This article first appeared in Personal Wealth, The Edge Malaysia Weekly on June 4, 2018 - June 10, 2018

Wakaf — the Arabic word for an endowment to a charitable cause — contributed significantly to the global socioeconomic landscape in the past, especially in eradicating poverty. However, in modern times, wakaf has not had a compelling impact on improving the welfare of the people, according to Dr

Farrukh Habib, researcher at International Shari’ah Research Academy for Islamic Finance.

While there are many reasons for this, it is mainly due to the mismanagement of wakaf assets, he says. Although these assets are estimated to be worth more than US$1 trillion globally, it has been difficult for individuals and institutions to maximise the value of the endowments.

“Wakaf institutions face so many challenges. First, the lack of data [on the value of these endowments]. Although there have been some efforts by organisations such as the Islamic Development Bank, it was only available on a country basis and not on a global level,” says Farrukh.

“Apart from that, there have been problems with transparency and accountability. There are so many wakaf assets, but no one knows what is going on with all of them.”

The problems include the lack of proper auditing and poor planning for the development of wakaf assets, says Farrukh. “Many of these assets are operated by people who do not have the expertise, thus causing many inefficiencies in their management. In some countries, there are also regulatory and legal constraints, such as individuals being allowed to establish a trust, but not a wakaf institution.”

In an attempt to increase the potential of utilising wakaf contributions for the greater good, Singapore-based financial technology company Finterra Pte Ltd has announced that it will be launching Endowment Chain — a blockchain solution for wakaf — this month in

Malaysia.

Finterra CEO Hamid Rashid says the blockchain solution will create smart contracts that will be tied to specific wakaf projects in the hope of providing a more efficient way to raise funds as well as manage and transfer the ownership of wakaf contributions. “We aim to develop a platform that is socially, economically and morally viable for the global development of wakaf assets that also complies with government regulations,” he adds.

A blockchain is a digital ledger that holds almost any kind of information that can be stored in a digital format, be it transactions, contracts, assets or identities. Entries in the digital ledger are permanent, transparent and searchable. These are the reasons blockchain technology will be beneficial to the management of wakaf assets, says Farrukh.

“It will also be incorruptible and unalterable. The copies of the ledger are then distributed to the community, also known as nodes. If the nodes do not agree on any of the changes, then they cannot be made.

“Additionally, as it is distributed, there is no one point of failure. If a hacker wants to manipulate the blockchain, he will have to attack all of the nodes at once.”

Spearheading blockchain development in Islamic finance

Finterra’s Endowment Chain piggybacks on the ethereum (one of the leading cryptocurrencies) network. Its smart contracting engine was built in accordance with shariah principles, says Hamid.  

Unlike bitcoin’s blockchain, which allows anonymity, every transaction on the Endowment Chain will require compliance with know-your-customer and anti-money laundering regulations. The public ledger follows a “51% rule”, which means that if more than 51% of the nodes do not agree with a transaction, it will be deleted.

Finterra started the Endowment Chain project early last year when Hamid, who had been working on multiple blockchain projects for the past two years, was looking for a blockchain use case that could disrupt Islamic finance. When he found out that there were many challenges in managing wakaf assets globally, he decided to study the matter more in-depth.

In addition to the problem of mismanagement, which is heavily discussed by Islamic scholars, wakaf institutions also find it difficult to raise capital. That was what led Hamid to start the project.

“I know that blockchain technology allows crowdfunding to be done in a responsible and transparent manner. That was one of the reasons why I thought I should embark on the project. I wrote a proposal for the project early last year and found a Hong Kong-based venture capitalist who was willing to fund it shortly after,” says Hamid.

The Endowment Chain allows participants to create project proposals to develop wakaf assets and get others to support the projects by contributing funds. If the project goals are met, the proposal is accepted and a certain number of wakaf tokens are created and distributed to the participating funders. The tokens can be held to gain stakeholder rights and revenue sharing, or transferred and exchanged in the wider Finterra ecosystem.

“Let’s say a wakaf administrator wants to build a project on a piece of wakaf land, be it an educational institution or a residential property, he will need to raise capital. But financial institutions usually take a very long time to provide funding while the grants given by the government are too meagre to develop anything real,” says Hamid.

“If he decides to use Finterra’s Endowment Chain, we will have to make sure he goes through ISO’s (the International Organization for Standardisation) Land Administration Domain Model guidelines as it is important to determine the accountability of the projects. Afterwards, the blockchain will issue the tokens to our global donors to raise capital.”

He clarifies that as Finterra does not hold a fund management licence and the company does not intend to manage the funds it raises, it will be working with licensed fund managers such as Maybank Islamic Bhd, Bank Islam Malaysia Bhd and Labuan International Waqf Foundation.

“Once the capital has been raised, we will pass the funds to the fund managers, who will then work with the wakaf administrators or any of the local wakaf authorities. The token distribution and project revenue are handled automatically in the smart contract logic system, guaranteeing fairness and accounting accuracy for token holders,” says Hamid.

Finterra aims to make the wakaf blockchain much faster and more reliable than other blockchains, in addition to the lower transaction cost. “The bitcoin network today can only process about seven to eight transactions per second. The ethereum network can process 100 to 150 transactions per second while the ripple network can process anywhere between 1,000 and 1,500 transactions per second,” says Hamid.

“This is still very low when compared to the Visa and

MasterCard network, which are able to process anywhere between 2,000 and 2,500 transactions a second. Finterra aims to process 100,000 transactions per second.”  

Although the company is headquartered in Singapore, its software development hub is based in Malaysia. It also has a presence in Hong Kong, Switzerland, the UAE and the US, among others.

Hamid, who has more than 15 years of technology consulting experience with companies such as Hewlett-Packard and Petroliam Nasional Bhd, admits that blockchain is one of the most overhyped technologies in recent years. However, he points out that although blockchain technology itself is still not fully mature, there are real use cases for it that could disrupt the global financial industry.

Blockchain technology has been around for about nine years, but the real applications have only been around for the past four years, when the ethereum blockchain was introduced, says Hamid. Since then, many real use cases for blockchain technology have been developed, especially after the ripple blockchain was launched.  

“Standard Chartered Singapore and India-based Axis Bank, for example, launched a cross-border payments platform built on top of the technology developed by Ripple last year. This year, the Saudi Arabian Monetary Authority worked with Ripple to improve their banks’ payments infrastructure,” says Hamid.

“Singapore Airlines recently announced that it would launch the world’s first blockchain-based airline loyalty digital wallet. As the technology matures, we will see hundreds and thousands more of these use cases. But so far, there have not been any significant blockchain projects in Islamic

finance. Hopefully, Finterra will be the first.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.