Cash Waqf Linked Retail Sukuk Model as Alternative Funding for Enhancing Food Security Program in Indonesia


Wida Reza Hardiyanti

4/20/20235 min read

assorted coin lot in clear glass jar
assorted coin lot in clear glass jar

Waqf comes from the Arabic word "al-waqf, " meaning to hold, stop, curb, or hinder. On broader terms, it is associated with property, which means freezing property rights for certain benefits. As for in terms, waqf means withholding property rights over the material property (al-'ain) from the waqf, and to give away the benefits or benefits (al-manfa'ah) for the good of Muslims, religious interests, community or to the beneficiary. Waqf retains its origin and distributes the results, which means people who donate Waqf is giving up ownership of valuable assets without reducing the items offered to individuals or groups that will be used for non-Shariah purposes. The Indonesia Waqf Board (BWI) is mandated under Act No. 41 of 2004 concerning Waqf. Waqf has been developed based on five pillars as follows:

  1. Waqif, the donor who contributes waqf assets.

  2. The assets contributed

  3. Nazhir, the manager who receives the assets for development based on the allocation

  4. Mauquf'alaih, the waqf beneficiaries

  5. The waqf deed, as a contract term from the waqif to the nadzir concerning the waqf asset contributed.

Data from the Waqf Agency Indonesia (BWI) shows that the potential waqf in Indonesia is currently large enough to reach 2000 trillion with an area of 420 thousand waqf land and cash waqf reaching IDR 188 Trillion. The Ministry of Religion explained waqf land reached 161,579 hectares and this asset area is spread over 366,595 locations. It makes Indonesia the country with the world's biggest waqf asset (Komite Nasional Keuangan Shariah, 2022). Since 2020, the Indonesian Ministry of Finance then developing an innovation that allows this waqf to be part of an investment product in the form of a retail sukuk. Cash Waqf Linked Retail Sukuk (CWLS Retail) is an investment of waqf money in the state whose imbalance is channeled by Nazhir (fund manager and waqf activities) to finance social programs and community economic empowerment. Cash waqf retail sukuk is like any other retail bond and gives a yield of 20 percent to the investor.

Most waqf fund and asset that has been managed by nadzir is less productive. Previously, waqf was used for building Islamic education institutions and mosque, but now it can be used for other means with high community interest, such as food security program. One country that uses cash waqf retail sukuk for food security programs is the Central Bank of Bahrain, which finances the staple food commodity program. The diagram below shows that the commodity that wants to be cultivated will be financed using a salam contract. The Central Bank of Bahrain issue the sukuk to the investor, which will be used for commodity plantation cultivation.

Diagram 1. The Mechanism of Cash Waqf Linked Sukuk for Improve Food Resilience Managed by Central Bank of Bahrain

Source: Chartered Institute for Securities and Investment (CISI), United Kingdom (2016)

Cash waqf retail sukuk become a form of public investment that will benefit the community, such as mitigating various force major risks and crises. It can be used to mitigate and overcome natural disasters, epidemics, poverty alleviation programs, infrastructure improvements, and food security improvements experienced by the community. Currently, cash waqf-linked sukuk must be optimized for tackling the main crucial problems in Indonesia, such as food security. The critical issue is that the growth of Indonesia's population is higher than the food production, which threatens hunger. Data shows that food security in Indonesia is weakened during the pandemic. Indonesia's food security index in 2022 will be at 60.2, higher than the 2020-2021 period (the Global Food Security Index, 2020)

This indicator is a dynamic quantitative and qualitative assessment model built from 28 unique indicators that measure these food security drivers in developing and developed countries. This study aims to assess the country’s most and least affected by food insecurity based on the categories of affordability, availability, quality and safety. Although the latest projection shows that Indonesia's food security will strengthen again in 2022, this level is lower than other neighbouring countries.

Agriculture is one the biggest sector in Indonesia, making the lending demand from this sector high. Data from Bank Indonesia shows that there is high demand for capital funding in the Agriculture sector, but conventional bank lack of attraction to funding the agriculture sector because of high risk, highly dependent on season and uncertain commodity prices. It makes bank lending mainly targeted for the trade and manufacturing sector, which has high returns with lower risk than the agriculture sector.

Source: BPS. 2022

Therefore, cash waqf-linked sukuk can be an alternative investment for financing the agriculture sector cultivation. Yunita (2021) also explains the potential for using the cash waqf-linked sukuk to increase food security through salam contract. A salam contract of sale in which the buyer pays in advance and delivery of the subject matter of the contract is deferred to a specified future date. To carry out Salam's covenant, they must fulfil his four elements: buyer seller, cash price and purchased goods. Before the interest ban, farmers received interest-based crop loans. After the prohibition of interest, both sides were allowed to enter into this agreement to get money in advance. Under the cash waqf-linked sukuk with salam contract, the Central Bank of Indonesia in coordination with the Ministry of Agriculture and Fisheries will issue this sukuk. Then, the Indonesia Waqf Council act as coordinator farmers, which will guide the waqf fund, monitor the plantation process, and report it to the Ministry of Agriculture and Fisheries. This scheme can make the farmer more accessible to the Islamic agriculture financing.

Diagram 2. Mechanism of Salam Contract in Islamic Financing

Source: AIMS

Unfortunately, cash waqf-linked sukuk is not very popular, making it less attractive than other forms of investment. They still thought that waqf was similar to donation or charity rather than a form of investment (KNKS, 2019). Ultimately, it affects the low collection fund from the community. Another challenge of this cash waqf-linked retail sukuk for agriculture cultivation is the management from waqf fund.

Therefore, the management of the waqf fund needs to be more transparent and professional. The nadzir as waqf management must be improved, especially regarding required skills in asset management waqf such as entrepreneurship or investment manager. It will also enhance the willingness to invest in cash waqf retail sukuk. The community also must be informed that this sukuk can be bought in the low amount of money which will become another selling point to attract new investors. One way to attract investors to buy this sukuk is by establishing cooperation with many agencies and communities and creating food programs or exhibitions with funds from the sukuk to increase awareness. If implemented correctly, this cash waqf-linked retail sukuk can be a breakthrough that strengthens the socioeconomic community in times of crisis.

Wida Reza Hardiyanti
Lead researcher at Indonesia Food Security Review. Wida is an experienced economist whose many of her research papers have won the best paper in research conferences. Wida holds a bachelor of economics from Gajah Mada University.