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DUBAI: A fund management venture set up in Dubai this month is taking aim at one of the great backwaters of the Middle Eastern economy: Islamic endowments, which control tens of billions of dollars of assets around the region.
The endowments, known as Awqaf, receive donations from Muslims to operate specific social projects, such as mosques, schools and welfare schemes.
Over the past few decades, as Middle Eastern populations have grown and the Gulf’s oil industry has boomed, Awqaf have amassed a vast array of assets, from real estate to cash holdings, equities and even valuable books.
But the management of these assets has failed to keep up with their expansion; money is often tied up in property or bank deposits that earn miniscule or even zero returns, analysts of the industry say.
That imposes a heavy economic cost on a region which is struggling to boost private sector growth.
A movement to apply modern management techniques to Awqaf is now emerging and if it succeeds in boosting returns, Middle Eastern financial markets and economies could benefit.
Basic changes in asset management methods could improve Awqaf yields globally by between 1.5 and 2 percentage points, according to consultants Ernst & Young.
This could see up to $2.5bn of additional returns from Awqaf assets ploughed back through Islamic financial institutions every year, said Ashar Nazim, Islamic financial services leader at the firm.
“Awqaf can be a source of long-term liabilities that the industry is desperately seeking,” he said.
Awqaf reached their heyday during the Ottoman empire, which ruled much of the Middle East for centuries. Historians estimate that an one stage, the endowments owned over 50 percent of real estate in major cities and a third of farmland. Some imperial awqaf even functioned as an early form of social security.
The endowments waned in the 19th and early 20th centuries as the Ottaman state and other authorities increasingly intervened in their operations. But they are still important; Safa Investment Services, a Swiss-Saudi venture which caters to them, estimates Awqaf in Saudi Arabia alone now control between $100bn and $250bn of assets.
There is little data on the extent to which endowments’ returns lag professionally managed funds, because the vast majority of Awqaf do not disclose full financial figures.
But since Awqaf have traditionally been run mainly by administrators rather than return-maximising investment managers, the underperformance is believed to be considerable. Reuters