April 2021

Blogs

Stress testing of the 20 large Muslim charities in UK

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Ramadan this year will be like no other Ramadan before it. The virus lockdown will mean that there will be no prayers in the Mosques or community iftars (opening of the fast). Ramadan will be at home with family. Ramadan is also a month when Muslims give their Zakat and increase their Sadaqa donations. Ramadan becomes a peak and most busy period for Muslim charities to raise funds, especially those charities that have international relief operations. They raise funds in UK to deliver projects abroad. The fundraising planning for Ramadan starts three months in advance and the full year’s income’ depends on the funds raised during Ramadan. The lockdown this year during Ramadan will deprive the Muslim charities from carrying out many of their planned activities. The story of 20 Muslim charities Each year these charities collectively raise Zakat and Sadaqa monies for emergencies. This aid saves lives by providing shelter and food when local governments often fail to do so. They provide regular support to more than 100,000 orphans living in poverty. These orphans rely on this support for a better and secure future. Each Ramadan millions of food packs are distributed worldwide and to coincide with the Hajj ritual hundreds of thousands of Qurbani sacrifices are carried out and the resulting meat is distributed to the most in need and often in the the most remote and hard to reach places. In order to assess the impact of the lockdown on Muslim charities working in the international relief sector, I reviewed the latest submitted audited annual accounts of 20 mainstream Muslim charities. My objectives were to assess the following: Total income raised for International relief and how much is related to UK donors. Total staff employed and the total wage bill. The average liquidity of reserves and the ability of these charities to spend without selling assets or relying on debtors. The average level of unrestricted funds that that these charities held and the flexibility these charities had in responding to the economic downturn. The table below lists the 20 selected Muslim charities in alphabetical order. These 20 mainstream charities are responsible for a significant portion of the funds donated by the Muslim UK donor. They operate a similar business model and face similar risks and challenges. Their combined financial position can give a good indicator on the potential issues the Muslim charity sector is set to face due to the expected and forecasted economic downturn. I reviewed each of the accounts and took an average of two years – these latest accounts covered mostly the year 2018. I noticed some issues that made the comparison and the assessment challenging. So, I had to use my own professional judgement and experience to moderate the numbers so that the findings were meaningful and relevant. Below are the issues that I noted during my review of these accounts. 1. Accounts show historical position more than 12 months old Often the accounts are submitted nearer the deadline which is 9-10 months after the accounting year-end. As a result, the reported numbers represent figures that may be more than 12 months old. International relief is a fast paced sector – numbers that showed the position and performance 12 months ago may no longer be relevant. Its important International relief charities work to submit their accounts within six months after the accounting year-end. 2. Income breakdowns are not sufficiently broken down Income disclosures do not provide enough breakdown to assess the type of income and the geography it relates to. This causes issues when comparing accounts. Different types of income attract a different cost and operating model. 3. Understatement of fundraising costs Some accounts either understated their cost of fundraising by allocating most of their back-office operations to charitable activities or did not disclose them at all. Within the Muslim charity sector, the slogan of 100% donation is heavily used and it may be this is resulting in charities to understate their cost of fundraising. Although this approach may suit a certain marketing narrative, it has an effect of hiding costs and the opportunity to control such costs. You cannot fix what you can’t see. 4. Large charity size effect Islamic Relief Worldwide (IRW) reported income was £127m, the next largest Muslim charity had reported income of less than £40m. This is important to note because if IRW is considered in a similar manner to other charities then what happens at IRW can skew the averages derived from the selected sample that includes IRW. Therefore, it is important to review the averages with and without IRW to ensure the averages were meaningful and relevant. Findings – the impact of the lockdown After reviewing the 20 accounts and moderating to ensure they were comparable, my findings are as follows: I – Income – £370m raised annually of which around £80m raised in Ramadan In the last reported period these 20 charities raised a staggering sum of £370m during a 12-month period. The UK donations were £225m (61%) of this total raised. This balance included gift aid from HMRC and also included gift in kind income of around £25m – these are goods donated to charities, mainly medical from USA and food from various global Institutions. It is estimated that these charities raised around £80m (35%) of their income during the month of Ramadan in UK. Due to the lockdown this part of the income is at risk. Lockdown impact on Ramadan income Due to the lockdown these charities may not be able to raise funds from the community through Events, bucket collections or within Mosques – this will deprive them from those donors that traditionally either gave cash or pledged money at Events. The economic uncertainty, 20% salary decrease of furlough employees and a significant drop in self-employed and cash business income can have an impact of reducing the Ramadan income from the expected levels or the levels raised in the last reported accounts. If the Ramadan income drops by 50%, this can

Blogs

The question of charity overheads

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Donating is key part of faith and worship during the month of Ramadan. Each donation during this period represents, a prayer, an emotion, memory of a deceased loved one or simple sacrifice of personal funds – this is why, when some charities are not able to give a satisfactory answer – it hurts. Muslim Charities in the last 20 years have become large with millions at their disposals. Stories of high salaries and high spend on marketing with few bad stories of mismanagement of funds or safeguarding issues damages the reputation of the whole sector. The question of overhead and value for more becomes more pressing. During the Covid crisis in 2020, I analysed the accounts of 20 large Muslim charities to assess their financial health. This provided a glimpse of the charity sector finances of the 20 Muslim charities. In summary they raised around £225m of which around £80m raised in Ramadan Payroll – £40m with 1300 employed with many self-employed Charities had £107m in cash at year-end When considering the question of overheads, donors should look out for the following in the charity accounts: 1. How much is being spent to raise funds and is this disclosed properly? Although this makes donations increase in size and helps charities contribute more to their causes, a high spend with little returns may suggest waste of funds. My analysis of the 20 large charity showed on average the cost of fundraising was around 17% of the total funds raised – each £1 spent was raising £6. My analysis noted some did not disclose fundraising costs at all, despite these charities raising millions each year. It costs to reach donors, especially when you have employed fundraisers, adverts on TV and social media, poster, and leaflet campaigns and call centres – this all adds up. When a charity does not disclose its costs of fundraising costs, these costs are then showing as part of charitable costs – money spent on actual causes. This maybe driven by the desire to show 100% donations (or close to it). Online fundraising, TV adverts, fundraising consultants and call centres, all focused on raising money from the public demand’s significant resources. A charity that uses such methods to fund raise can expect to raise £4 for every £1 spent. As a result fundraising costs can be around of 25%, if not more. This is supported by my analysis of the 20 charities – four charities had cost of fundraising around that level. However many charities do better and these costs can be from around 15% depending on the fund raising model employed by the charity, its established brand and following. 2. How is charitable spend incurred? If this is incurred through third party organisations abroad, then the real overhead incurred abroad is not disclosed in the charity accounts – this sits with the third-party organisation. The charities are required to disclose these third party partners and how much grants are paid to them. A good and effective overseas operation that is planned and delivered properly will have indirect overheads of 5% to 10% of the total spend in the country. Some countries are more costly than others for delivering relief projects. Overheads lower than 5% may indicate cutting of corners or some exceptional circumstances. 3. How much is being spent on support costs and what is included? The Charity Commission requires all charities to disclose their support costs in their annual accounts. These are indirect costs that are incurred when delivering projects. For an International relief charity, this should represent the general back-office costs (i.e. finance, HR, facilities and IT costs) that support fundraising and charitable activities. For an International relief charity this can range between 5% and 12% of total income. The larger the charity, the smaller the percentage due to economies of scale. This does not mean a large charity becomes better at managing support costs – they should be measured against a similar size charity. 4. What is the salary ratio to income? All charities are required to disclose their payroll costs in their accounts. During my analysis of the 20 Muslim charities, I noticed the overall ratio of payroll cost to total income to be around 11% of the total income. All charities are required to disclose staff on salaries (including benefits) higher than £60,000. A lower ratio may indicate many workers on consultancy contracts and costs hidden within fundraising and charitable costs. If a charity runs its own field offices, then the salary of such office staff should also be disclosed in this note. However, if the charity model is such that the projects are delivered through a third-party Partner which is often the case, then the salary costs of the field office are hidden within the Partners accounts only. My Analysis showed that Muslim charities generally need to improve the information they disclose in their annual accounts – these should not be just marketing documents but a mechanism to satisfy the donors with many genuine questions and concerns. Muslim charities appeal using faith values and the very same values require transparency, better accountability and that the donations are spent wisely and effectively.   Nasir Rafiq is the founder and director of Dua Governance Chartered Accountants and Business Advisors – He is a widely experienced Fellow Chartered Accountant and a charity finance specialist.

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