Venture waqf in a circular economy

Khan, Tariqullah Article Venture waqf in a circular economy ISRA International Journal of Islamic Finance Provided in Cooperation with: International Shari'ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur Suggested Citation: Khan, Tariqullah (2019) : Venture waqf in a circular economy, ISRA International Journal of Islamic Finance, ISSN 2289-4365, Emerald, Bingley, Vol. 11, Iss. 2, pp. 187-205, https://doi.org/10.1108/IJIF-12-2018-0138 This Version is available at: https://hdl.handle.net/10419/236946 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Venture waqf in a circular economy Tariqullah Khan College of Islamic Studies, Hamad Bin Khalifa University, Doha, Qatar Abstract Purpose –This paper aims to enhance the impact of incorporated waqf institutions by blending their resources to promote responsible small businesses that are inclusive of human development, service to society and preservation of ecological environment and other species. This is expected to shift the paradigm of businesses from the current waste-oriented linear economy to ideally a zero-waste circular economy. Design/methodology/approach –This is an analytical study building on the experience of European Venture Philanthropy Organizations (VPOs) that work with the primary objective of making impactful businesses successful, with capital protection and return on investment being of secondary concern. This paper suggests an incorporated institutional design that blends resources for promoting responsible businesses using a new hybrid financial mechanism, namely, equity-at-default (EaD) to replace collateral and foreclosure requirements with responsibility and compassion. Findings –The research calls for changing the business paradigm from linear to circular, an incorporated institutional framework for venture waqf, purpose of the waqf to make impactful small businesses successful and designing a financial contract to loan in favor of responsible businesses that convert to equity stake for the waqf in case of default (EaD) replacing collateral and foreclosure requirements. Research limitations/implications –This is a theoretical study motivated by the success of VPOs but assigns a new role to waqf institutions. Furthermore, the incorporated nature of waqf is a new idea and EaD is a new mechanism. Being new, these ideas have the risk of not being implemented. However, the broader message that waqf shall promote businesses that are inclusive of ecological concerns is generally applicable. Practical implications –The paper has a significant practical implication to transform the responsibility and consciousness of businesses. Waqf is fundamentally a compassionate institution, and it must enhance the responsibility of businesses to become more inclusive of the environment and other species. It should also become more compassionate toward businesses that are in distress and default. In this sense, the paper tries to internalize compassion in financial contracting that can potentially change the architecture of lending. Social implications –Altering businesses’mindset from a waste-driven extractive linear economy to inclusive circular economy has a tremendous transformative role. This will have implications for enhancing business consciousness and responsibility. As poverty is a phenomenon of state of mind, changing the society’s state of thought in Muslim communities is expected to have basic positive implications. Entrepreneurs with a new mindset can have far-reaching positive impacts on the society. Originality/value –The paper offers potentially innovative perspectives in four key areas and blends the different resources in an incorporated waqf that makes responsible entrepreneurs assume a partnership role in times of distress through EaD. Furthermore, the integration of compassion in financial contracting could have better implications for return on investment as well. The ideal state of an economy is where waste is turned into wealth and well-being is something that all policymakers must keep on the top of their agendas. Keywords Waqf, Circular economy, Venture philanthropy, Zero-waste economy, Equity-at-default Paper type Research paper © Tariqullah Khan. Published in ISRA International Journal of Islamic Finance. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode Venture waqf 187 Received 17 December 2018 Revised 24 February 2019 12 April 2019 17 April 2019 22 May 2019 Accepted 22 May 2019 ISRA International Journal of Islamic Finance Vol. 11 No. 2, 2019 pp. 187-205 Emerald Publishing Limited 0128-1976 DOI 10.1108/IJIF-12-2018-0138 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0128-1976.htm Introduction Waqf is an endowment for a good purpose and is sanctioned by the Sharīʿah (Islamic law). It has played a pivotal role in Islamic civilization and Muslim societies as recorded in the voluminous historical literature. Over the past three decades, a vast contemporary intellectual effort has emerged, and significant policy-driven institutional efforts have been made all over the world to reinvigorate this important institution of the Islamic economy. There are numerous practical initiatives ongoing worldwide to harness the power of waqf for multidimensional human development. In different jurisdictions, these initiatives are registered under waqf, endowment, trust, or charity laws. In a recently released joint study by Bank Indonesia (BI), Indonesian Waqf Board (BWI) and Islamic Research and Training Institute (IRTI)-Islamic Development Bank (IsDB) (2018), Jeddah, the challenges, principles, and rules of good governance of waqf are set. It is understood from these guidelines that waqf can be established by a God-fearing Muslim philanthropist for any good purpose that can please Him. This, in the author’s view, includes the new purpose of waqf that is focused on in this paper, namely, to make impactful businesses successful. There could be different modalities for establishing a waqf. Under the most prevalent model, waqf institutions mobilize waqf funds and pool these funds to establish Sharīʿahcompliant businesses and investments. The income proceeds of the businesses and investments are used for providing emergency aid, food, health, educational and other assistance to the underprivileged segments of the society and for community empowerment (Alam, 2010), among numerous other studies). Waqf initiatives address the alleviation of economic poverty, which is a purpose of high merit. Indeed the businesses in which these waqf funds are invested must be Sharīʿah compliant and hence must intrinsically contain social responsibility considerations. However, none of these practical efforts of organizations and none of the vast literature dealing with the revival of waqf have the primary purpose of making these socially responsible small and micro businesses successful. Therefore, a number of pertinent concerns arise: Is poverty a phenomenon of material resources, or is it the cause of a typical mindset? This paper is based on the understanding that the root cause of social inequalities is actually the negative externality of poverty of consciousness. Two important examples are elaborated –first dealing with the conscious responsibility of businesses and second dealing with the conscious design of financial contracts. First, it is to be highlighted that businesses may either be reckless or responsible towards the society, ecology, and species, generating either positive or negative externalities. A pertinent example of negative externalities is the rampant behavior of dumping waste into landfills, rivers, and seas, burning wastes and spewing toxins into the environment. Usage of bags and other plastic products that damage the environment is another example. On the other hand, businesses could be conscious of being impactful through positive externalities. One effective example could be a zero-waste business strategy. It means that a compassionate institution such as waqf canmakethisasapurposetomaximize the positive externalities of businesses. Second, the design of financial contracts is important in conjunction with the above-mentioned positive or negative business mindset. In the Islamic economy, the original intent of the following contracts, and others, is that they are compassionate in nature: kaf alah (sponsorship), wak alah (delegated authority),  dam an (guarantee), tak aful (Islamic insurance but originally mutual protection), tawarruq (tripartite sale, but originally a bilateral lending by mutual sale and purchase),  haw alat al-dayn IJIF 11,2 188 (transfer of debt) and qar  d(interest-free loan). However, in view of practical urgencies, these have been commercialized. It means that a compassionate institution such as waqf has an important potential role of effectively using these listed instruments of compassion to harness their social power. Another important aspect of the design of a financial contract is related to safeguarding the rights of the contracting parties as prescribed in the contract covenants. Collateral secures the lender’s rights at the beginning, and foreclosure secures the lender’s rights at termination in the case of distress. The borrower’s rights are not commercially recognized, although in Islamic finance under compassionate considerations, the borrower is legally and morally protected with forbearance. Therefore, there are at least three vital concerns as summarized in Figure 1, namely, the purpose of business, institutions of compassion, and design of contracts. A compassionate institution such as waqf is expected to play a role where compassion can be internalized in financial contracting. An analogy of this expectation can be found in the expectations of family and neighbors when a person gets sick; they get Figure 1. Institutions of compassion, design of contracts and business responsibility Venture waqf 189 closer in warmth, sympathy, encouragement, and delivering help. In the same spirit, when a responsible business gets sick, a compassionate institution such as waqf is expected to get closer, exercising forbearance and potentially taking more responsibility as a partner in overcoming the distress instead of invoking foreclosure and closing the distressed business. Is it not a fact that collateral and foreclosures are inevitable in financial contracting and that it is impossible to avoid them? Indeed collateral is the essential initial pillar, and a foreclosure is the inevitable ending pillar of the existing commercial loan-driven financial architecture. Owing to these two foundational requirements, greed is inherent in financial contracting, and compassion remains an external idealistic phenomenon. Hence, collateral and foreclosure are barriers to accessing financial services by small and micro-enterprises. With a built-in compassion mechanism, declining equity participation has the potential power to replace both collateral and foreclosure requirements. To further embed and blend compassion in financial contracting, the baseline contract is suggested as an interest-free loan with a blended option to convert into declining equity at the trigger of a default event. With the Islamic ideals of compassion in place, the healthy people of the family and community take care of the sick person. With the compassionate spirit, the designated waqf is expected to take care of the sick and defaulting responsible small businesses by taking an equity stake instead of foreclosure. Can the primary purpose of a waqf be the ultimate success of an impactful small and micro business? It is argued that as the rescue of a person from sickness can be the legitimate purpose of a waqf, the rescue of a responsible business from sickness can also be the sole purpose of a waqf, provided the business is Sharīʿah-compliant and impactful. Venture waqf (VW) is a proposed institution for the specific purpose of making Sharīʿah-compliant impactful small and micro businesses successful. The vision of the VW institution is to support and make successful small businesses that apply the Islamic vision of entrepreneurship for achieving a zero-waste free market economy. The mission of the VW institution is to internalize the motivation of compassion in the profit motive, to raise funds for the vision, and to channel the funds to selected impactful small businesses using different Islamic financial contracts. Is it possible to blend the different resources of a waqf institution? The existing waqf institutions collect their financial resources as waqf contributions. It is argued that the waqf institution established with the purpose of making impactful businesses successful could blend its resources. The sources of funds and other resources of the VW could be interest-free loans; charitable grants; waqf contributions; investments; structured and blended financing with philanthropic organizations; voluntary service and advice; compassionate guarantees; and any other legitimate contributions. Is it possible for the waqf to act as a venture financier or investor? Venture finance or investment must have a predetermined exit strategy. The nature of the proposed VW is such that it must make impactful businesses successful and must exit so that it can support other new businesses. The VW will use the funds and other nonpecuniary resources such as voluntary advisory and training services, voluntary guarantees and other resources for financing, training, capacity building, business advisory, and incubation, accessing markets, subsidizing finance, insurance and guarantees, and research and innovation. When there are abject economic poverty and other urgent needs, how can VW be justified for the above-mentioned purpose? Abject economic poverty and other social inequalities and rising concerns with environmental imbalances are the IJIF 11,2 190 results of the waste-oriented existing capitalistic economic system. As a root-cause treatment, compassion needs to be blended with the profit motive along with a zerowaste entrepreneurial philosophy. The purpose of the VW is to achieve a working model of such a compassionate free market economy. Waqf already deals with Sharīʿah-compliant businesses, and VW only formalizes compassion in the business model through the design of the financial contract and through the requirements of conscious responsibility of the business. Given the above explanations and observations, the purpose of the paper is summarized and recapitulated in Figure 2. In this paper, it is suggested to: replace the current waste-driven linear economy paradigm with a new zero-waste  hal al (Islamically permissible) circular economy paradigm consistent with the Islamic vision of entrepreneurship; establish waqf as a corporate entity, looking at the experience of the European Venture Philanthropy Organizations (VPOs); assign a new purpose to waqf as venture-waqf (VW), to make impactful (zero waste  hal al) small businesses successful and then exit; and use a new baseline compassionate financial contract –an interest-free loan with a built-in condition that in the case of default, the defaulted amount will become the equity of the VW on a declining partnership basis. This is to replace collateral and foreclosure requirements of the existing interest-based lending instruments. The remainder of the paper is structured as follows. After having provided a background on the paper and delineating its objective in the introduction, in the next section, the basic Islamic premises of entrepreneurship are elaborated. In the following section, the Qurʾ anic mentioning of ecology in the context of the universe is referred to, and inferences are drawn from them. An economic paradigm is then deduced from what has been discussed, and basic parameters for multidimensional development are set. Afterwards, it is argued that poverty is a Figure 2. Integrated summary of the purpose of the venture waqf in circular economy Source: Author’s own Venture waqf 191 state of mind and that we need to get rid of it by recognition, determination, an enterprising mindset, and focused action. The institutional framework that is required for a transition from the current linear economic paradigm driven by waste and greed to the more compassionate circular economy paradigm is discussed. The last section concludes the discussion. The Islamic vision of entrepreneurship and the ideals of zero-waste economies This paper is based on our understanding of the existence of two competing paradigms about human motivation and behaviour as evident from several Qurʾ anic verses: ﻣ َ ﻦﻛ َ ﺎﻥ َ ﯾﺮﯾﺪ ُ ﺣ َ ﺮ ْ ﺙ َ ﺍﻵ ْ ﺧ ِ ﺮ َ ﺓﻧﺰ ۪ ﺩ ْ ﻟﮫ َ ﻓﻲ ِ ﺣ َ ﺮ ْ ﺛﮫ ِ ﻭ َ ﻣ َ ﻦﻛ َ ﺎﻥ َ ﯾﺮﯾﺪ ُ ﺣ َ ﺮ ْ ﺙ َ ﺍﻟﺪ ُّ ﻧ ْ ﯿﺎ َ ﻧﺆ ْ ﺗﮫ ِ ﻣ ِ ﻨ ْ ﮭ َ ﺎﻭ َ ﻣ َ ﺎﻟﮫ َ ﻓﻲ ِ ﺍ ﻵ ْ ﺧ ِ ﺮ َ ﺓ ِ ﻣ ِ ﻦﻧﺼ ّ۪ ﯿﺐ ٍ Whoever desires the harvest of the Hereafter-We increase for him in his harvest. And whoever desires the harvest of this world-We give him thereof, but there is not for him in the Hereafter any share (Qurʾ an, 42:20). In the first paradigm, absolute material considerations drive human behaviour. In this paradigm, wasteful instincts drive the attitudes of entrepreneurs, individuals, households, and firms. The Qurʾ an equates such attitudes with the fellowship of the devil: ﺇ ِ ﻥ َّ ﺍﻟ ْ ﻤ ُ ﺒ َ ﺬ ِّ ﺭ ِ ﻳﻦ َ ﻛ َ ﺎﻧ ُ ﻮﺍﺇ ِ ﺧ ْ ﻮ َ ﺍﻥ َ ﺍﻟﺸ َّ ﻴ َ ﺎﻃ ِ ﻴﻦ ِ ﻭ َ ﻛ َ ﺎﻥ َ ﺍﻟﺸ َّ ﻴ ْ ﻄ َ ﺎﻥ ُ ﻟ ِ ﺮ َ ﺑ ِّ ﻪ ِ ﻛ َ ﻔ ُ ﻮﺭ ً ﺍ Those who squander are the brothers of Satan, and Satan is most ungrateful to his Lord (Qurʾ an, 17:27). In the second paradigm, our consciousness is driven by a balance and harmony between the worldly good (the for-profit motivations of life); and what is best in the Hereafter (the not-forprofit motivations of life). This is clear from the following verse from Surah Al-Baqarah: ﺭ َ ﺑ َّ ﻨ َ ﺎﺁﺗ ِ ﻨ َ ﺎﻓ ِ ﻲﺍﻟﺪ ُّ ﻧ ْ ﻴ َ ﺎﺣ َ ﺴ َ ﻨ َ ﺔ ً ﻭ َ ﻓ ِ ﻲﺍﻵﺧ ِ ﺮ َ ﺓ ِ ﺣ َ ﺴ َ ﻨ َ ﺔ ً ﻭ َ ﻗ ِ ﻨ َ ﺎﻋ َ ﺬ َ ﺍﺏ َ ﺍﻟﻨ َّ ﺎﺭ ِ Our Lord, give us good in this world and good in the Hereafter and save us from the torment of the Fire (Qurʾ an, 2:201). The Islamic vision of entrepreneurship falls within the second paradigm. It has a direct manifestation of being honest (amīn), trustworthy ( s adiq), imbued with compassion (ra  hmah), and establishing balance (mīz an), which includes environmental concerns. These are the requirements of the second paradigm. As an entrepreneur, Prophet Mu  hammad (peace be upon him) practiced these character traits even prior to the commencement of his prophethood. Aversion to waste is an important attribute of conscious behaviour of entrepreneurs, individuals, households, and firms. In our times, the first paradigm is represented by the linear global free-market economy, which has resulted in social inequalities and environmental imbalance. Ecological, social, and compassionate concerns are external to the paradigm. With respect to the importance of sustainable small businesses, despite considerable growth and the spread of microfinance globally, the results are not satisfactory, nor do they inspire much hope. The paradigm has also greatly influenced Islamic economics and finance. Through legal stratagems, several instruments of compassion became part of commercial activities. Kaf alah, daman,tawarruq, waʿd,and  haw alat al-dayn are only a few of the numerous examples that were originally compassionate but have gradually been turned into commercial activities. In such a paradigmatic framework, service to society on the one hand and financial return, on the other hand, become competing and conflicting goals, and precedence is always given to the latter. IJIF 11,2 192 Ecological balance (mīz an) The Qurʾ an has numerous references to the balance in the creation of the universe and its living species and the life-sustaining qualities of water, air, and energy. It further points out the calamities and disasters that occur because of irresponsible human behaviour: ﻭ َ ﺍﻷ َْ ﺭ ْ ﺽَﻣ َ ﺪ َ ﺩ ْ ﻧ َ ﺎﻫ َ ﺎﻭ َ ﺃ َ ﻟ ْ ﻘ َ ﻴ ْ ﻨ َ ﺎﻓ ِ ﻴﻬ َ ﺎﺭ َ ﻭ َ ﺍﺳ ِ ﻲ َ ﻭ َ ﺃ َ ﻧﺒ َ ﺘ ْ ﻨ َ ﺎﻓ ِ ﻴﻬ َ ﺎﻣ ِ ﻦﻛ ُ ﻞ ِّ ﺷ َ ﻲ ْ ء ٍ ﻣ َّ ﻮ ْ ﺯ ُ ﻭﻥ ٍ And the earth-We have spread it and cast therein firmly set mountains and caused to grow therein [something] of every well-balanced thing (Qurʾ an, 15:19). ﻭ َ ﺟ َ ﻌ َ ﻠ ْ ﻨ َ ﺎﻟ َ ﻜ ُ ﻢ ْ ﻓ ِ ﻴﻬ َ ﺎﻣ َ ﻌ َ ﺎﻳ ِ ﺶ َ ﻭ َ ﻣ َ ﻦﻟ َّ ﺴ ْ ﺘ ُ ﻢ ْ ﻟ َ ﻪ ُ ﺑ ِ ﺮ َ ﺍﺯ ِ ﻗ ِ ﻴﻦ َ We provided sustenance in it for you and for all those for whom you do not provide (Qurʾ an, 15:20). ﻭ َ ﺍﻟﺴ َّ ﻤ َ ﺎﺀ َ ﺭ َ ﻓ َ ﻌ َ ﻬ َ ﺎﻭ َ ﻭ َ ﺿَﻊ َ ﺍﻟ ْ ﻤ ِ ﻴﺰ َ ﺍﻥ َ He has raised up the sky and set the balance (Qurʾ an, 55:7). ﺃ َ ﻻ َّ ﺗ َ ﻄ ْ ﻐ َ ﻮ ْ ﺍﻓ ِ ﻲﺍﻟ ْ ﻤ ِ ﻴﺰ َ ﺍﻥ ِ [...] That you not transgress in the balance (Qurʾ an, 55:8). Building on these and other verses Akhtar (1996) and Kamali (2010), among others, emphasize that Islam establishes environmental balance (mīz an). Al-Mubarak and Goud (2018) formulated and summarized these meanings of environmental balance, which we have rendered in Figure 3. Searching for a compassionate paradigm Ecology, as it appears in the Qurʾ an, is referred to in the previous section. This section deduces an economic paradigm from the previous sections. Science and technology have made tremendous progress by following natural laws in what is known as “biomimicry”to behave exactly as nature works. If we observe nature with respect to resources –water cycle, oxygen cycle, carbon cycle, photosynthesis, food cycle, etc. –we will come to the conclusion that nature does not waste. However, the existing Figure 3. Summary of interpretations of verses about environmental balance Venture waqf 193 dominant economic paradigm is linear (Figure 4)–extract resources, produce, use, and waste. Waste is an essential ingredient of the paradigm, and businesses operate within this dominant extractive and greed-driven system. Following the consistent relationship and harmony between science and nature, economics can also learn from nature. As nature does not waste, economics too can adopt a zero-waste paradigm. If we observe nature, for example, the water cycle or food cycle, we notice that zero-waste is achieved by nature by a circular system. In the same manner, through a circular instead of the linear economic system, we can achieve zero-waste, compassionate, and inclusive economies. Figures 5 and 6summarize the circular economy paradigm and potential steps to reach a zero waste level. The circular economy literature (Lacy and Rutqvist, 2015) identifies a number of waste reduction opportunities, including the following: behavioral rationalization of consumption to eliminate wastage of food, water, energy, clothing, wealth, etc.; enhancing design, repair and maintenance to eliminate wastage in product life cycles; Figure 4. Linear economy paradigm Figure 5. Paradigm of circular economy IJIF 11,2 194 concerns by contributing resources, technical advice, and in entrepreneurial capacity building for which the VWO provides a suitable platform and framework. The general trend of rising compassion can be extended to commercial banks. Current accounts are a source of significant funds in commercial banks. For example, about 85 per cent of the total funds of some banks in Saudi Arabia (Al Rajhi Bank, 2018) come from current accounts. In other regional banks, this contribution of current accounts to total funds ranges from 30 per cent (Kuwait Finance House, 2017) to 65 per cent (Dubai Islamic Bank, 2017). As a consequence of these free funds, some banks are able to earn up to 16-20 per cent return on equity (ROE) (KPMG, 2018, p. 16). In the spirit of the rising global trend of compassion, and with proper regulatory oversight, part of these funds can be used, by banks in VW type of activities for extending interest-free loans to needy small enterprises based on the EaD concept. Special social responsibility reserves (SRR) funds can be established by banks with regulatory and philanthropic support to cover the risks of the interest-free loans extended to the small enterprises. In the same spirit, a special new category of longer maturity (say two years) interest-free and special philanthropic-deposits can be created by banks. These funds could be used for equity building through interest-free lending to impactful small and medium enterprises (SMEs) on the basis of the EaD. Such deposits could potentially become popular if offered by credible and reputed banks with regulatory oversight and support. As suggested previously, the SRR funds would cover the risks of interest-free loans extended to the impactful SMEs. The VWO offers a blended finance modality in which fund providers and other contributors have different motivations. For example, a contributor may offer a compassionate guarantee to a finance seeker. Some other contributors may offer interest-free loans. Still, other contributors may commit to meet accidental costs of beneficiaries. Redesigning SME finance initiatives by using the blended finance modality of the VWO creates an interesting prospect. The EaD concept potentially offers a refined and structured form of VWO going into administration from the outset in terms of default; especially, if the loan component is great, invoking management decision issues when such a situation actually happens. Banks may decide to sell their stake in such businesses; also, they are assumed to do their due diligence and would only fund projects that would serve a purpose instead of merely yielding great returns. So if the EaD causes a bank to be “locked up”in the business, it can sell its equity shares. On the other hand, there is a potential incentive for default built in. Large firms would not default because they want to avoid foregoing a cheaper source of finance given the tax advantage of debt and if the return on equity ROE >(1 t)r (where ROE = return on equity; t= tax rate; r= interest rate). However, small firms with more chances of default may renege on loans if expected ROE <(1 t)r. This way, the beneficiary of the loan may become less careful in taking on risk given that the recourse to equity is last and without any further contingent liability after default. We agree that given the relaxation to the borrower, in this case, such a product will be more useful to VPOs. Secondly, given the uncertainty of the investor/lender regarding default occurrence at present, such products if used extensively in commercial financing may add an extra premium in debt contracts given the asymmetric information about the probability of reneging, default and business risk without recourse to collateral as in plain debt financing contracts. Thirdly, convertible securities are more in supply from large corporates; hence convertible securities of SMEs may not be as popular. Also, convertible security gives a chance to the investor to exercise conversion when RoE >(1 t)r. Giving this conversion at default only means it would usually happen when ROE <(1 t)r unless Venture waqf 201 the conversion takes place at some significant discount to the market price of equity, which is difficult to know in small illiquid companies. Other equity-at-default-like examples EaD functions as an automatic stabilizer in case of distress. A number of other examples can also be mentioned, where intuitively, the relevance of EaD is significant. As such, EaD could perhaps have wider architectural implications for the global financial system. Default risk of corporate, municipal and sovereign bonds In corporate, municipal and sovereign bonds, EaD will take the form of a binding condition in the contract whereby at default the investor in certain types of bonds will automatically become an equity holder in the issuers’business. For example, if the bond was issued to finance a solar energy storage project, and the issuer defaults –the bondholders would become owners of the project. A plain vanilla ij arah  sukūk(lease-based  sukūk) is the simplest baseline example of such a bond. To replicate the return and safety of a bond, the ij arah  sukūkis issued on the basis of the issuer’s credit risk. In normal times, the  sukūkwill earn the agreed rental income, and at maturity, the issuer will repurchase at the initial price. In case of default, the  sukūkholders would invoke their ownership titles to the  sukūkassets. Therefore,  sukūkis a bond and becomes an equity stake in the  sukūkasset in case of default. Integrating finance in the real economy The global economy is facing the rather threatening challenge of a complete disconnect between the financial economy and the real economy, with the financial economy exceeding the latter about eightfold. To illustrate, over-the-counter (OTC) derivatives at the beginning of global financial crisis were valued at about US$672tn (BIS, 2008) while total world GDP in 2017 was about US$75tn (Statista, 2017). This makes it seems as if the real economy needs to be integrated into the financial economy, but actually, the financial economy must be integrated into the real economy by supporting genuine businesses. The EaD condition offers strong incentives for financiers to select projects and businesses that will not default, and in unlikely cases of default, the financiers will assume ownership instead of pursuing costly bankruptcy procedures. Equities-at-default, mortgages and foreclosures In case of defaults in mortgages, instead of foreclosures, the financiers could take equity in the house after a fair valuation of the default. The prospect is that in such cases, house buyers and financiers will jointly own the houses and in case of further default the ownership of the financiers will gradually increase. The buyers will pay rentals on their declining portions of the houses. Manning’s (2009) “Using Shared-Equity Agreements to Reduce Foreclosures: Policy and Analysis”is an interesting paper that discusses the different legal and regulatory aspects of similar structures. Securitization of equities-at-default and financial stability Financial crises have largely been attributed to extreme leverage and the resultant securitization of debts and collateralized debt obligations (CDOs). EaDs would be much more stable, and genuine substitutes for the CDOs and are expected to contribute to financial stability in comparison with the existence of markets for CDOs. Common equity tier-1 capital enhancement. Certain types of deposits, certificates, and bonds issued by banks can be considered to qualify for binding conversion into common IJIF 11,2 202 equity tier-1 based on regulatory acceptance and procedures. As reported by Avdjiev et al. (2017), this form of bank capital enhancement is already emerging in the form of contingent convertible capital instruments (CoCos). Government bailouts of distressed banks It has become a normal practice that governments take equity shares in distressed banks and gradually return the ownership shares to the owners after restoring normalcy. To the extent that the motive of this government action is to help the stressed banks to succeed, the act is philanthropic and parental in nature. Technology It is expected that the VW will leverage technology in two important areas. First, holistic strategy management systems enhance the performance of for-profit as well as not-for-profit entities. One such system is the Balanced Scorecard approach. By using this management tool, VW can make its performance robust. Second, distributed ledger technology (DLT) potentially enhances access of micro-investors and contributors as well as users. The VW can use such technology for accessing different types of resources as well as for management efficiency. Conclusion Venture waqf opens a potential new direction in the transformative role that waqf can play for internalizing compassion in financial contracting and in developing an Islamic vision of entrepreneurship for achieving a waste-free  hal al market economy. Blending compassion with the profit motive are inherent ideals of Islamic economics and finance; but under the influence of the dominant waste-driven economic and financial system, it has been pushed to the side. VW and EaD could potentially reform the financial architecture in a significant way. Lending on the one end and collaterals and foreclosures on the other end are the two pillars of the current financial architecture. EaD blends compassion with responsible profit motives and offers prospects to reform both pillars of the architecture. There is a significant potential for lending to be based on philanthropic compassion. To offer affordable finance to micro, small, and medium enterprises with an objective of building the equity of such enterprises, compassion-based interest-free lending offers significant prospects. Potentially such lending could be done through VWs as well as through banks with proper regulatory oversight. If the objective of extending finance is to build equity in a responsible recipient enterprise for its success and sustainability, then EaD offers better prospects as compared to costly collaterals and disturbing foreclosures. We gave a number of examples where the potential benefits of EaD types of contracts are significant, and the limitations could also be challenging. The area is worth exploring both from financial innovation and policy perspectives, as part of the general academic pursuit. To summarize, in this paper we suggested to: replace the current waste-driven linear economy paradigm with a new zerowaste  hal al circular economy paradigm consistent with the Islamic vision of entrepreneurship; establish a new form of waqf as a corporate entity, looking at the experience of the European VPO; Venture waqf 203 assign a new purpose to waqf as a venture waqf with a predetermined exit strategy, to make impactful (zero waste  hal al) small businesses successful; and use a new baseline compassionate financial contract –an interest-free loan with a built-in condition that in the case of default, the defaulted amount will become the equity of the VW on a declining partnership basis. This is to replace collateral and foreclosure requirements of the existing interest-based lending instruments. We understand that the paper opens a new area of further research and could potentially help policymakers to transition to a more responsible and compassionate zero-waste, freemarket economy. At this stage, the subject matter could remain of academic interest for further discussion and research. References Akhtar, M.R. (1996), “Towards an Islamic approach for environmental balance”,Islamic Economic Studies, Vol. 3 No. 2, pp. 45-65. Alam, N. (2010), “Islamic venture philanthropy: a tool for sustainable community development”, available at: https://ssrn.com/abstract=1565859 or doi: 10.2139/ssrn.1565859 (accessed 17 April 2019). Al-Mubarak, T. and Goud, B. (2018), “Environmental impact in Islamic finance”, The Responsible Investment Foundation. Al Rajhi Bank (2018), “Annual report 2018”, available at: www.alrajhibank.com.sa/en/investorrelations/documents/al_rajhi_bank_annual_report_2018_(eng).pdf (accessed 17 April 2019). 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Kuwait Finance House (2017), “Annual report 2017”, available at: www.kfh.bh/bahrain/en/reports/ bahrain/Annual-Reports/Annual-Report-2017/document_en/KFH%20Annual%20Report%202017. pdf.pdf (accessed 17 April 2019). IJIF 11,2 204 Lacy, P. and Rutqvist, J. (2015), Waste to Wealth: The Circular Economy Advantage, Palgrave Macmillan, London. Manning, R. (2009), “Using shared-equity agreements to reduce foreclosures: policy and analysis”, available at: https://goo.gl/e8o7ra (accessed 17 April 2019). Statista (2017), “Gross domestic product (GDP) ranking by country 2017 (in billion US dollars)”, available at: www.statista.com/statistics/268173/countries-with-the-largest-gross-domesticproduct-gdp/ (accessed 22 May 2019). About the author Tariqullah Khan, PhD, is a Professor of Islamic Finance at the College of Islamic Studies, Hamad Bin Khalifa University, Qatar. Tariqullah Khan can be contacted at: [email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] Venture waqf 205