The endowments, known as awqaf, receive donations from Muslims to operate specific social projects, such as mosques, schools and welfare schemes. The system goes back more than a thousand years, to soon after the birth of Islam.
But the management of these assets has failed to keep up with their expansion; money is often tied up in property or bank deposits that earn miniscule or even zero returns, analysts of the industry say. That imposes a heavy economic cost on a region which is struggling to boost private sector growth.
A movement to apply modern management techniques to awqaf is now emerging and if it succeeds in boosting returns, Middle Eastern financial markets and economies could benefit.
Basic changes in asset management methods could improve awqaf yields globally by between 1.5 and 2 percentage points, according to consultants Ernst & Young.
This could see up to $2.5 billion of additional returns from awqaf assets plowed back through Islamic financial institutions every year, said Ashar Nazim, Islamic financial services leader at the firm.
"Awqaf can be a source of long-term liabilities that the industry is desperately seeking," he said.
Awqaf reached their heyday during the Ottoman empire, which ruled much of the Middle East for centuries. Historians estimate that an one stage, the endowments owned over 50 percent of real estate in major cities and a third of farmland. Some imperial awqaf even functioned as an early form of social security.
The endowments waned in the 19th and early 20th centuries as the Ottaman state and other authorities increasingly intervened in their operations. But they are still important; Safa Investment Services, a Swiss-Saudi venture which caters to them, estimates awqaf in Saudi Arabia alone now control between $100 billion and $250 billion of assets.
There is little data on the extent to which endowments' returns lag professionally managed funds, because the vast majority of awqaf do not disclose full financial figures. But since awqaf have traditionally been run mainly by administrators rather than return-maximising investment managers, the underperformance is believed to be considerable.
Ahmed al-Najjar, a member of the economic policy committee of Egypt's Freedom and Justice Party, estimates awqaf in his country hold half a trillion Egyptian pounds ($75 billion) of assets and are earning near-zero returns.
"The level of managing awqaf funds in a sophisticated and professional manner is below par in its potential," said New York-based Rafi-uddin Shikoh, chief executive of DinarStandard, a research and advisory firm focused on emerging Muslim markets.
There are signs this situation will change, however, as professional investment firms, sensing a business opportunity and encouraged by the growth of Islamic finance during the global credit crisis, offer their services to awqaf - in some cases with the encouragement of governments which want to energise the sector.
This month, for example, Dubai's Noor Investment Group and the Awqaf and Minors Affairs Foundation (AMAF), a Dubai government body which runs endowments, launched NoorAwqaf, an advisory firm that will specialise in managing endowment assets.
"What we are trying to do here is provide a professional platform that is regulated and transparent on the way we do business," said Hussain Al Qemzi, group chief executive of Noor Investment.
NoorAwqaf's plans include setting up a real estate advisory unit to help awqaf earn better returns from their properties. By pooling money from various awqaf, it hopes to be able to channel investments into larger and more lucrative projects.
In November, California-based brokerage Noriba Investing signed its first awqaf client in the United States, and it intends to establish a presence in the Gulf soon, said chief executive Ahmad Bassam. "We are building a team around this area - it's an open market for us right now."
Mohieddine Kronfol, chief investment officer for Middle East fixed income at Franklin Templeton Investments, a leading global investment company, said that as big, long-term investors, awqaf could in some ways play the financial market role that pension funds fill in the West.
Some governments are revising regulations to make this easier. In Egypt, an Islamic finance law passed by parliament this week will allow awqaf to raise money through Islamic bonds, and encourage their formation not through a single donor but via multiple subscriptions to a public offer, Najjar told Reuters.
Other Gulf states, including Oman which is in the process of opening its capital markets to Islamic finance, are considering ways to improve the "level of rigour" of their awqaf, said Nazim at Ernst & Young.
A number of awqaf publicly recognise a need to improve the way in which the industry operates.
"We want to do things to bring the awqaf back into an era where they really flourished and benefited the community," said Tayeb Abdel Rahman Al Rayes, secretary-general of AMAF, which says it holds over 1.5 billion dirhams ($408 million) of assets that generated rental income of 114.6 million dirhams in 2012.
AMAF has been exploring cooperation with awqaf outside the United Arab Emirates, such as a venture underway with a New Zealand endowment to make products derived from sheep, and has begun to focus on energy-saving projects. An orphanage which it plans in the UAE will have a modular design, so that parts of the property can be leased to outside tenants to help cover running costs.
The UAE government's General Authority of Islamic Affairs and Endowments (GAIAE), which oversees awqaf activities in the UAE, has broadened its use of external advisors, said Khaled Al Neyadi, an executive manager at GAIAE.
"We want to make sure their money is in safe hands. We are open to investment outside the UAE, as long as it is advised properly," he said.
GAIAE's budget for 2013 is 240 million dirhams, up from 17 million dirhams in 2006 when it was established, Al Neyadi said. The awqaf run by GAIAE seek annual returns of up to 10 percent on their investments, with as much as 5 percent of their money allocated to Islamic bonds, he added.
In the long run, awqaf which earn higher returns and are financially more efficient could benefit economies by moving beyond traditional projects such as schools into areas such as sustainable energy and vocational training, some hope.
"Awqaf, in their modernised form, can strengthen civil society across the Islamic world," said Timur Khan, professor of economics and political science at Duke University in the United States.