Enhancing the Idea of Corporate Waqf with Initial Waqf-Share Offer

The idea of corporate waqf has recently been enhanced further with an Initial Waqf-Share Offer. With an innovation of great value, the Waqaf An-Nur Corporation (WAN Corp)- the entity set up by Johor Corporation, a public sector conglomerate to manage the assets and shares it endows – has hit the market with an offer of 850 million new shares worth RM85 million to the wholesale and the retail markets. The immediate objective is to generate revenues for upgrading and overhaul of Larkin Sentral, the public transport terminal in the state of Johor Bahru and the purchase and development of land for the benefit of the public. The promoters underscore two additional objectives: to enhance awareness about the concept of waqf; and to provide opportunities for people regardless of race or religion to create wealth and contribute to community. Since the waqf is considered a public waqf, both Muslims and non-Muslims can participate as investors. Both Muslims and non-Muslims who subscribe to Larkin Sentral can benefit from the proceeds obtained from the Offer. The funds will mainly be used to finance the upgrade and repair works of Larkin Sentral , the main and largest public transport terminal in Johor Bahru, as well as its adjacent market, and the acquisition of land for the construction of a seven-stage car park.

In the said waqf, the four pillars as required under Shariah are as follows: The waqif or the endower are the subscribers to the shares issued. The shares constitute the maukuf or the endowed assets. The immediate beneficiary of waqf or maukuf a’laih is WAN Corp. The ultimate beneficiaries include poor lessees and tenants of the shops in the Larkin Sentral complex, to be identified by WAN Corp as well as the larger community of commuters who will benefit from the enhanced and improved facility. WAN Corp will also act as agent of the waqif to execute the waqf deed or declaration to form waqf. According to Malaysian laws, the nazir or trustee-manager for all waqf or endowed assets is the concerned State Islamic Religious Council – the MAIJ in the state of Johor Bahru. In an interesting tweak, the concept of nazir is extended to include another party. MAIJ now assumes the role of nazir-am and delegates the responsibility of actual management of assets to nazir-khas or special nazir. In the present waqf, WAN Corp also assumes the role of special nazir.

1. Waqif subscribe to waqf shares issued by Larkin Sentral
2. Waqf Deed executed and waqf shares issued to WAN Corp
3. Larkin Sentral declares dividends on the shares held as waqf by WAN Corp
4. 90 percent of the dividends received by WAN Corp flow back to Larkin Sentral for reinvestment in the project as well as distribution as refunds on lease rentals among poor tenants identified by WAN Corp
5. 10 percent of the dividends received by WAN Corp passed on to MAIJ

An overview of the waqf offer is illustrated in the diagram above.

Waqf Benefits for Whom:

As is clear from the above, ten percent dividends received by WAN Corp will be channeled to the MAIJ, which will then be used as follows:(a) 5 percent will be retained by MAIJ as the sole trustee of waqf in the State of Johor in accordance with Section 89 of the Administration Enactment Islamic Religion, 2003; and(b) the remaining 5 percent will be distributed for charitable purposes involving education, entrepreneurship and health sectors. A bulk of the dividends – ninety percent received by WAN Corp will be passed on to the project-sponsor, Larkin Sentral for reinvestment and charitable purposes. In case of reinvestment, the ultimate beneficiaries are the commuters who will use the enhanced and improved facilities. In case charitable activities (as elaborated below) the ultimate beneficiaries will be poor women-entrepreneurs and micro businesses who may find it difficult to pay rentals for shops at market rates due to adverse business conditions. The distribution between “reinvestment purposes” and “charitable purposes” however, remains unspecified.

More specifically, the dividends from the waqf shares meant for charitable purposes, will enable Larkin Sentral (as required by WAN Corp):  (1) to charge reasonable rental rates by way of lowering rental rates by up to 10 percent of going market rental rates for selected tenants of Larkin Sentral (that will exclude tenants with a strong business), subject to good performance in the form of timely rental payments; and (2) to impose minimum rental rates for established shop lots in Larkin Sentral for single mothers and low-income groups (at approximately half the market rates). Larkin Sentral, the project-company is required to maintain proper documentation and submit evidence to the satisfaction of WAN Corp for the purpose refunds. The former is required to provide, on a monthly basis, a list of tenants selected by Larkin Sentral that benefit from the reduced rental rates and minimum rental rates to WAN Corp. Refunds by WAN Corp will be based on the lists provided. Larkin Sentral will inform tenants about the reduction, if exists, by credit note.

Benefits for Waqif-Subscribers

The clear focus on the beneficiaries and the process flow of benefits is welcome as well as understandable. This is supposed to be the primary trigger for motivating the waqif-subscribers. Of course, they are entitled to tax benefits as any other donor for a noble cause under Malaysian tax laws. Section 44(6) of Malaysian IT law provides that any gift of money to government, state government, or local authority is eligible to be deducted from taxable income. A deduction is also available for any gift of money to an approved institution or organization, which is not operated or conducted primarily for profit. However, this is restricted to 7 percent of aggregate income. The Finance Act 2009 has increased this restriction to 10 percent of aggregate income in the case of companies. Individuals or corporate subscribers to the waqf shares are, thus, eligible for similar tax-deductions as the case may be, from income for the period from January 1, 2015 until 31 December 2019.

Risk Factors

The project according to the sponsors and promoters involves the following types of risks:

Risks regarding upgrading and refinement of Larkin Sentral and land development

These include: (i)    possible delay in completion; (ii)  potential claims from contractors, tenants and visitors; (iii)possible failure by contractors for the supply of raw materials and labor; (iv)possible failure by managers in managing the uplift and repairing of Larkin Sentral and in ensuring contractors’ performance and managing daily operations; (v)  possible failure to obtain building plan approval for expansion of the bazaar and shop lots as well as failure to get planning permission and building plan approval for land development from local council;

Risks relating to land acquisition

(i)    possible inability to complete land acquisition and to obtain financing in the event of a shortfall in financing; and (ii)  possibility of take-over of land by the Government

Financial risks

(i)    Inability to mobilize required financial resources before closure of offer; (ii)  Risk of variability in profit rate and consequent non-compliance with the credit-terms resulting in low dividend payouts; (iii) Possible change in dividend policy.

The project related risks are inherent to every infrastructure development project and there seem to be no unique risks with the Larkin Sentral project. It may be noted that Larkin Sentral has very strong locational advantages that mitigate such risks. It is located within the Flagship Zone A in Iskandar Malaysia and is the main transportation terminal in Johor Bahru. The public bus service from Larkin Sentral offers various transport destinations in Peninsular Malaysia and Singapore and taxi services from Larkin Central provides transportation to all major cities in Johor and to various destinations outside of Johor. Apart from bus and taxi services, the Larkin Sentral building is also a wet market selling fresh produce such as fish, vegetables, meat, fruits etc. that can accommodate up to 1,000 visitors at one time. In addition to the food court, there are also fast food restaurants such as Kentucky Fried Chicken, Pizza Hut, McDonald’s, Dunkin ‘Donuts and Subway as well as various bakeries and coffee shops. The transport terminal also has a bazaar selling various items such as clothes, bags, shoes, books, groceries, health products, wedding items, snacks and providing services such as sewing shops, laundry, shoe repair and watches, hairdressing and clinic services. Other facilities include An-Nur Larkin Central Mosque, Waqaf An-Nur Clinic, mini Post Office, ATMs and parking lots. Larkin Central strives to generate a steady flow of results through recurring rental income. Improved facilities are expected to significantly increase the demand for rental space occupancy rates for retail tenants.

The impact of this innovation on the Malaysian as well as the global waqf landscape is expected to be significant. Its success will go a long way in popularizing the concept of corporate waqf and how it can serve as an effective tool to meet resources gap for infrastructure development. A lot depends however, on the efficiency and effectiveness of the special nazir as well as the project company in managing project risks leading to high-quality development; in generating the expected returns on the portfolio of waqf shares; and finally, in ensuring low rentals for intended poor shop-owners through the suggested mechanism. The combined objectives of the waqf – developmental and charitable – make it difficult to draw any prior conclusion regarding possible trade-offs between the benevolent and commercial objectives of the exercise in future. The “corporate” nature of waqf assets (shares) permit managerial discretion in the determination of pay-outs (unlike pre-determined pay-outs in case of comparable Shariah-nominate contracts, e.g. mudharabah and musharakah). The quantum of expected benefits available for distribution, thus, can only be observed ex-post. The current dividend policy may speak little about the future pay-outs. The arbitrariness in the matter is further enhanced by the fact that the distribution of dividends between “reinvestment purposes” and “charitable purposes” also remains unspecified and left to the discretion of the management.