Personal Finance

Preserving Kenyan Muslim family wealth using Waqf endowments

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Kenya boasts close to 500 family-owned businesses that generate revenues surpassing the $10 million mark. PHOTO | SHUTTERSTOCK

Recent research conducted by Asoko has revealed that Kenya boasts close to 500 family-owned businesses that generate revenues surpassing the $10 million mark. This diverse spectrum of businesses spans across various industries, sectors and specialisms. Furthermore, among these businesses, close to 15 percent achieve annual earnings exceeding $50 million, a quarter of which exceed the $100 million threshold.

Despite their positive impact on Kenya's economy, family-owned businesses 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 in a timely and inclusive way, could potentially limit their growth and reduce their lifespan.

Local, regional and international press are littered with examples of families that have experienced dire consequences and potential bankruptcy, in addition to the breakdown of family ties and destruction of the family legacy, as a result of failing to address succession and governance adequately and early.

Jersey Finance recently hosted an exclusive invitation-only roundtable discussion with financial services professionals and business owners in Mombasa that brought together family enterprises, including family businesses and family offices, and their advisers.

During the roundtable dialogue, our discussions delved into several critical subjects which are paramount to successful family business management, operation and preservation.

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 company, legal considerations in the context of succession planning, and the incorporation of Shari’a-compliant principles about succession and governance.

What especially caught my attention during the discussion, was an experience shared by a NextGen qualified engineer who currently leads her family's enterprise. For the sake of reference, we'll refer to her as Mary; who is based in Mombasa.

The complexities

Mary's thought-provoking question centred on the notable observation that groups of family-owned businesses were only just coming to grips with the complexities, both operational and legal, when it comes to succession planning.

She shared her own experience of being thrust into leading their family business as a second-generation member as a result of the death of the founder of the business, her father.

Although relatively transparent and good-intentioned, the transition plans were perhaps in the mind of the late founder and the sudden death of the founder catapulted the NextGen into a role that was new to them.

As a highly educated and close-knit family, the family were able to address the challenges head-on, with Mary having to make some life-changing decisions about her career projection.

She decided, in agreement with her entire family, to take the helm of their business. Today the family business flourishes, with family bonds intact.

Perhaps the most important observation she shared was that as the third generation now gets involved in the business, the approach they have decided to take as a family is very much a proactive, long-term path, surrounding themselves with able and experienced advisers to guide them along the ‘journey of succession’.

Not all families can survive through such a drastic and fundamental change. Nevertheless, Mary and her family’s valuable experience set the scene for a lively exchange of similar experiences among roundtable attendees.

Mary’s question on the complexities of succession planning, while seemingly straightforward, transcends racial boundaries.

It emphasises the importance of equity and integrity in treating all family members impartially, for this is how longevity is assured within the family enterprise and the family legacy is protected.

Those you bring with you along the decision-making process will stand tall to protect the plan and family legacy.

Another example that was very interesting and well received by the attendees was the increasingly popular route of structuring endowments - whether they are private or public, fixed or perpetual - and including Shari’a-compliant endowments or Waqf.

For the Kenyan coastal community which has a large Muslim demographic, this is seen as an attractive tool available for succession planning.

To provide further commentary and to understand Awqaaf (plural of Waqf), one must delve into the ethical framework underpinning the relationships between people in the commercial context, including between family members, guided by the principles of the Shari’a, which dictate the conduct of every Muslim is expected to uphold in all facets of life, including when earning, preserving or spending their wealth.

How Waqf works

The institution of the family Waqf is widely used by Muslim families as an instrument for the succession planning process and to enable a patriarch or matriarch to provide for the future prosperity of his or her children and close relatives.

To put it simply, in a Family Waqf, the founder will declare his wealth as Waqf for the benefit of his children and thereby, provide for their future welfare.

The beneficiaries of a Waqf will be entitled to the revenue and benefit from the Waqf property but, will not ordinarily own the Waqf property itself, which will be vested with the Waqf. Family Waqf is one of the tools that Muslims use for wealth preservation and succession planning, within their religious beliefs.

The Family Waqf provides great flexibility and can accommodate very diverse wishes and intentions for distribution. It is a tool that can be used not only to protect the family wealth from fragmentation but also to provide beneficiaries with a sustainable source of revenue.

Additionally, a Family Waqf may also benefit other public charitable entities, once the defined benefit for the family comes to an end. For instance, the founder could create a family Waqf for the benefit of his children and their successors and when there are no living family members, the Waqf could be structured to thereafter provide a wider defined purpose, for the benefit of, for example, the poor and the needy, in perpetuity.

Similarly, it is also possible that the founder stipulates that a certain percentage of the revenue of the family Waqf go to defined charities or charitable purposes.

For Muslims, a Family Waqf provides a structuring tool which can help protect and preserve the family's wealth, while adhering to their religious beliefs and protecting the family’s long-term objectives and family legacy. The Waqf can also be extended to provide socio-economic benefits to the wider community and society at large.

Most importantly, a Family Waqf allows the founder flexibility to prescribe the key governance protections to ensure the aims and objectives of the Waqf are fulfilled transparently and with adequate supervision for the duration of the Waqf.

The writer is the Director of Middle East, Africa and India, Jersey Finance.