Promises of Blockchain for Awqaf

An international forum on Waqf and Blockchain with the theme “harnessing the potential of blockchain technology for global waqf development” is being held in Kuala Lumpur tomorrow. Jointly organized by the International Centre for Waqf Research of the International Islamic University Malaysia and FINTERRA, a start-up in the field of FinTech, this event promises to explore the economic, Shariah-related, technology-related and other practical considerations underlying the application of blockchain technology for development of awqaf across the globe. So what is the promise of blockchain technology? And how will it address the enormous challenges facing the global awqaf sector?

Blockchain is an emerging, enabling technology. Experts assert that similar to the PC or internet, blockchain poses transformative power to individuals and organizations, enabling them to achieve step-function improvements in productivity. However, instead of revolutionizing logistics or physical production, blockchain stands to redefine transactional processes – and the accompanying relationships – that exist between individuals, companies and governments. (Beyond Crypto: Blockchain Applications Create Enterprise Solutions)

In the context of awqaf, what is the nature of the transactional process and what are the accompanying relationships? A waqf (plural: awqaf) is a perpetual endowment. The literal translation of the word waqf is “to hold”. The institution of waqf or awqaf, therefore, implies holding or setting aside certain assets by the donor (waqif) and preserving it so that benefits continuously flow to a specified group of beneficiaries or community. The nature of the expected benefit or the purpose of the waqf is clearly stated in the waqf deed or document created for this purpose by the donor (waqif). A traditional example of waqf is that of donating or setting aside a land for construction of a masjid or a school or a hospital. The donor also specifies the trustee-manager(s) who would ensure that the intended benefits materialize and flow to the community. The trustee-manager is variously described as mutawalli or nazir. The waqf deed provides for the method of compensation of the trustee-manager, usually a part of the earnings or benefits from the assets under waqf. The trustee-manager may also be paid a pre-determined amount of compensation, though paying him/her a share of the earnings or benefits is a better method as it would give him/her an incentive to generate/maximize profits. Then, there are other stakeholders in the game, depending upon the waqf infrastructure present in a given region/ country. There may be the government or a state-created agency assuming a regulatory and/or supervisory role, though this role is originally meant for the judiciary.

It appears we are in familiar territory when we seek to apply blockchain to the institution of waqf. The building block of waqf is the waqf deed that is a written record of the transactional process and the relationships. While blockchain employs a variety of modern technology and security steps absent in a written text, it is essentially a ledger, or a record. Similar to a written record, it has chapters – or blocks – of information, each added sequentially over time.

In recent times, with a growing concern regarding recovery of lost awqaf properties across the globe due to encroachment, often by the state or its agencies, powerful corporates and individuals, there have been ambitious initiatives to create computerized central databases on waqf deeds/ assets. I am aware of at least two such projects in India and Indonesia, where conservative estimates place the value of awqaf assets at 24 billion USD and 60 billion USD respectively.  A project for the Balkans is also underway led by the Islamic Development Bank. Will a blockchain based approach yield better results than the central databases?

Experts note that the blockchain fundamentally differs from the traditional databases or computerized/ manual records. It differs in two distinct ways.

First, the blockchain is a shared record. We are no longer talking about records that are centrally controlled and updated, whether written documents by individuals, or digital files owned by database administrators. In these cases, a centralized authority would govern the records. By contrast, the blockchain is a distributed record. No single participant owns the blockchain or dictates additions to it. Rather, updates are a function of consensus amongst participants. In the context of awqaf, it is perhaps an extremely ideal scenario that the society as a whole or the waqifs (and designated individuals/ bodies, e.g. Islamic scholars/ jurists/ waqf-entities) collectively own the blockchain. In some cases the blockchain may be “public” with complete access to waqf records given to every member of the society. The blockchain may also be “private” with restricted access for specific parties with ability to “modify” or “update” records by consensus. It would definitely be a more desirable scenario where participants (society) by consensus decide to modify the intended use or develop the asset or replace the asset if considered desirable in societal interest, as compared to one where the changes are effected by a waqf board/ waqf commissioner.

Second, the blockchain is immutable. It stores a history of itself back to the first entry, known as the genesis block. The identity of each new entry is created, in part, from the identity of the previous entry. Because every individual block is inextricably linked to all that precede it, changing its content or identity is essentially impossible. It is this feature of the blockchain that makes it most suitable for awqaf. A waqf by definition, is inalienable, irreversible (for most Islamic scholars with some recent exceptions) and perpetual dedication of a privately owned asset for public purpose by the owner. Throughout the history of Islamic societies, there have been cases of abuse, misuse and usurpation of waqf assets, tampering and destruction of waqf deeds by bad actors (which unfortunately included public or state agencies as well as private entities). A search for solutions to this apparently intractable problem has eluded the societies. Given the immutability of the blockchain, which brings in its unprecedented security in the form of tamper-proof record, impermeable to incursions by bad actors, we may just have hit upon a solution.

As an append-only database, blocks cannot be changed once committed to the blockchain. The blockchain only changes by the addition of new blocks. It appears most suitable for creation of waqf-mushtarak or for use of new waqf resources for development of existing waqf assets.

It must be noted that awqaf have a business face too. The waqf resources must be invested in the best possible way to maximize returns, which tmay then be directed at the intended beneficiaries. The blockchain database has enormous potential for corporate applications. Experts note that the blockchain eliminates the need for an intermediary third party, such as a state agency (often lacking credibility). Both transacting parties can trust that the information added to the blockchain cannot, and will not be changed. Large waqf-based organizations could directly interact with each other, writing their own contracts with no need to involve third parties, or any other intermediary to assert correctness. Blockchain also allows participants to reach consensus, or settle a transaction quickly. Multi-day processes channelled through intermediaries are reduced to minutes, thereby, enhancing the efficiency of waqf-based organizations.

Experts note that for shared records such as, waqf deeds or contracts, the blockchain fundamentally transforms ownership, transparency, security and consequently, the value of the records and the process they govern. In the context of a shared record or contract, blockchain reframes the concept of trust. The blockchain lets people (or companies) who have no particular confidence in each other collaborate without having to go through a neutral central authority. As a machine for creating trust, the blockchain could provide a solution to the problem of massive trust-deficit in the waqf sector. Indeed the importance of trust can be hardly overemphasized in the context of development of waqf assets, especially where it involves infusion of private capital. Often the trust-deficit is linked to society’s concern for preservation of waqf assets. For example, in the face of large scale encroachment of waqf assets in India by state agencies, most proposals to develop a particular waqf property and transform the same into productive community assets has met with stiff resistance by community leaders.

Often the contracts that go with waqf management evoke trust-deficit. For example, waqf assets are often leased (if not sold or offered as collateral) at grossly below-market rates, or are offered for a near-perpetual lease term to lessee(s). While waqf laws seek to minimize such possibilities through provisions, e.g. penalty for the mutawalli, these have generally been ineffective in most jurisdictions, aggravating the problem of trust-deficit. The blockchain potentially offers a solution in the form of smart contracts.

A smart contract is a computerized transaction protocol that executes the terms of a contract. It purports to, inter alia, satisfy common contractual conditions (such as payment terms, liens, confidentiality, enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs. For example, the Islamic lease contracts can now take the form of self-executing digital or smart contracts, with “electronically coded” terms of the contracts. The contractual terms will execute only if the conditions are met. This will automate the entire contractual process for Islamic institutions. The Islamic contracts will now be easy to verify, immutable and secure, mitigating operational risks arising from settlement and counterparty risks as well as administrative and legal complexities and redundancies. Thus, a “smart ijara” or operating lease contract – that uses the blockchain and automates the periodic payment streams as well as reversion of leased assets to the waqf at the end of lease period – will now be a self-paying and self-executing instrument.

The promises of the blockchain for awqaf are many. Whether the Islamic societies in general, and waqf institutions in particular will be able to turn them into reality, remains a moot point.