Mideast money islamic endowments edge towards modern management

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* Awqaf seen as less efficient sector of Middle East economies* Investment firms, governments want to boost their returns* Could affect tens of billions of dollars of assets* Awqaf may play role of pension funds in financial markets* Move beyond traditional projects to areas such as sustainable energyBy Bernardo VizcainoDUBAI, March 20 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. The system goes back more than a thousand years, to soon after the birth of Islam. 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 $2.5 billion of additional returns from awqaf assets plowed 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.

IMPERIAL AWQAF 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 $100 billion and $250 billion 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. Ahmed al-Najjar, a member of the economic policy committee of Egypt's Freedom and Justice Party, estimates awqaf in his country hold half a trillion Egyptian pounds ($75 billion) of assets and are earning near-zero returns.

"The level of managing awqaf funds in a sophisticated and professional manner is below par in its potential," said New York-based Rafi-uddin Shikoh, chief executive of DinarStandard, a research and advisory firm focused on emerging Muslim markets. There are signs this situation will change, however, as professional investment firms, sensing a business opportunity and encouraged by the growth of Islamic finance during the global credit crisis, offer their services to awqaf - in some cases with the encouragement of governments which want to energise the sector. This month, for example, Dubai's Noor Investment Group and the Awqaf and Minors Affairs Foundation (AMAF), a Dubai government body which runs endowments, launched NoorAwqaf, an advisory firm that will specialise in managing endowment assets."What we are trying to do here is provide a professional platform that is regulated and transparent on the way we do business," said Hussain Al Qemzi, group chief executive of Noor Investment. NoorAwqaf's plans include setting up a real estate advisory unit to help awqaf earn better returns from their properties. By pooling money from various awqaf, it hopes to be able to channel investments into larger and more lucrative projects. In November, California-based brokerage Noriba Investing signed its first awqaf client in the United States, and it intends to establish a presence in the Gulf soon, said chief executive Ahmad Bassam. "We are building a team around this area - it's an open market for us right now."Mohieddine Kronfol, chief investment officer for Middle East fixed income at Franklin Templeton Investments, a leading global investment company, said that as big, long-term investors, awqaf could in some ways play the financial market role that pension funds fill in the West.

POLICY Some governments are revising regulations to make this easier. In Egypt, an Islamic finance law passed by parliament this week will allow awqaf to raise money through Islamic bonds, and encourage their formation not through a single donor but via multiple subscriptions to a public offer, Najjar told Reuters. Other Gulf states, including Oman which is in the process of opening its capital markets to Islamic finance, are considering ways to improve the "level of rigour" of their awqaf, said Nazim at Ernst & Young. A number of awqaf publicly recognise a need to improve the way in which the industry operates."We want to do things to bring the awqaf back into an era where they really flourished and benefited the community," said Tayeb Abdel Rahman Al Rayes, secretary-general of AMAF, which says it holds over 1.5 billion dirhams