Leveraging the Waqf Principle For Engaging The Next Generation In Family-Owned Enterprises In Kenya

Recent research conducted by Asoko has revealed that Kenya boasts approximately 490 family-owned businesses that generate revenues surpassing the US$10 million mark. This diverse spectrum of enterprises spans across various industries. Notably, among these 490 businesses, 14.3% (comprising 70 companies) achieve annual earnings exceeding US$50 million, with 22 of them even crossing the US$100 million threshold.

Despite being an enabler of different countries’ economies, family-owned businesses in Kenya face several structural challenges, including a lack of robust succession planning and good governance strategies, poor management, as well as challenges with the integration of the next family generation (‘the NexGen’) – all of which, if not correctly addressed at an early stage, could potentially limit their growth and reduce their lifespan.

A couple of weeks ago, Jersey Finance and partners hosted a roundtable discussion in Mombasa that brought together stakeholders to discuss ‘Responsible Leadership for East Africa’s NextGen: A Family Business Roundtable.

This roundtable convening aimed to identify various opportunities that family-owned businesses could take into consideration for effective succession planning. A report by PWC states that 75 – 77% of family businesses are looking for growth in the East Africa region. However,70% of them won’t survive the transition from the founder to the second generation.

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During the roundtable dialogue, our discussions delved into several critical subjects that are paramount to successful family business management. These key topics encompassed the dynamics of succession and governance within family enterprises, strategies for overcoming cultural barriers among generations, the pivotal role of family governance in facilitating seamless transitions within the business, legal considerations in the context of succession planning, and the incorporation of Shariah-compliant principles into the realm of succession and governance.

What caught my attention profoundly was a query posed by a highly qualified engineer who currently leads her family’s enterprise. For the sake of reference, we’ll refer to her as Mary. Mary’s thought-provoking question centered on the notable observation that gatherings of family-owned businesses predominantly feature participation from the Arab or Indian community. She pondered upon the valuable lessons that she could glean from these communities to ignite and enrich her entrepreneurial journey.

Drawing from extensive experience as a wealth and fund manager, I’d like to shed light on the significance of the Waqf principle in engaging the next generation within family-owned businesses, particularly in the Kenyan context.

Mary’s question, while seemingly straightforward, transcends racial boundaries. It emphasizes the importance of equity and integrity in treating all individuals impartially. To address her inquiry, one must delve into the ethical framework underpinning Islamic businesses, guided by the principles of the Quran, which dictate the conduct every Muslim is expected to uphold in all facets of life.

Allah (swt) has bestowed upon humanity an innate inclination to accumulate personal wealth and build families. Furthermore, humans possess an inherent instinct to safeguard and pass down their wealth to the next generation, thereby securing their future prosperity. There is evidence both in the Quran and Hadith that supports wealth succession planning and management.

Within the Quran, some verses illuminate the necessity of proactive measures and thoughtful planning, even in the face of an uncertain future. These verses highlight the wisdom in parents having a succession plan in place to ensure the secure transfer of their hard-earned wealth to their children in the most prudent manner possible. They underscore the virtuous nature (Amal Salih) of parents emulating the actions of those deemed ‘righteous’ by taking every requisite step to accumulate wealth through lawful means and to meticulously strategize for the future well-being of their children. Given the unpredictability of life and the possibility of sudden demise, it is not only advisable but imperative to establish a comprehensive succession plan. Such planning not only minimizes potential harm but also guarantees a brighter spiritual, moral, and material future for one’s children to the greatest extent possible.

Indeed, the concept of spending in the way of Allah (swt) (Infaq) is broader to cover all types of charitable spending including spending on one’s family and providing for their future spiritual, educational, and material needs. For centuries, Muslims used the institution of Waqf and family Waqf to financially support the poor, the needy, and also one’s children. In the following sections, we will briefly discuss the concept of Waqf, in particular family Waqf, and its role in providing a continuous source of spending on one’s children.

Waqf refers to a perpetual dedication of certain property to Allah (swt) and devoting its benefit to religious and charitable causes. Waqf is a continuous charity (Sadaqah Jariyyah) and the property devoted as a Waqf must be capable of yielding continuous benefit. The concept of continuous charity is introduced by the Hadith of the Prophet (pbuh) which states: “When a man dies, his acts come to an end, but three, recurring charity, or knowledge (by which people) benefit, or a pious son, who prays for him.” (Sahih Muslim, Hadith no: 1631, 3/1255)

Throughout Muslim history, the institution of family Waqf (Waqf al-Zurri) was used as an instrument of succession planning to enable a person to provide for the future prosperity of his/her children and close relatives. In the family Waqf, the founder will declare his wealth as Waqf for the benefit of his children and thereby, provide for their future welfare.

The children will be entitled to the revenue and benefit from the Waqf property but they will not own the Waqf property itself. Family Waqf is an ideal tool for wealth preservation and succession planning. A founder might have thought that after his death the estate would be subjected to Faraidh (the Islamic law on inheritance) and distributed among the heirs.

However, the nature of the estate is such that its division will diminish its value and economic productivity. He might also intend that after his death all his children, whether male or female, should equally benefit from the estate. It is also possible that by making a family Waqf he might have planned to protect the estate from being squandered by his prodigal children and at the same time to provide a continuous source of revenue for their long-term welfare.

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Family Waqf not only saves the key family wealth from fragmentation but also provides the beneficiaries with a sustainable source of revenue. Moreover, a family Waqf also benefits other public charitable entities. For instance, the founder could create a family Waqf for the benefit of his children and their children until there are no living family members after which the Waqf could be turned into a public Waqf for the benefit of the poor and the needy. It is also possible that the founder stipulates that a certain percentage of the revenue of the family Waqf goes to charities.

Family Waqf most appropriately suits all these objectives. It protects the wealth from fragmentation, and serves the religious and family objectives of the founder and the socio-economic interests of the society. Most importantly, it allows the founder to retain control over its management and upon his death to appoint a successor to manage the Waqf for the benefit of the family or to decide on a formula based on which the appointment of future management could be decided. Endowing strategic wealth such as main family business or commercial properties also helps maintain family solidarity.

In Kenya, the Waqf Commission was established to manage Waqf and ensure Shariah compliance, financial transparency, and socio-economic gain. A vital component towards succession planning – the essence of having a jurisdiction with good governance and regulatory structures on shariah-compliant products.

An offshore jurisdiction like Jersey presents a compelling option for individuals like Mary who seek to ensure the enduring success of their business ventures. Jersey, with its impressive management of USD 1.5 Trillion in wealth, provides a welcoming environment for all investors and can uphold the principles of Islamic Finance, characterized by a flexible legal framework, a progressive regulatory system, and a tax-neutral setting. These attributes firmly position Jersey as a clear leader in Islamic financial services.

What sets Jersey apart from other jurisdictions is its inherent compatibility with a wide array of Shariah-compliant structures and contracts, encompassing Waqfs, sukuks, and various special purpose vehicles, without necessitating amendments.

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