Modeling Resources-Based Sovereign Wealth Funds as Awqaf

Recently I had the privilege of watching the proceeding of the ASEAN Islamic Public Universities Summit 2024. Most speakers emphasized the need for determining common focus areas and mutual recognition of programs in line with the theme of the Summit. What caught my attention was the maiden presentation by Dr prayudhi azwar from Bank Indonesia. Dr Azwar's presentation offers a new insight into management of natural resources of a country, modeling the same as waqf management.

The following is inspired by Dr. Azwar’s proposition in which we explore the potential of waqf-based innovations to manage natural resources through sovereign wealth funds (SWFs). Grounded in the prophetic tradition and constitutional principles (in Indonesia), the framework advocates state ownership and collective benefit from natural resources to address poverty, economic inequality, and resource mismanagement.

The Prophetic Foundational Principles

The Prophet Muhammad (peace be upon him) stated, “Muslims share three things in common: pasture, water, and fire” (Abu Dawood). This hadith underscores the collective ownership of natural resources, reflecting an obligation to manage these assets inclusively. In Islamic jurisprudence, such resources should be treated as public trusts (awqaf), where the principal value is preserved, and the derived benefits serve societal needs.

Historically, the early Islamic communities recognized the strategic importance of natural resources and mandated state control over land, water, and natural wealth for public benefit. However, the contemporary application of these principles often falls short of these ideals, necessitating a reimagined economic model that aligns with both Islamic and national values.

Challenges in Resource Management

Despite resource wealth in many countries, they face stark contrasts between its potential and reality. For instance, private concessions on Indonesian coal have allowed foreign entities to amass immense profits according to Dr Prayudhi —such as the 148 trillion rupiah earned by a foreign oligarch in 2022—while state-owned enterprises generated only 12.6 trillion rupiah in the same period. Such disparities contribute to entrenched poverty and income inequality, underscoring the urgent need for a more equitable resource management system.

To address these challenges, a waqf-based sovereign wealth fund (SWF) model is proposed. This framework emphasizes the following principles:

1. State Ownership: All natural resources are owned and managed by state enterprises, ensuring alignment with the collective interest.

2. Resource Preservation: Revenues from resource extraction are allocated to a Resource Fund (RF), with the principal value preserved as waqf.

3. Inclusive Distribution: Yields from RF investments are distributed to fund public welfare programs, infrastructure, and poverty alleviation.

This model integrates waqf principles into modern economic instruments, creating a perpetual cycle of wealth generation and equitable distribution. It also proposes that revenues from resource extraction be retained within the RF, rather than channeled directly into the government budget. This approach ensures the long-term sustainability of resources while enabling effective fiscal strategies, such as reducing public debt and financing development projects.

Adopting this waqf-based SWF model requires a multifaceted approach:

1. Policy Realignment: Reform existing laws and regulations to align with Islamic and constitutional principles of state ownership and resource endowment.

2. Public and Academic Advocacy: Amplify awareness through academic research, public campaigns, and revised microeconomic curricula emphasizing resource-based macroeconomic policies.

3. Institutional Mechanisms: Establish robust governance structures for SWFs, ensuring transparency, accountability, and equitable resource allocation.

4. Political Collaboration: Forge coalitions among civil society, academia, and policymakers to overcome resistance from vested interests and enact meaningful reforms.

If implemented, this model would enable many resource-rich developing nations to transform their vast natural endowments into perpetual sources of public benefits. The resulting socio-economic upliftment will address chronic issues like poverty and inequality, while fostering long-term fiscal stability.

Moreover, the proposed approach aligns with global best practices. Adapting such models within an Islamic framework provides an opportunity to merge ethical governance with economic efficiency.

The integration of waqf principles into sovereign wealth fund management indeed offers a transformative pathway for countries like Indonesia that are resource-rich and also seek to mainstream their awqaf sectors. By aligning Islamic economic values with national mandates, this model promises to unlock the full potential of the nation’s natural resources. However, realizing this vision requires concerted efforts in policy reform, academic advocacy, and public mobilization.

Landscape photography by Mohammed Alim (apyfz.com)