Charities Zakat Funds

A need for demonstrating Impact and Financial transparency.

By Javed Akhtar, 11 May 2020.

Introduction

Ramadan is the period for spiritual recuperation; healing of the mind, body and soul. It is a period when Muslims generally fulfil their socio-economic values by paying their Zakat (welfare due).

Zakat is based on a person's accumulated wealth at a rate of 2.5% and given annually.

“…establish prayers and give the Zakat, welfare due” (al-Qur'an 22:41)

Here the Muslims are presented noble values to put into practice; for the most effective method of socio-economic justice. Zakat collected globally on an annual basis was projected to surpass US$3Tn by 2020 and the potential humanitarian impact for betterment is significant.

However, given the growing number of opportunities Muslims have for making Zakat donations, the donors are doing more due diligence and asking more questions about the way their donations are spent.

Donors are seeking more transparency on how donations are spent before committing funds to any particular Zakat soliciting charity.

Donors need to have confidence that charities have implemented their Zakat donations to fulfil the noble values and demonstrated the impact of their activities towards socio-economic justice.

Zakat charities are facing an increasingly demanding fundraising environment

Ramadan sees increased and focused marketing, fundraising activities by charities who actively solicit funds with promises to utilise them in various ways that are compliant with Zakat criteria and in accordance with the donors wishes.

Over recent years, there has been increased competition to receive donations, Islamic faith-inspired charities have been joined in the 'appeal for Zakat funds' by across the sector by UNHCR, Oxfam, Barnardo's etc.

This has increased the demand for feedback and communication from donors.

In general, most charities will focus on appealing to donors for Zakat funds and some form of communication and feedback to donors on specifically how those Zakat funds were utilised and what type of Zakat projects were undertaken. Donors are, understandably frustrated if not concerned.

There is an increased understanding to seek greater transparency than previously; this should raise the level of reporting of impact and financial transparency of Zakat funds.

To succeed; Charities need to go beyond focusing on Zakat calculations.

Across most charity websites the communication on Zakat is limited to the Islamic jurisprudence explaining the categories of Zakat, its calculation and who should pay Zakat.

Looking beyond this, publications and feedback to donors on the utilisation and impact of Zakat is vague. Furthermore, the annual financial statements lack transparency on Zakat funds e.g. what funds were raised during the year, spent during the year and amounts carried forward to the next year.

As a minimum, every charity should be maintaining a specific track of Zakat income and Zakat expenditure in their accounting systems and the programmatic systems should have clearly identified the charitable programmes that are deemed applicable for Zakat.

Donors want to be confident the right proportion of their Zakat goes to the people who need it and not to marketing and other expenses.

Many donors will be focused on whether the charity operates a 100% donation policy or does the charity take a percentage for their operational costs.

All Charities firstly, to exist, to get the zakat funds to those in need, in marketing, fundraising activities for Zakat funds and then administrating those Zakat funds to ensure they reach the beneficiaries entitled to Zakat funds will incur costs.

To what extent can these various expenses be taken from zakat funds? As a simple overview, in Islamic jurisprudence, scholars have taken different views:

  1. Charities do not meet the criteria of 'collectors of Zakat' (as defined by Islamic jurisprudence) that is reserved for the State and are not entitled to spend Zakat funds on their costs.
  2. or

  3. Charities can cover their costs from Zakat funds to a maximum of 12.5%.

In either case, the charities will incur costs of marketing, fundraising, administration and project implementation. The charities will either cover this from other funds or from the 12.5%.

Thus, Donors want to be confident that the Zakat fund is compliant.

Reporting requirements are escalating

Charities reporting should always go beyond compliance and demonstrate impact and financial transparency.

Impact "Broader or longer-term effects of a project's or organisation's outputs, outcomes and activities." (Impact Reporting in the UK Charity Sector)

Charities should mitigate the risks of perceived misuse of Zakat funds by raising the standard of financial transparency and explain clearly to their donors the performance of the Charity in relation to Zakat funds and if 100% of Zakat funds went to the beneficiaries, how did the charity cover the other costs.

Therefore, charities need to take the following four steps:

  1. Measure and report the impact of Zakat funds.
  2. Demonstrate how Zakat funds reached the intended beneficiaries.
  3. Assess the application of policy and practice on Zakat administration.
  4. Disclose transparently in the audited Trustees Annual Report and Financial Statements the Zakat amounts collected and expensed.

 

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