While APIF can serve as a good replicable model for financing awqaf development in India, APIF itself is now in a position to contribute to awqaf development in India with some welcome changes in its regulatory framework (e.g. increase in maximum permissible lease period to 30 years). As discussed earlier in several blogs, the regulatory framework may be further fine-tuned to open up the possibilities of raising resources from the capital market in the form of issue of ijara-based sukuk (for instance, this would require incremental flexibility in leasing rules without altering the laws). Awqaf Boards may seek financing from APIF for developing specific waqf assets using appropriate Islamic finance modes. In this blog, I seek to explain how.
APIF requires the following documents and information for a successful consideration of an application seeking financing of a development project.
A comprehensive feasibility study of the proposed project, containing the following information:
- Description of the project and its component (its location, planning, regulations, urban design,
rules governing it, details of engineering study, etc.).
- Cost of land and construction.
- Schedule for implementing project.
- Market study, supply and demand and the general level of rent in the project area.
- Occupancy rates and expected returns.
- Administrative and operational costs.
- Financial study and basic assumptions on which they rest, financial calculations and the internal rate of return of the project, sensitivity analysis in case of cost overruns by 10 % or decrease of returns by 10%.
Basic Information about the waqf
All necessary pieces of information about the waqf and a copy of waqf deed, where it exists.
Basic Information about the entity in charge of the waqf: Annual audited statement of such entity must be included along with other information.
If similar project has been completed by the same entity, then its basic details, including name, description, location, date, object, cost of the project and its returns.
APIF undertakes a comprehensive assessment of various factors – legal, economic, financial, social, political, technological end environmental – to take its investment decisions. The legal analysis involves (i) waqf deed; (ii) title deed of the waqf property (land) and registration certificate (iii) proof of non-encumbrance on the Property. It also involves (iv) application of the principles of Shariah (v) local laws and regulations on Waqf, Trust, NGOs (vi) land and property law and regulations and (vii) tax law and regulations.
The project cycle for waqf projects financed by APIF involves (i) identification & preparation (ii) evaluation/ appraisal (iii) approval of IDB management (iv) preparation of financing agreements by the Legal Department (v) signature & declaration of effectiveness of financing agreements (vi) implementation and disbursement (vii) repayments and finally, (viii) completion and closure.
In terms of financial analysis, APIF essentially looks forward to a good return on its investments. The maximum duration of the financing is 15 years including gestation period of 3 years (construction period). The minimum amount of financing is US$ 5 million and maximum between US$ 10-12 million. The mark-up, usually comprised of LIBOR plus spread, is added to the financing amount. Total mark-up usually varies between 6%-7%. APIF seeks the following types of guarantees to mitigate risk: (i) sovereign guarantee (ii) bank guarantee (iii) corporate guarantee (iv) guarantee taken on other assets owned by the beneficiary (v) third party guarantee (vi) letter of comfort by the Government (vi) pledge /mortgage and (vii) escrow account mechanism for collection of receivables.
While examining the “business face” of a given waqf project, APIF gives equal if not greater importance to the benefits that would ultimately flow out of the project to the community. The table below seeks to capture this additional dimension of waqf project evaluation.
Development of awqaf sector in India like its counterparts elsewhere faces the critical challenge of liquidity. The portfolio of awqaf assets is highly imbalanced in favor of physical assets. Cash and monetary assets as waqf are almost insignificant. At the same time, cash is needed if the physical
assets are to be developed and transformed into high return-yielding assets. Therefore, the commingling of private investment capital with waqf is tolerated by fuqaha on condition that such private participation would be finite, for a limited period and not dilute the ownership of awqaf assets in any manner. Accordingly, a need is felt to establish a new breed of Islamic financial institutions that would essentially mobilize investment capital that would (i) enhance returns to the Waqf, which in turn would be utilized for furtherance of waqif’s intentions or socially beneficial objectives in the absence of the former; and (ii) provide expected returns to the investors. One of the earliest experiments in this regard has been the Awqaf Properties Investment Fund (APIF) that is managed by the Jeddah-based Islamic Development Bank. The newly established National Waqf Development Corporation (NAWADCO) in India has a similar purpose. Hence, it is proposed that the latter may benefit from the APIF model in many ways and learn from its accumulated experience. At the same time, APIF is now in a position to directly contribute to awqaf development in India with some welcome changes in its regulatory framework. In this blog I briefly present the APIF as a replicable model of awqaf development. APIF was established in the year 2001 with a mission “to contribute to the revival of the Islamic Sunnah of Waqf through the development of Awqaf properties (land and buildings) with the aim of increasing their returns which may in turn be used for the socio-economic development of the Ummah (poverty alleviation, education, health, etc.)”. The purpose of the Fund is to invest and develop in accordance with the principles of Islamic Shariah, awqaf real estate properties that are socially, economically, and financially viable, in the member countries of IDB and Islamic communities in non-member countries.
The Fund provides a full spectrum of real estate business opportunities from development, asset management to complex project financing initiatives. Its operations provide diverse investments spread over in various countries and financing platform across the risk/return dimensions
tailored to the needs of awqaf institutions and charitable organisation worldwide. Key sectors include residential, commercial, retail and industrial facilities.
The main focus of the Mudarib is the long term success of the Fund for the benefit of all stakeholders: waqifs, nazers, beneficiaries, unit holders and the public at large.
The following are the key elements of the Fund’s strategy:
Global reach: The geographical spread of APIF’s operations, which are not confined to IDB member countries, underlines the global platform for the Fund’s operations. The Fund pursues a global strategy giving priority to: (1) APIF’s participating countries; followed by (2) IDB member
countries; and (3) other countries. Integrated services: The Fund seeks to partner with capital providers: APIF’s own capital resources,
IDB Departments and financing windows, other Islamic banks and financial institutions, conventional investors and BOT operators looking for developmental opportunities. Financial packaging: The Fund harmonizes the interplay between capital requirements, technical
and design work, revenue and ongoing property management in order to optimize the facilities delivered to awqaf customers and enhance the returns to investors and eventually to the beneficiaries of the waqfs.
The Fund’s Regulations set the initial capital of the Fund at US$ 50 million, divided into 5,000 certificates, having a value of US$ 10,000 each. The Regulations also provided for the minimum subscription in the Fund to be US$ 1 million. The Participants’ Committee has since approved increasing the capital of the Fund to US$100 million. Subsequently, fifteen other participants including ministries of awqaf, awqaf organizations and Islamic banks have subscribed in the capital of the Fund. The paid up capital of the Fund as of end 1434H amounted to US$76.410 million (INR450 crores).
To support the activities of the Fund, the IDB has provided a line of financing of US$ 100 million to the Fund. In addition, the Bank has approved an amount of US$ 200,000 for technical assistance to be used for preparing feasibility studies, concept and preliminary designs of qualifying projects.
IDB, as part of its commitment to the development of Awqaf properties, has made significant efforts on research and publications, and has also convened conferences aimed at the revival of the Sunnah of Waqf. IDB has also been instrumental in developing Awqaf as a modern institution at
the macro level. To achieve this objective, the IDB established the World Waqf Foundation (WWF) which aims to establish a network of waqf institutions that would undertake Shariah compatible charity activities, support waqf institutions, contribute to the alleviation of poverty, etc.
During the year 1434H, the Fund approved eight projects for an aggregate value of US$ 214.4 million for Saudi Arabia, USA, UK, Morocco, Egypt, Germany, Macedonia and Indonesia. In the course of managing its liquidity, the Fund also invested in short-term murabaha operations, ijarah sukuk and non-waqf operations.
Mode of Financing
In principle, APIF finds all the below-mentioned mechanisms as acceptable for investing in the development of awqaf assets.
- Murabaha (purchase and selling of existing buildings)
- Installment Sale
- Diminishing Participation
- Other appropriate Islamic modes of financing
For a comprehensive discussion of the above modes, please refer to my earlier blogs on how to finance awqaf development.
However, the modes of financing mostly used by APIF are leasing and Istisna’a for construction of residential buildings (service and residential apartments of high standing), commercial buildings (office blocks, commercial centres), mixed-use development on land that are well located in city centres in order to maximise the return potential of the project. T
After the earning per certificate, after Mudarib’s share of net income amounted to US$ 216 in 1434H compared to US$ 326 in 1433H. The Fund has distributed a dividend of 2.5% for the year ending.
(Reference: APIF Annual Report, 1434H)