Awqaf’s Un-calculated Risks

Awqaf organisations, notwithstanding their religious and social objectives, in order to fulfill and promote their social mission, often find it necessary to expand their revenue base by actively engaging in commercial activities and investment. This means that in addition to the sector-specific risk determinants, awqaf are exposed to much of the same risks that affect for-profit companies. However, unlike the corporate world where business owners and managers determine the risk policy, awqaf have not taken a sufficiently robust view of risk management due mainly to lack of risk awareness and training.

Risk management in awqaf is still in the early phase of development and no standards have yet become established which would describe a comprehensive risk strategy for the sector. Awqaf nazirs are better at identifying problems than presenting solutions. They have only one risk management strategy – that of saying no. This is tantamount to bearing the risks themselves, or at best, taking out standard insurance cover for damage resulting from fire, water and theft.

The commitment to manage awqaf risks demands more than adherence to a prescribed set of steps or a series of mathematical calculations. Managing awqaf’s risk/reward trade-off is a vital balancing act. Some of the risks can be avoided, other risks can be reduced and some other risks can be borne. The question that we should ask is what risks awqaf can take to protect their assets, increase revenues and advance their mission, and what should the tolerance level be when the expected rewards are promisingly high and the probable losses are reasonably low? There are no easy answers because the solution is based largely on the waqf’s own mission obligations, asset base, operational processes and social commitments.

The process of screening, evaluating and managing awqaf risks employs both quantitative and qualitative approaches. The quantitative approach relates mainly to asset ownership, investment and business risks and aims at putting in place mitigation measures that weigh the best risk/return profile. There are complex valuation methods that will calculate values at risk as the market fluctuates.

The qualitative approach is more relevant but more contentious simply because the focus is on human behavior and social impact than on numbers and percentages. Sometimes awqaf investment returns cannot be measured in terms of money. These risks are difficult to measure and much more difficult to mitigate. In a complex environment involving the interaction of human, social and economic factors, no system can predict what the incidental and consequential damage will really be in a quality risk occurrence. The harm is usually more noticed and felt than it is measured and quantified.  The qualitative approach provides awqaf with a conceptual framework on how to identify, evaluate and address such risks as Shariah and legal compliance risk, reputation risk, cross-generational risk, benefit distribution risk, and importantly the procedural safeguards for these risks. Descriptive information are used in lieu of numerical estimates to deal with negative impacts.

A basic step in risk assessment findings is the construction of reference benchmarks that correlate with the various aspects of the waqf mission. Benchmarking aims at understanding and evaluating the performance of a waqf organisation compared to the best practices within the sector. A notable difficulty for implementing a holistic benchmark lies in the fact that awqaf lack recognized sector indices. This is because awqaf organisations have different mandates and are accountable to different beneficiaries and multiple stakeholders. A waqf organisation has to improve performance to meet the needs of three main groups: the waqifs, the beneficiaries and other stakeholders. Since the needs are different, a separate benchmark will be required in respect of each group. For the waqifs, the benchmark is the better reach for people in need, for beneficiaries the benchmark is incremental benefit distribution, and for non-beneficiary stakeholders the benchmark is the degree of satisfaction to which the relationship between the waqf and the stakeholders can be established.

For too many awqaf organisations, cybersecurity and technology disruption are posing new risks. Data breaches and online threats are all too common. Many awqaf organisations store information that is considered personal and confidential. If that information gets breached, it harms not only the people whose data was stolen but also the waqf organisation can face a strong backlash of negative reactions for the breach. It’s important for the organisation to have at least some protection.

Risk management is something that needs to be a priority for awqaf perhaps more than it is for the commercial sector. Awqaf organisations have to account for many of the same risks of commercial businesses, albeit there are different levels of protection that awqaf have to cover that companies don’t. The waqf model makes a critical distinction between the ownership and management subsystems. More important than the risks of ownership, are the risks of management and control.

For awqaf organisations with cross-border operations, they have to deal with both local and global risk considerations.  The regulatory burdens can be much greater these days as they need to understand the requirements of all the different countries where they have presence. The demand for better risk management puts a lot of pressure on awqaf and their nazirs. Greater risk awareness is required in the overall governance practices of an awqaf organisation.

Author: Hisham Dafterdar, CPA, PhD, Chairman, Awkaf Australia Ltd