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What is waqf and how can it help finance Indonesia’s clean energy transition?

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Indonesia, especially vulnerable to the impacts of climate change and home to the world’s largest Muslim population, can use waqf to finance its climate change mitigation and adaptation efforts.

Islamic endowments, waqfs (pronounced ˈwəkf),have been gaining popularity in Indonesia as a funding source for its national climate goals.

During a recent G20 Energy Transition Working Group session in Jakarta, Vice President of Indonesia Ma’ruf Amin instructed his ministers to tap into the potential of waqfa charitable endowment or donation under Islamic law, to help finance the country’s clean energy transition.

In response, Sri Mulyani Indrawati, Indonesia’s Minister of Finance, announced plans to engage with the Indonesian Association of Islamic Economists to assess the role of Islamic financial instruments in the clean energy transition, particularly waqf-linked sukuk, which are Islamic bonds.

Understanding waqf

Waqf is a form of endowment under Islamic law. Waqf funds can be used in three ways: social waqfs, productive waqfs or a combination of the two.

Social waqf supports social initiatives, typically non-profit-oriented, that provide free services or facilities for the general public.

Productive waqf supports ethical business or investment practices. According to Islamic law, waqfs cannot be used to support ‘non-ethical’ businesses that are deemed as generally ‘harmful’ such as tobacco or alcohol.

Productive waqf models are funded and managed in various ways: cash waqf with a self-managed model, Islamic bank financing with a self-managed model, sukuk with an external partnership model, cash waqf with external partnership, and cash waqf and co-financing with the external partnership.

Indonesia is home to the world’s largest Muslim population and thus its waqf assets are significant.

Annual cash waqf donations are estimated at around US$12 billion (Rp180 trillion), while total land waqf assets are valued at a staggering US$134 billion (Rp2,000 trillion). Meanwhile, Indonesia needs approximately US$247 billion of financing to reduce greenhouse gas emissions by 29–41 per cent by 2030. Private finance contributed less than 10 per cent of that figure from 2015–2018.

However, in Indonesia, leveraging waqf for climate change has been unpopular compared with other causes such as for religion, education, health and poverty. But in terms of applying Islamic financing to climate, the country has successfully issued the world’s first sovereign green sukuk in 2018.  

The sukuk’s proceeds finance or refinance ‘eligible green projects’, such as renewable energy, energy efficiency, climate change resilience, disaster risk reduction and others. 

Waqf and climate change in Indonesia

It is important for Indonesian waqif, the name for a person or entity making waqf donations, to be fully aware of how climate change will impact Indonesia.

Yet a study published by the Yale Program on Climate Change Communications found that 71 per cent of respondents in Indonesia know very little or have never heard about climate change. Only 16 per cent believe that climate change is mostly caused by human activity. However, 45 per cent of respondents reported that they need more information about climate change. This research reflects the need for a massive climate education undertaking in Indonesia, especially if the public is to take part in the climate funding ecosystem.

Due to the gaps in climate change awareness, waqf’s endorsement as a climate funding source will be difficult without accompanying climate education for waqif. Developing an understanding among waqif about climate change and its broad-ranging impacts on society and biodiversity is a fundamental step for using waqf for climate goals. 

Investing in waqif education on climate, religion and finance

There are a few instances where waqf has been used for climate initiatives. 

Examples of projects financed by waqf in the forestry sector in Indonesia include waqf designated for environmental protection and recovery. While this is a relatively new initiative, a few pioneering programs validate the premise, for example:

  • Programs including tree-planting initiatives, well digging projects and clean water installations; although limited in scope, the programs are meeting their goals and receiving increasing support. 
  • Waqf funds being used to conserve valuable forest land and biodiversity, as well as to prevent the forest area from other land use, in three waqf forest areas in Indonesia: the Jantho forest in Aceh, the Leuweung Sabilulungan forest in West Java and the Cibunian waqf forest in Bogor.

These are also some examples of projects financed by waqf in the energy sector, such as solar panel projects:

  • Wakaf Energy Nusantara Foundation runs an energy project to electrify Pesantren Al Qolam, an Islamic boarding school, in East Nusa Tenggara using solar energy. This project uses waqf funding to provide needed energy in rural areas while preserving the environment. 

However, unlike green sukuk which is supervised by the Ministry of Finance, there are no clear action plans, other than a framework and recommendation, for how Indonesia will mobilize waqf to address climate change. The effort to expand the distribution of productive waqf, which includes climate change, has been historically slow. This is partly due to the lack of awareness about climate change in the country,

Building climate knowledge within the Muslim community can be done through activism and religious services.

Major Muslim organisations such as Nahdlatul Ulama and Muhammadiyah have included sustainability as an institutional objective.

However, the emphasis on climate change impacts has been limited. For now, they have encouraged mosques and Islamic boarding schools to include lessons on environmental preservation.

To promote climate awareness, the government can set climate goals for religious education. Embedding climate change in religious teaching can go a long way in raising awareness and unlocking waqf for climate initiatives as more waqif come to appreciate it as a meaningful cause.

Source: Climateworks Centre

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