What Is Waqf and How Can It Help Finance Indonesia’s Clean Energy Transition?
This article is published in collaboration with the Climateworks Centre.
Islamic endowments, waqfs (pronounced ˈwəkf), have been gaining popularity in Indonesia as a funding source for its national climate goals.
At last year's G20 Energy Transition Working Group session in Jakarta, Indonesia Vice-President Ma’ruf Amin instructed his ministers to tap into the potential of waqf, a charitable endowment or donation under Islamic law, to help finance the country’s clean energy transition.
In response, Indonesia Minister of Finance Sri Mulyani Indrawati 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.
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 $12 billion, while total land waqf assets are valued at a staggering $134 billion. Meanwhile, Indonesia needs approximately $247 billion of financing to reduce greenhouse gas emissions by 29%–41% by 2030. Private finance contributed less than 10% of that figure from 2015 to 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% of respondents in Indonesia know very little or have never heard about climate change, while 45% 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 organizations 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.
Brurce M. Mecca
Senior Analyst, Climateworks Centre
Brurce Mecca spearheads analysis around mobilizing finance for climate in Indonesia with a focus on practical recommendations for governments and businesses to facilitate enabling environments and credible investment strategies supporting a net zero emissions future. Brurce is also working to build strategic partnerships with stakeholders in Southeast Asia and Asia Pacific on climate finance, blue finance, and carbon markets.
Country Lead, Indonesia, Climateworks Centre
Guntur Sutiyono leads Climateworks’ Indonesian team, enhancing Climateworks’ understanding of the region by providing context around policy, politics, and the economic landscape. His team is responsible for assessing opportunities and acting as a trusted advisor to stakeholders, with Guntur overseeing projects in sustainable finance, fiscal policy, energy, and support business development. Prior to joining Climateworks, Guntur worked for the Climate Policy Initiative and the World Bank as an analyst covering topics including fiscal policy, public finance, climate finance, and environmental economics. Guntur has also worked with governments, local universities, and civil society organizations, providing analysis and capacity building.
Senior Analyst, Climateworks Centre
Petra Christi works within the International and Country Context team, supporting data analysis and policy analysis, focusing on gaps and opportunities for sustainable finance in Indonesia. Petra started as a student intern at Climateworks, supporting the International team on the Indonesia Electricity Roadmap, working on regulatory analysis and energy sectoral planning and development. Since then she has contributed to the team’s work on Indonesia’s Green Economic Recovery, Indonesian financial system climate action mapping, Indonesia’s long-term strategy on low carbon and climate resilience, the ASEAN energy transition, and a natural disaster insurance framework for MSMEs in Indonesia.
This article was first published by the Climateworks Centre on 18 October 2022.
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