf funds. This is entrusted to the specialized mudarabah companies. Actually, to be more precise, Islamic bank’s involvement in the management of waqf funds in this model is limited to a periodic assessment of the performance of the mudarabah companies. If the bank is satisfied with this performance, the waqf funds can indeed remain with the mudarabah company in perpetuity. But to ensure this, the mudarabah company must perform. To provide further protection to the awqaf funds, the mudarabah company may also be required to ensure the mudarabah capital through takaful insurance that would guarantee the safety of the original waqf assets .
Next, we come to the linkage between the mudarabah companies utilizing the waqf capital and the entrepreneurs financed. Since, again, only mudarabah/musharakah instruments are used, there is no problem from Islamic perspective. Structurally speaking, we are talking about a triple mudarabah arrangement here. The first mudarib is the Islamic bank also fulfilling a trustee function as just described. The second layer is the various mudarabah companies and the third is the entrepreneurs. In this structure, it is possible to form two different sets of portfolios and thus minimize the risks. The first portfolio is created by the bank and pertains to the mudarabah companies and the second one is created by each one of these companies and pertains to the entrepreneurs.
Reducing the risks by setting up two different sets of portfolio constitutes only one aspect of the perpetuity of the waqf funds. The other one is the re-investment of profits returned to the waqf. Research has revealed that in the Ottoman economy, more than a quarter of the cash awqaf established in the city of Bursa survived for more than a century and 81% of these surviving awqaf owed their resilience to capital enhancement realized either by re-investment of profits or receiving further donations from various other smaller cash awqaf (the so-called Rahmenstiftung model mentioned above) . In view of this, it is suggested that the modern cash awqaf add their profit shares to their corpus thus ensuring the perpetuity of the endowment. Actually, it is quite possible that in this way, not only the perpetuity will be assured, but also, managed properly, the original endowment capital will substantially grow in real terms as well.
Actually, establishing a cash waqf within the framework of an Islamic bank and mudarabah companies, constitutes only one aspect of cash waqf creation. A modern cash waqf can also be created directly by endowing joint-stock company shares. This can be done as follows. An individual with substantial means can allocate a part of the shares he owns for a cash waqf. He can stipulate further that the returns to be generated by these shares would be allocated for a specific charitable purpose. In view of the previous paragraph, he would be well advised to stipulate further that a certain part of the total returns would be re-invested by purchasing more shares and added to the corpus of the cash waqf.
What we have just stated above does not constitute an original suggestion. Muslim philanthropists have already thought of these possibilities and established cash awqaf as described above. The Vehbi Koç Foundation in Turkey constitutes perhaps the best example of such a waqf. The following excerpt dictated by the late Vehbi Koç, himself, and taken from the Deed of Trust of his foundation explains why he had decided to establish his foundation as a cash waqf:
“Praise be to Almighty God, who with His Will enabled me to perform charitable works during my lifetime with pleasure, and granted me the means to continue (performing ongoing charity) after my death. In my belief that the Turkish Nation will continue to exist so long as the world endures… and my wish being to establish this foundation in perpetuity, I have based this endowment on a commercial entity that will be able to adopt itself to the requirements of the day rather than on properties dependant on economic conditions and natural disasters. I have chosen to set up this endowment with the shares of Koç Holding. These are made up of numerous commercial and industrial enterprises, and are therefore less subject to risks. This foundation that I have established by the grace and kindness of God, I entrust, first of all, to my heirs and to their succeeding generations, to my business colleagues and to the Government of the Republic of Turkey. I call upon all my heirs, my close acquaintances, my business colleagues, my fellow citizens who may be involved in this Foundation, and the officials who will assume its administration, to accept this endowment as a bequest made to the Turkish Nation, to protect it, and strive with their best intention to achieve its original aims. I request the auditing authorities of the State and, when necessary, its authorized agencies, courts and judiciary, never to depart from the dictates of their conscience when making decisions, lest this foundation suffers harm and be diverted from its aims. I have brought this enterprise into being as a result of lifetime of effort and sincere desire. I pray that God will regard it worthy of His protection and grant it success”. 
The late Vehbi Koç’s personal statement reveals a number of important points on which we would like to comment. First, there is a deep sense of religiosity and gratitude to the Almighty for allowing him to do continuous charity even after his death. In other words, an awareness of the importance of sadaqa jariya and the Prophetic tradition mentioned at the beginning of this article. This is followed by an explanation why he has decided to organize his endowment as a cash waqf rather than one based on real estate. His decision was based on the concern that real estate awqaf may be vulnerable to economic conjuncture and natural disasters. Since, the shares of his own holding are made up of numerous commercial and industrial estates, “they are less subject to risks”. Here we observe a profound understanding of the way waqf functions. Vehbi Koç seems to have been fully aware of the vulnerability of real estate awqaf to economic conjuncture. Such vulnerability has been demonstrated by Suraiya Faroqhi based upon the seventeenth century records of Mahmut Pasa Vakfi. Faroqhi has shown how stagnation can ruin a waqf by providing evidence that due to the stagnant trade conditions more than half of the Ankara revenue as calculated in gold coins was lost to this particular waqf and how the cloth market in Konya was allowed to fall into ruins .
Although we have no way of knowing as to how the Vehbi Koç Vakfi would fare under similar conditions, theoretically, it may be argued that a conglomerate capable of penetrating into international markets should be better equipped in dealing with stagnation by diversifying its markets. Indeed, there are more than 100 companies in the conglomerate with 40,000 employees and the total number of Koç Holding shares allocated to the foundation have been declared as 10,000 . In this way, the late Vehbi Koç, a brilliant businessman, has diversified the risks.
At the end of 1993 the book value of the foundation’s assets stood at $ 120 million with an approximate market value of $ 297 million. The foundation is then entrusted first, to the coming generations of his heirs, thus, this is essentially a family waqf in perpetuity, and then to the business colleagues and then to the Government of Turkey. The business colleagues were probably included with the view that if the heirs prove to be incapable individuals, the colleagues who run the Koç enterprises should interfere and manage the waqf with proper business perspective. Their inclusion in the deed would certainly enable them to have a say in the waqf affairs. Inclusion of the Government is also telling: Vehbi Koç had been an eye witness to the great destruction of the Turkish awqaf by the state that took place between the 1930s and 50s. Perhaps, by entrusting his endowment to the Government of Turkey he wanted to impose a moral obligation on the state. Finally, he prays that “God will regard it worthy of His protection”.
We are given further important information pertaining to the investment of the foundation shares in the waqf deed. Article 7 of the Vehbi Koç Foundation Deed stipulates that all excess cash of the foundation that accrue to the waqf on annual basis shall be converted into government bonds and kept as emergency fund. These bonds shall be used when the Koç Holding exercises a capital enhancement. Should this process take place, the foundation shall participate therein, so as to maintain its relative share in the conglomerate. Should the emergency fund not suffice to maintain the foundation’s share in the conglomerate, the Board of Trustees can allocate 20% of the primary revenue of the waqf for this purpose. Should a process of capital enhancement not take place, the excess cash of the fund shall be invested in shares and bonds, preferable those of Koç Holding companies.
Article 9 stipulates that a minimum of 80% of the total revenue of the waqf shall be allocated to social and cultural services. A maximum of 20% of the revenue shall be allocated to administrative expenses, emergency cash, and investments to buy properties for the waqf. These conditions also imply a deep understanding of institutional history. For, it is well known that waqf revenues allocated for charity were often usurped by the trustees. Consequently, while historically charity to total expenditure ratio has often declined, salary to total expenditure ratio has often either remained the same or increased at the expense of the former . Vehbi Koç seems to have been either aware of these historical tendencies or has been able to envisage them thanks to his great business acumen. In any case, by stipulating fixed ratios of charity to administrative expenditure, he seems to have been determined to avoid such problems. Finally, we are informed that the Vehbi Koç Foundation has been granted tax-exempt status by the Council of Ministers on 28 December 1968.
The Vehbi Koç Foundation just explained constitutes an example of a large business enterprise establishing its own waqf. But the reverse, i.e., a waqf establishing its own firms, is also possible. In this case, a waqf or awqaf pool their resources and create a company or companies. They also share the profits generated by this company(ies) according to their relative contribution to its capital. The Diyanet Vakfi constitutes an example of a waqf creating a multitude of companies or providing equity finance to already established companies,  while the Koç Foundation is the best example of a huge conglomerate creating its own waqf. The Koç specializes in education and has financed a highly ambitious secondary high school and a major university, while the Diyanet, like the Tabung Haji of Malaysia, is involved in the organization of the annual pilgrimage to Mecca and is represented in 700 localities by 90,000 religious functionaries.
The importance of these innovations cannot be emphasized enough. This is because, for the first time in the centuries’ long history of awqaf we have this institution at last provided with the means to benefit from the dynamism of companies. It will be recalled that notwithstanding Imam Zufar’s prescription that cash awqaf should invest their capital through mudarabah, Ottoman cash awqaf had invested their capital by providing interest bearing loans, istiqlal. Consequently, their income was limited to the “economic interest” that they had charged which always fell behind the market interest rate. In short, risk aversion had condemned Ottoman cash awqaf to inertia. In the post 1967 Turkish Republic, however awqaf have become direct recipients of companies’ realized profits. Thus, ironically, not the awqaf of, Ottoman, but of the staunchly secular Republican Turkey, actualized, at long last, Imam Zufar’s teaching .
Moreover, we can also interpret these waqf-company relations as the rebirth of cash awqaf. Thus, Ottoman cash awqaf destroyed in 1954 by being incorporated into the bank of awqaf, Vakiflar Bankasi, have, like a phoenix, been re-born albeit in a radically different organization structure and in a far more dynamic form. It will be suggested here that these latest developments taking place in Turkey should be carefully taken into consideration by those interested in re-designing cash awqaf.
We can now return to the complex relationship between the state and awqaf mentioned above. This is indeed a highly complex relationship. On the one hand, the rulers founded the greatest awqaf in nearly all the Islamic countries, on the other, many of them exhibited a relentless hostility towards this institution. While, the reasons behind this hostility have assumed different forms over time and space, the hostility, itself, has remained a constant. It is, therefore, all the more remarkable that this institution has managed to survive.
The hostility of the state towards awqaf has assumed a new dimension with the advent of colonialism. Both the British and French colonial powers were hostile to awqaf. This hostility was based on the same principles and took in practice very much the same forms . The colonial hostility, which sought an outright prohibition of awqaf, was supported by the indigenous modernists persuaded by the former. The combination of these two forces was formidable and, thanks to the modernists, the hostility continued, even enhanced, after the colonial epoch.
While we would be justified to criticize the colonial powers and their modernist supporters for aiming to destroy an age old institution that has provided Islamic world with innumerable architectural masterpieces, financed education, health, infrastructure investments and municipal services at marginal cost to the state, we have to be far more restrained in our criticism when it comes to agriculture. For, the colonial/modernist onslaught has ended up transforming agriculture in the Islamic world from one dominated by awqaf and share cropping into one dominated by private ownership of land. Consequently, to the extent that small family ownership of land is more productive than waqf lands exploited through share cropping, aggregate productivity in the agricultural sector of Islamic countries must have been considerably enhanced. In our opinion, a waqf reform in modern Islamic world should not aim at transforming small, family owned lands into waqf held agricultural estates, but concentrate instead on urban real estate and cash awqaf where the real potential lies.
Finally, the definitive establishment of property rights in the post-colonial Islamic world means that Islamic philanthropy shall be transformed. To the extent that Muslims endowed their properties in order to escape confiscations, which, in it as we have seen, is a controversial point, this motive shall disappear. Thus, religious charity pure and simple shall dominate the Islamic world of future. But in the meantime much has been lost and philanthropic gap between the Islamic world and the West has widened: whereas the largest Turkish waqf has an approximate market value of US$ 300 million, in the United States a donation of one billion US dollars has recently been reported .
 Çizakça (1996b), Vol.3, No.2, p.84
 In history close, personal and continuous contact between the principal and the agent in a mudarabah partnership could not be maintained due to distance and communication problems. But this difficulty was partially overcome by the small size of the mercantile community and informal controls imposed by this community on the agent. See Anver Greif, “Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies”, Journal of Political Economy, 102(5), pp. 912-950.
 This is not a general rule, some mudarabah contracts, particularly in trade finance, can be of short-term nature. But mudarabahs involving high technology investments in the industry yield returns only in the long run. For historical examples of both short and long term mudarabahs see Çizakça (1996).
 I owe this point to the anonymous referee of the Islamic Economic Studies.
 Çizakça, “Cash Waqfs of Bursa”, op. cit.
 The Vehbi Koç Foundation (1995), Twenty-five Years of Philanthropy, 1969-1994, Istanbul: The Vehbi Koç Foundation, p.1. I am grateful to my sister, Professor Dr. Çigdem Kâgitc1basi, for sending me this important document from Istanbul.
 Suraiya Faroqhi (1995), p.281-284
 Vehbi Koç Vakfi Resmi Senedi, Article 4, p.5.
 Suraiya Faroqhi (1995), p.285.
 According to; Diyanet Vakfi.(1997), pp.109-119, this waqf had established six different companies and owned 80-99% of their equities. It also purchased shares of various Islamic banks (Kuveyt-Türk Evkaf Kurumu and Ihlas Finans) and insurance companies. Such shares constituted 1-10% of the total net asset value of these companies.
 For the near identity of equity finance and the historical mudarabah see Çizakça (1993).
 David S. Poers (1989), pp.535-571.
 Newsweek, September 29, 1997, pp.13-21.