IDENTIFYING THE OPTIMAL CASH WAQF LINKED SUKUK: INDONESIAN EXPERIENCE

The National Waqf Body (BWI) and Ministry of Finance (MoF) have implemented a model called Cash Waqf Linked Sukuk (CWLS) and issued the Government of Indonesia Sukuk (Islamic securities) namely Sukuk Waqf Indonesia (SWI) in 2020. The intention behind applying CWLS model is to accelerate waqf as one of the Islamic social funds and particularly, to optimize the collection of cash waqf with Islamic securities to serve the public and at the same time to diversify the sovereign securities ( Sukuk) in the Islamic financial market. Indeed, it is very crucial to assess the feasibility of the CWLS model as a new sovereign Sukuk instrument in the market despite its sharia compliant aspect. Especially, it needs to undergo a robust academic assessment such as formulation of the model, optimal level of each party such as the government, waqif , waqf management agencies ( Nadzhir ), etc . This is the objective and main motivation of the research. The paper will answer the following research questions: (i) What is the quantitative formula of SWI model especially SWI issuers and holders? What is the formula of the optimal impacts of SWI model, taking into account two types of waqif ? Finally, what is the optimal formula for project financing, given the total cash waqf investment? Then, the paper technically constructs and develops the quantitative formulas of SWI instrument namely BWI, Ministry of Finance (MoF), waqf management agencies ( Nadzhir ), partners of Nadzhir and waqf investors ( waqif ). SWI formulation is derived based on SWI’s terms and conditions, cash flow, intentions of waqf investors and tenor of SWI. Later, the optimal impacts of SWI Identifying the Optimal … optimal implementation of CWLS model which might benefit the waqf stakeholders.


Background
The modern approach to managing Islamic endowment (waqf) is allowing cash as another type of waqf. Practically, waqf takes the form of physical assets such as land, house, car and, buildings but lately, other types of assets such as Islamic securities, insurance, including cash are being accepted as waqf, as long as they are used for public benefits and comply with Islamic principles. In Indonesia, cash waqf is stipulated in: (i) Indonesia Islamic Council Fortunately, Indonesia has a huge potential for cash waqf. At least, its amount is between IDR20 billion -IDR25 billion or USD1.42 billion -USD 1.78 billion coming from potential waqf donators (companies, private including individuals and government) 2 . This cash waqf fund is available to finance public infrastructures such as public hospitals, state schools, mosques, and, traditional markets 3 . A huge amount of cash waqf can even potentially finance some public infrastructures such as airports and, sports centers (football fields).
Assuming that the Government is the one to provide the public (social) facilities, compared to financing it with commercial funds (which require a return to be paid by the government to the investors), financing with cash waqf can give some benefits to the government, particularly; cash waqf does not require any payment of return as waqf itself is one of the charity (gracious) instruments in Islam 4 . A return paid in waqf contract (if any) is considered a kind payment of return in order just to appreciate the social investors (waqf investors or waqif). Hence, occupying cash waqf can lessen the government budget particularly to pay for compensation (for example: return, interest) of the commercial funds.
BWI and the government (ministry of finance) of Indonesia have a model called Cash Waqf Linked Sukuk (CWLS) and has issued the sovereign Sukuk (Islamic securities) namely Sukuk Waqf Indonesia (SWI) in 2020 5 as a realization of the CWLS model. CWLS is derived from the experience of Indonesia in developing waqf, optimizing cash waqf and at the same time diversifying Sukuk instrument in the Islamic financial market. BWI attempts to increase the collection and utilization of cash waqf by constructing CWLS model and fortunately, the government of Indonesia is also willing to diversify its sovereign Sukuk series by issuing a new series named SWI, which is waqf based sovereign Sukuk.
Even though CWLS has had a verdict (fatwa) from the National Sharia Board (DSN) to approve the Sharia aspect of the model, there has been no academic assessment or theoretical formulation to formulate and asses CWLS model or to measure the optimal impact of SWI in assisting the government to construct social projects. Moreover, no secondary data of SWI is available since it has been issued only one time so far; in March 2020. In fact, it is very crucial to assess the feasibility of the CWLS model as a new sovereign Sukuk instrument in the market despite its sharia compliant instrument. As such, the paper attempts to comprehend the Sharia aspect of the model (fatwa) by conducting the academic assessment by formulating the SWI model, and determining the optimal level of each party; the government, waqif, waqf management agencies (Nadzhir), etc.
Particularly, the paper will answer the following research questions: (i) What is the quantitative formula of SWI model, especially SWI issuers and holders? What is the formula of the optimal impacts of SWI model, taking into account two types of waqif? and finally, what is the optimal formula for project financing given the total cash waqf investment?
The paper endeavours to conduct an academic assessment, especially to develop the quantitative formula of SWI to assist its application in the economy by considering the benefits of cash waqf and the need of the government to build public (social) projects (facilities). The CWLS model involves some parties namely National Waqf Body (BWI), Ministry of Finance (MoF), waqf management agencies (Nadzhir), and partners of Nadzhir and waqf investors (waqif). Following the formulations of CWLS model, the paper measures the optimal impacts of the model, taking into account the two types of waqifs namely; temporary waqif (who invest in CWLS temporarily) and permanent waqif (who invest in CWLS permanently).

Literature Review on Cash Waqf and Sukuk
Indonesia has some potential in waqf for examples 6  In addition to those two references, the National Sharia Board (DSN) of the Indonesia Islamic Council (DSN-MUI) has issued the DSN opinion with regard to the idea of CWLS from BWI, which is DSN opinion number B-109/DSN-MUI/II/2019 regarding the compliance of CWLS with Islamic principles 9 . Based on DSN letter, in principle, CWLS idea has complied with Islamic principle as long as it follows: (i) terms and conditions of cash waqf principles (the one stipulated in MUI verdict number 29 year 2002 on Cash waqf) and, (ii) requirement to manage waqf funds as regulated in BWI regulation number 1 year 2009. Those three references are followed and become the basis in the formulation of CWLS model in order to make it sharia compliance.
Since cash waqf is linked with Sukuk (Islamic securities), some requirements of Sukuk have to be considered, particularly 10 : 1. Every Sukuk issuance has to have a real project, in this case, a public (social) project becomes the underlying of Sukuk issuance. 2. Sukuk issuer can be the obligor. And in a CWLS model, government is the issuer of CWLS. 3. Sukuk can generate income for its investors. Since CWLS is a social (charity) based Sukuk, return (coupon) is not compulsory. 4. In maturity of Sukuk, its principal needs to be returned to the investors.
CWLS (referring to waqf verdict and regulation) can return the principal to its investors (waqif) if it is a temporary waqf or does not return it to its investors if it is permanent waqf. In addition to some facts from the previous studies and verdicts above, there are two types of cash waqf namely temporary and permanent cash waqf with some unique features based on Waqf Act number 41 year 2004, which are 11  Lately, some researches on CWLS have been conducted to stress on some points; Firstly, the integrated CWLS model for community food security by modifying the central bank of Bahrain Sukuk model with a salam contract 12 ; It constructs and proposes the design of CWLS model but does not produce the optimal formula of the Sukuk issuance.
Secondly, the paper conducts a research on the model of Cash Waqf Linked Sukuk (CWLS) as the Instrument for food security in Indonesia SDGs and limits its assessment to only analyzing CWLS for food security in the SDG context but not for other purposes 13 .
Thirdly, an analysis of CWLS model as a financing instrument for economic recovery from the impacts of COVID-19 pandemic 14 . This research adopts a descriptive qualitative method to find out whther that CWLS can become a sustainable Islamic financing instrument to finance the economy after the pandemic. However, it does not assess each party (i.e Nadzhir, Waqif, LKS-PWU, etc) which is involved in CWLS.
Fourthly, there is another paper which assesses CWLS for the economic security during the pandemic period 15 . But again, it focuses only on the pandemic period and is not large enough to capture the general purposes of CWLS.
Fifthly, a paper on evaluation of the issues, challenges and future direction of CWLS (namely SWR 001) issuance. It finds that issues and challenges of CWLS are new product announcement, limited partners for waqf distribution, low coupon rate, lack of public understanding and, incomplete literacy 16 . For the future CWLS issuance, the paper suggests that waqf stakeholders need to improve communication strategies, ease of service and professionalism of Nadzhir 17 . Nevertheless, the same as the previous researches, the paper does not develop and provide formulas of the optimal waqf investments by waqif.
Regarding financing the government project, Sixthly, the research explores Cash Waqf Linked Sukuk (CWLS) as an alternative instrument for infrastructure financing. But, this paper merely adopts a qualitative method to propose a CWLS model without providing quantitative formulas of the optimal social (waqf) infrastructure projects, managed by Nadzhir 18 .
However, the paper at hand is very different and more specific than the six researches above in terms of: 1. using parties involved in CWLS issuance and employing a quantitative method which is mathematical formulation based on net present value (NPV) concept and project finance theory to calculate the financial implication of CWLS investment, 2. deriving optimal formulas of SWI issuance, SWI holders and waqif investments both temporary waqif and permanent waqif and, 3. dentifying optimal conditions of the CWLS invesments.

Research Objectives
The paper conducts an academic assessment especially to develop the quantitative formula of SWI instrument to assist its application in the economy by considering the benefits of cash waqf and the need of the government to build public (social) projects (facilities) taken into account parties involved in the model namely the National Waqf Body (BWI), Ministry of Finance (MoF), waqf management agencies (Nadzhir), partners of Nadzhir and waqf investors (waqif). Then, it finds the optimal formula for the amount of cash waqf, project financing and both temporary and permanent waqf by using finance formula since this also answers the research questions listed previously.

Research Method
Technically, the paper adopts project finance theory as it constructs a financing model for project financing using cash waqf. Project finance has two phases namely; construction and development phase and, operation phase. It then engages some parties such as: (i) project sponsors (entities that manages the project), (ii) borrower as the user of funds, (iii) financial advisors, (iv) lender which lends fund (liquidity) to finance the project and, (v) construction company which construct the project 19 . Figure 1 below describes parties engaged in the project finance. In relation to the case of the paper, the first party is the regulator or BWI which regulates the waqf project. The second and the seven parties are the lending bank and sponsors which is waqif (waqf investors), the third party is the suppliers of raw materials for the project construction, the fourth party is the plan operator or ministry of finance (MoF) which manages and operates the waqf project. The fifth party is the constructor which is hired by MoF to construct the waqf project. The sixth party is the project user or the public (Mauquf 'alaih).
Source: modified from 4

Figure 1: Parties Engaged in Project Finance
In essence, BWI is very important, especially to ensure that the waqf project complies with the state's rules on waqf and sharia (Islamic jurisprudence) principles for waqf. Lending bank and sponsors take part as fund providers to finance the waqf project. Next, supplier of raw materials, plan operators and constructor are parties determining the construction and development of the project such as duration of the project, quality of the infrastructure, etc. Finally, project users are the public who will benefit from the project. in which r f is the return coming from risk free asset, r m is the market return and β is risk of the securities 20 . The cash flow of the project finance is determined by gross revenue minus gross expenditures (such as operating cost, taxes, pre debt service, drawdown, debt and interest repayments). Technically, the future value of the project (FV) is formulated as in which CF is the cash flow of the project and r is the rate of return of the project 21 . The optimal future value comes from the partial derivative of the FV equation. Taking into account project financing and cash flow of the project, the paper constructs formula of SWI in the following section.
Even though investors of CWLS are social investors who do not expect any return from waqf investment, measuring the value of current investment with respect to the future values (simply called the Present Value or PV) is always requested and formulated as: Then, the net present value (NPV) represents the net value (differencies) between the future and present values. The prospective project or asset is shown by a positive NPV while the negative or zero NPV is the less prospective or even can be perceived as the worst project.
Since the CWLS model is composed of temporary and permanent waqf investments, the optimal investment of the latter is assumed to be continuous random investment, independent and identically distributed (i.i.d) variable, and is counted with the infinite limit formulation of: 23 . This means that when p approaches infinity, the sum converges to normal distribution.

Cash Waqf Linked Sukuk (CWLS) Model and SWI Instrument
To answer a set of research questions before, the next sub sections constructs the quantitative formulas of the SWI model, SWI issuance, SWI holders and finally the optimal impact of SWI model.

Formulation of SWI Model
In addition to Sukuk requirements mentioned above, even though SWI is not yet being issued by the government, formulation of CWLS model still has to consider its terms and conditions which are: 1. SWI is issued by Ministry of Finance. 2. SWI is offered via private placement only to BWI (Nadzhir) which collects waqf funds from Nadzhir partners. 3. The minimum amount of private placement is IDR50 billion. 4. Tenor of SWI is 5 years and renewable upon requested. 5. The government pays coupon to SWI holders (waqif) just to appreciate for their social investment in SWI. 6. Upon agreement by waqif, SWI coupon is used to finance other (supporting) social projects, related directly or indirectly to the SWI project.
As in figure 2, CWLS model starts from waqf investors (waqif), both permanent waqif and temporary waqif who invest in CWLS model (SWI instrument) and place the funds in Nadzhir partners (both LKS-PWU or non LKS-PWU) (arrow number 1) who are receivers of waqf funds. The funds are then placed by Nadzhir partners in Nadzhir (BWI), (arrow number 2a) and followed by the issuance of CWLS certificate (arrow number 2b). When the waqf funds have exceeded the minimum amount of private placement in SWI, BWI (Nadzhir) places them in SWI, issued by Ministry of Finance (arrow number 3a). The government then issues SWI certificate to BWI as the legal document for placing fund in SWI (arrow number 3b).
Basically, the government has a list of social projects (facilities, infrastructures, etc) to be financed by waqf funds under SWI instrument. Once waqf funds are received, the government determines social project to be financed which complies with waqf criteria as well (arrow number 4). As the government intends to appreciate waqif (waqf investors), it pays coupon to SWI holders (arrow number 5). Upon receiving coupon payment, BWI leaves it to Nadzhir partners (distributor of waqf funds) (arrow number 7) to reconfirm if such a coupon is agreed to be used upon for supporting the related social projects (arrow number 8). In the maturity time, the government (ministry of finance) returns the principal of SWI to BWI (arrow number 9) which is then extended to Nadzhir partners (arrow number 10). For temporary waqif, Nadzhir partners return the principal after which, they may decide to continue or end the social investment (waqf). Whilst, for the permanent waqif (arrow number 11), the principal is non-returnable as they have already released the ownership of the cash waqf, as such Nadzhir (BWI) can keep rolling over it in CWLS model.

Formulation of SWI Issuance
Based on SWI model above, the issuance of SWI (W t ) comes from both temporary waqf (w s ) and permanent waqf (w p ) or W t = w s + w p . Social project (P t ) is financed from SWI funds after deducting some funds for liquidity (L t ) purposes (such as non-operation cost, miscellaneous cost, etc) or P t = W t -L t . Given the certain tenor of SWI, P t is formulated as: Meanwhile, liquidity (L t ) connects with the amount of waqf funds and can be formulated as Hence, the optimal social projects P t is P t = max (W t -L t ).

Formulation of SWI Holders (Waqf Investors or Waqif)
As waqf investors, both types of waqif (permanent and temporary) invest preliminary as I 0 (initial social investment) which is I 0 = W 0 . During the waqf period, they will get coupon (M t ) regularly (for example yearly) or simply formulated as: Whilst, m is determined as a certain portion of the waqf investment or m n = βw n as such: Thus, in the maturity time of SWI (I m ), the government will pay the temporary waqif the principal of waqf (W sm ) plus coupon (essentially, the waqif released the coupon back to the project as mentioned before): and practically it is only 0 W I sm  I sm is the value of the matured investment of the temporary waqif. For the permanent waqif, they will not get either (principal and coupon) because all of them have been released to the Nadzhir for the sake of the public. But, the government counts their social investment as: ... ...

4.4.
Optimal Impact of SWI a.

From Temporary Waqif
As they invest temporarily, these type of social investors have specific tenor of investment. Assuming they only invest one time (no roll over at the end of the SWI contract), their period of SWI is only 5 years. Further, principal of waqf will be taken in the maturity time while coupon is used for supporting the social project. Then, formulations of this type of waqif are below: Whilst project financing is P t = W t -L t , then As assumed, they invest only in 1 round (5 year), the formulations above become: Then, The optimal condition of the investment in this period is: (21) and this is achieved if:

Findings of the Research: the Optimal Features of SWI
From the formulations and calculations above, some findings of the optimal features of SWI in relation to maximum project financing, impacts of the temporary waqif and permanent waqif are in the following:   Table 1 shows key success formulas in applying CWLS program by issuing SWI. First, the key success in the issuance of CWLS depends on both the values of temporary waqf and permanent waqf. Certainly, the permanent waqf promises a more optimal waqf project financing than the temporary one. However, considering that waqf is not yet well educated and socialized among social investors (waqif), it needs intensive promotion of CWLS program particularly investment in SWI. Thus, more issuance of SWI is highly recommended to generate the optimal waqf project financing. The Ministry of Finance (MOF) and BWI play an important role to ensure more frequent issuances of SWI and social projects to be financed by the instrument.

No Main Features Formulas
Second, the max project financed by cash waqf relies on the max values of the total collected cash waqf minus liquidity to be reserved. In this case, an efficient usage of liquidity (such as efficient construction, cost efficiency, robust liquidity management including liquidity risk mitigation) can maximize waqf project financing. However, since CWLS program is the brand new type of sovereign Sukuk in Indonesia, an optimal liquidity management requires strong committment of the government, BWI, Nadzhir, LKS-PWU, constructor of the projects and other related parties. This committment can be realized by having (for example) a memorandum of understanding (MoU) among parties for the mid and long terms project financing (financed by SWI issuances).
Third, the max impact of temporary waqif is determined by the total waqf and coupons coming from waqf investment minus liquidity for the executing the project. In this sense, the Ministry of Finance (MoF), BWI and related parties in construction and operation of the waqf project have to optimally utilize it in order to receive maximum benefits and pay well expected coupon to the temporary waqif. Even though temporary waqif are experted to re-donate their return (coupun) to futher support the needies (users of the waqf project).
The last but not the least, the max impact of the permanent waqif is the combination of the unlimited allocation of both regulator waqf and coupon minus liquidity to do the project. Similar to optimizing the temporary waqf investment, maximing the utilization of waqf project becomes one of the key success factors to increase the contribution of permanen waqif. Then, a well communicated CWLS model to the public is a must to prolong the maximum impacts of SWI in the public.

Conclusion
SWI instrument as the implementation of CWLS model promises benefits for the government (Ministry of Finance) as the issuer of SWI. These are as follows: 1. SWI might ease the government budget spending, especially to provide public (social) facilities such as public school projects and public hospitals because cash waqf is a zero cost of fund financing instrument. The coupon paid by the government is purely and simply a form of an appreciation of the government to both permanent and temporary waqif. 2. SWI does not require any payment of return and thus the project can potentially be optimized for the sake of the users (public) which are both Muslim and Non-Muslim. 3. SWI coupon paid to temporary waqif can even be reused to support the public projects, which gives a double social impacts to the society. The temporary waqif only expects to receive their initial waqf investment at the end of the SWI period. 4. Permanent waqif permanently places their funds in the instrument. Hence, its social investment impact is even more significant to the economy and society (public) than the temporary waqif.
Formulating the SWI instrument suggests that optimization of SWI is mostly determined by the amount of waqf funds placed in SWI, coupon rate as it re-supports the project financing and less liquidity ratio besides the length (tenor) of SWI. However, taking into account, the outputs of the paper, SWI can potentially be a new Islamic based fiscal instrument to serve the public and take part in the national economic development of a country. Even though this is initiated by Indonesia, other countries having similar interest and Islamic finance industry such as Malaysia, Pakistan, Bangladesh and Middle Eastern countries, might consider this Sukuk innovation and take benefit from this assessment.

Limitation of the Research
The paper limits its assessment on the formulation of CLWS model, particularly the SWI instrument and finds the optimal formulas for waqf investment, project financing and the impacts of both temporary and permanent waqf to complement the stakeholder's understanding when executing the CWLS model. Nevertheless, it