In Awqaf We Trust: Management of Family Wealth

Some of the earliest awqaf in Islam were founded for the benefit of the poor members of the family. On advice of the Prophet (pbuh), most of the Prophet’s companions (sahaba), notably, Umar Ibn Khattab and Abu Talha Al Ansari, established awqaf for the benefit of their poor relatives by following the Prophet’s advice to hold the property as waqf and donate its usufruct. This directive of the Prophet became the basic principle upon which all the formal and procedural rules that govern awqaf were built.

Wealth creation is part of human nature, and Islam recognizes its importance as a means of life fulfilment. Wealth in Islam is not measured only in material terms, but includes all moral and social aspects of the higher objectives of Shariah (maqasid al Shariah). Wealth preservation is a Shariah requirement, and is mentioned in the Quran and in Hadith. Quranic verses prohibit wastefulness, extravagance and squandering of wealth, and require Muslims to provide for their families during their lifetime and after their death. This implies that the wealth we have control over is ultimately a trust from Allah to be used in accordance with sound moral principles. Allah says:

{And do not entrust your wealth which Allah made a means of support for you to the feebleminded, but provide for them with it and clothe them and speak to them with kind words}  4:5.

The following Hadith urges the Muslim to provide for his family after his death:

(It is better to leave your heirs rich than to leave them poor begging from people.)

The waqf principle of holding the asset and expending its usufruct is a golden rule for wealth preservation and a Shariah compliant system for estate management and transfer of wealth through generations of beneficiaries. Throughout Muslim history, the family waqf (waqf ahli or thurri) was used as an instrument for wealth protection and estate planning. Family awqaf were established to protect family property from falling into the wrong hands or to reduce its exposure to risks that might arise from such things as insolvency, liabilities, claims by creditors and other legal challenges. Once a property is made a waqf, it becomes inalienable and therefore cannot be sold, pledged, gifted, inherited or otherwise disposed of.

Awqaf and family business can coexist in harmony indefinitely. Generational change is a big risk factor and two thirds of family businesses do not survive the transition to the second generation. The issues that cause the demise of a family business are mostly family issues not business issues. Sibling rivalry, conflicting interests and defections reduce the survival rate to the third generation to less than thirteen percent. Declaring the family business as a waqf does not harm the heirs, but on the contrary benefits them. Family beneficiaries need not all be involved in the business. The waqf structure makes it possible for beneficiaries to pursue their own interests while still getting their share of the net profit. The waqf model gives family business a stable foundation with patient capital. Family businesses can evolve through the waqf ecosystem as it provides a sound governance framework that not only saves family wealth from fragmentation, but also helps its intergenerational transition in a frictionless environment.

The family waqf is the responsible legal unit created by the founder to own and manage the business. Once created, the waqf will have its own legal entity separate from that of its founder, nazir or beneficiaries. It is permissible for the founder to be a beneficiary and nazir during his lifetime, and to include non-relatives as beneficiaries, and to dedicate a share of the business profits for general charitable causes. After the founder’s death, if an independent nazir is appointed, his relationship vis-a-vis the waqf will be at arm’s length, in that he shall have control over the waqf’s business and its assets, but no beneficial interest in them. He has fiduciary duty towards the beneficiaries to protect the assets and manage the business profitably for their benefit. He may only receive an agreed fee but not a share of the profit. The beneficiaries will be entitled to the revenue and benefit from the business but will not own the waqf property itself.

The modern concept of family trust was developed in the west in the nineteenth century to preserve family business. Monica M. Gaudiosi (The influence of the Islamic law of waqf on the development of the trust in England: The case of Merton College- 1988) has noted the resemblance between the Islamic waqf and the English Law of Trust and highlighted the strong influence of the waqf on the development of Western laws. There are similarities between the family waqf and the private trust that ensure the continuity of the family business and the flow of revenues to the heirs. Under the Law of Trust as under the rules of waqf, property is preserved and its usufruct is appropriated in order to benefit specific individuals or some other charitable purpose. These institutions can be created for an indefinite period of time and favour the successive beneficiaries. However, there are substantial differences between trusts and awqaf. The structure and purposes are different. The trust is not a separate legal entity like a company or an individual. It is essentially a relationship that is recognised by the courts in the context of their jurisdiction. Family trusts, are often established for tax considerations and other financial reasons. They can dispose of their assets and can be imminently wound up according to laws regarding dissolution of trusts by the settlor, or the trustee or the beneficiaries. In contrast, the waqf is perceived as a sacred trust and there is no separation between its legality and morality. The waqf is protected by a whole raft of Shariah rulings which ensure its irrevocability, inalienability and perpetuity. A family waqf would ultimately devolve to a charitable waqf (Waqf Khairi) after the fulfillment of the object of its creation such as the passing of a certain number of generations or the extinction of the family line and hence the business unit remains within the domain of the waqf.

A family waqf may also be set up in the founder’s will (wassiyah) which by its nature is a testamentary trust that goes into effect only after death of the founder (grantor). However in such a case, the waqf should not exceed one third of the estate and should not include beneficiaries who are heirs under the Islamic inheritance (faraidh) rules. Thus the waqf allows for transfer of the business both while the founder is alive or after his death. Unlike wills, which can be easily contested, a waqf is rarely successfully challenged.

Most Muslim parents share the same concerns and worries about their children’s long term financial security and happiness. They hope that the values upheld by the family and the principles that they cherish will be instilled and handed down to future generations. Many of the parental concerns and expectations arise from the inheritance of wealth. The waqf structure is a trusted mechanism that combines family values and wealth. Investment performance is just one of its functions. What ultimately is more important is realising the founder’s wishes and upholding the family legacy.

By Hisham Dafterdar, CPA, PhD

Chairman, Awkaf Australia Ltd


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