By Faizal Bhana, Director Middle East, Africa and India, Jersey Finance
Recent research conducted by Asoko has revealed that Kenya boasts close to 500 family-owned businesses that generate revenues surpassing the US$10 million mark. This diverse spectrum of businesses spans across various industries, sectors and specialisms. Furthermore, among these businesses, close to 15% achieve annual earnings exceeding US$50 million, a quarter of which exceed the US$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, in collaboration with CMS Daly Inamdar Advocates, that brought together family enterprises, including family businesses and family offices, and their advisers to discuss ‘Responsible Leadership for East Africa’s NextGen: A Family Business Roundtable’.
The aim of this roundtable convening was to identify various opportunities that family-owned businesses could take into consideration for effective succession planning. A recent study by PwC that reviews East Africa’s Family Offices landscape states that 75 – 77% of family businesses are looking for growth in the region. Conversely, however, the report also found that 70% of such firms are unlikely to survive the transition from the founder to the second generation.
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 in relation to 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. Mary’s thought-provoking question centered 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 for all intents and purposes 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 own 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 strong and intact. Perhaps the most important observation she shared was that as the third generation now get 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 are able to 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.
Drawing from my own experience in supporting and advising family enterprises across the Middle East, Africa and India, further on you can read my overview in-depth analysis on the background and significance of the Waqf principle in engaging the next generation within family-owned businesses. I focus particularly on the Kenyan context, specifically in situations where religious belief, in this case adherence to Islamic principles, is a critical prerequisite.
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 also 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 include 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 every Muslim is expected to uphold in all facets of life, including when earning, preserving or spending their wealth.
In Kenya, the legal and regulatory framework supporting public Awqaaf has developed significantly, including the supervision of public Awqaaf. The Waqf Commission for instance was established in 2022 under the Act No. 8 to manage Awqaaf and ensure individual Waqf-level Shari’a compliance, financial transparency and socioeconomic gain as per the intentions and wishes at the time of the creation of the Waqf. Similarly, the private Waqf provides flexibility to adapt the Waqf structure so that it is created for the benefit of the family and future generations of the family. Thereby providing a Shari’a-compliant tool available to families for succession planning and governance.
A vital component towards succession planning – the essence of having a jurisdiction with good governance and regulatory structures on Shari’a-compliant products.
An international finance centre (IFC) like Jersey presents a compelling option for individuals like Mary, who seek to ensure the enduring success of their business ventures and investment. Jersey IFC, with its impressive management of US$1.5 trillion in wealth, provides a welcoming environment for investors and has, if applicable, the capability to uphold the principles of Shari’a-compliance, characterised by a flexible legal framework, a progressive regulatory system, and a tax neutral setting. These attributes firmly position Jersey’s IFC as a clear leader for Islamic financial services and support families seeking such specialised succession and governance support.
What sets Jersey’s IFC apart from other jurisdictions is its inherent compatibility with a wide array of Shari’a-compliant structures and contracts, including encompassing Awqaaf, within the existing legal framework. We successfully support families from across the globe that wish to incorporate their religious and ethical beliefs and traditions within their overall succession and governance plan.
Market Spotlight: An in-depth analysis of the Waqf principles in a Kenyan context
For Muslims, their religion encourages and bestows an innate inclination to accumulate personal wealth, while preserving and building family ties and values, always mindful of the impact on the wider community. Furthermore, their religion prescribes safeguards about passing down their wealth to the next generation, thereby securing their future prosperity. There is evidence both in the Quran (holy book for Muslims) and Hadith (practices as prescribed by the prophet of Islam) which supports wealth succession planning and management. For Muslims, as custodians of any and all wealth in their possession and control that ultimately belongs to the Almighty, it is a religious duty to adequately and correctly provide for succession, and by implication robust governance, at the family level to ensure so.
For Muslims, their religion dictates the necessity of proactive measures and thoughtful planning, even in the face of an uncertain future. Many Muslims believe, through their religious learnings, the wisdom in 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 of parents emulating the actions of those deemed ‘righteous’ by taking every requisite step to accumulate wealth through lawful means and to meticulously strategise 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. Succession planning not only minimises potential harm but also guarantees a brighter spiritual, moral, and material future for one’s children and future generations to the greatest extent possible.
The concept of spending on charitable endeavours and the spirit of giving in the broader sense, covers all types of charitable spending including spending on one’s family and providing for their future spiritual, educational and material needs. This is in addition to spending on the wider community. For centuries, Muslims used the institution of Waqf and family Waqf to financially support the poor, the needy and one’s children.
Waqf, a form of Shari’a-compliant endowment, refers to a dedication or setting aside of a certain property or portion of wealth and devoting its benefit to certain specific causes, including social, religious and charitable causes, for a period or in perpetuity. Waqf is one form of continuous charity (Sadaqah Jariyyah), an act that would benefit the donor after they have passed, deriving spiritual reward from the benefit that the Waqf bestows on its beneficiaries long after the donor’s death. The property devoted to the Waqf for example must be capable of yielding continuous benefit to its beneficiaries for the prescribed period of the Waqf. This concept of continuous charity is rooted in the religious principle that “When a man dies, his physical capacity to perform good deeds and acts come to an end, but the good derived from three sources continue after his death: recurring charity, knowledge (by which people) benefit and a pious offspring who prays for him and seeks forgiveness for him.”
Succession Planning for Families
The institution of 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 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 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 socioeconomic 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.