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Islamic Finance, Mosques & Charities – the Missed Opportunity

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This blog represents the well received presentation by the author, he gave as a guest at the launch of the Birmingham City University’s UK’s first Islamic Finance undergraduate degree course.   Islamic Finance has become a multi-billion dollar industry and is fast growing. Despite this growth and reach, this industry has had little to offer Mosques, charities and for the wider uplifting of the state and economies of disadvantaged Muslim societies worldwide.   Islamic Finance has worked to make wealthy Muslims wealthier by helping them avoid the guilt that comes with breaching shariah guidelines – Although there is nothing wrong with that, in my opinion Islamic Finance has a bigger role to play in promoting the finances and impact of Mosques and charities, especially in the UK context.   Islamic Finance is a component of the Islamic Economic system which aims to create a fairer and just society in which hard work is rewarded, those that are at disadvantage are supported, business and entrepreneurship is promoted, and infrastructure is built that benefits all – Mosques and charities play an equally important role in achieving these objectives.   In UK, the top 20 International Muslim charities raise around £400m with around £100m raised in Ramadan alone (see blog). In total when combined, the UK Muslim charity sector can be estimated to be raising around £500m each year. This is despite it being a relatively young sector (only 30 years +) but a fast-growing sector.   Mosques are built using Qard-e-Hasan financing The majority of Mosques in UK are successfully built using Qard-e-Hasan, interest free community loans, and this is also the case when they extend their facilities. There is no Islamic Finance solution in UK that provides this interest free facility to Mosques in spite of the underpinning strong business model of Mosques.   Each Mosque has a ever growing number of worshippers and donors. They are engaged in a never-ending cycle of Friday prayers and Ramadan worship, during which funds are raised to return the loans.   Mosques are the heart of Muslim community – this is where everything starts from (i.e. marriages), sustains (i.e. prayers and education) and ends (i.e. funerals) – promoting them should be the first priority of the Islamic Finance sector.   Islamic loans for buildings and ICT systems   The UK Muslim INGOs have seen a significant growth in their income. With this growth, a time comes to upscale the back-office facilities and the ICT systems – this is crucial for good governance. Some of these required investments are significant and can’t be covered by the general funds raised in one year and therefore the financing solution makes business sense.   Despite the fact that these charities have stable income and have the ability to payback loans, there are no interest free solutions available to them. The existing solutions are too focused on private and commercial initiatives.   Ultimately the beneficiaries suffering in the most remote parts of the world pay the price for the inefficiencies and weak governance caused by this lack of investment.   Foreign exchange (forex) costs with no hedging solutions   UK Muslim charities transfer around £250m each year worldwide to support beneficiaries. Sometimes the transferred currency has to exchanged up to three times before it reaches the beneficiaries. This poses a significant cost on the charity finances.   Unlike the mainstream non-Muslim charities where they have hedging products available to mitigate their forex costs, the UK Muslim charities have none.   Surplus cash – nowhere to go   In 2020, I analysed the accounts of the top 20 Muslim charities and noted that they held around £107m in cash balances (see blog). UK Muslim charities raise around 40% of their annual income in the month of Ramadan. This is then spent through out the year based on the need and ability to deliver.   The business model of the UK International Muslim charities is such that there will always be surplus cash held by them. It is unfortunate that there are lack of suitable Islamic Finance short term investment / finance solutions in place that can provide low risk returns and at the same time provide benefit to the UK community.   Islamic Finance products – Sustainable relief of poverty   The UK Muslim sector often lacks the required focus and priority on activities that are at the heart of sustainability and capacity building for the long term relief and impact in UK and worldwide. The nature of these activities requires Islamic Finance input and initiative. For example:   a) Micro Finance – building capacity and self-reliance   These are small interest free loans to the poor and disadvantaged individuals for business and self-reliance. Micro finance projects are carried out by some household UK Muslim charities worldwide but not on the scale needed and required on the ground – partly because this is not popular with UK fundraisers and also due to local registration restrictions.   However, In my opinion this activity has a significant potential in UK where a significant number of unemployed or disadvantaged youth and old can benefit. For this to work, an Islamic Finance approach is needed where businesses, professionals, charities, and government agencies need to partner and devise solutions.   b) Endowments (Waqf) – investment in the future   Waqf has historically been at the heart of Muslim charity with its long-term benefits in this world and in the hereafter. However, this approach is often ignored by donors over activities that provide benefit today (i.e. food projects) and also by charities due to their lack of ability to deliver such projects – these projects could be investments in self-sustaining buildings, infrastructure and businesses.   Endowments are investments and although are a charitable product, there delivery is no different from any commercial endeavor. This requires the right and experienced business and commercial skill, hence endowments projects to succeed have to be large in scale so that they can afford the required delivery cost efficiently and

Blogs

Reading between the lines – Human Appeal Inquiry

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The Charity Commission on the 28th October 2021 published its decision of its 3 ½ year long inquiry into Human Appeal. This was a comprehensive investigation that has had a profound impact on the charity itself and some of the individuals involved.   This decision has caught my attention as I feel it has some important governance learning for the wider Muslim charity sector, especially charities with international operations.   In 2019, I analysed the accounts of 20 of the largest international relief charities. I found collectively, they raised £350m in UK of which around £80m was raised alone in Ramadan. Hence, there is a lot at stake, and it is imperative that charities learn lessons from such Inquiries.   Background to Human Appeal Inquiry   On 18th April 2019, the Commission opened a statutory inquiry (a serious inquiry) into Human Appeal. The inquiry focused on how Human Appeal trustees conducted themselves in relation to their duties, decision making, due diligence and financial controls.   At the time the Inquiry opened, the charity was of a significant size with an income of £36m, operations in 24 countries and over 100 full-time staff including six directors and a CEO.   My reading of the Inquiry report   The Commission report is a valuable read and trustees of all Muslim charities should read and understand the findings in this report, as much of it, is relevant to all International NGOs.   I will set out my observations below, reading between the lines.   The Trustees can’t wash their hands off overall responsibility In large charities, trustees employ the executive and delegate responsibilities to them. This does not mean trustees have no responsibility and when something goes wrong, the trustees can simply blame the CEO and get away with it.   The Inquiry concluded that there had been misconduct and/or mismanagement in the administration of the charity by its then Trustees and identified that a significant factor in the misconduct and/or mismanagement was insufficient oversight of the charity’s executive by the then Trustees.   Steve Roake, Head of Compliance Visits and Inspections at the Charity Commission, said “While trustees of larger charities will delegate certain tasks to staff members, we and the law are clear that trustees retain ultimate responsibility for running their charity. and our guidance is clear that trustees must ensure that robust reporting procedures are in place. Responsibility for ensuring they have sufficient information and are adequately informed to make decisions rests with the charity trustees”.   It should be noted that in the detailed report, the Commission did not single out the CEO for misconduct, never mind gross misconduct.   Ignorance of Trustee(s) is not a defence   The Commission report states that part of a trustee’s role is to review proposals and challenge assumptions critically and objectively in making decisions.   No one should be able to direct the trustees or drive decisions through without sufficient consideration. Trustees who simply defer to the opinions and decisions of others aren’t fulfilling their duties. In large charities (especially), it is imperative that formal systems and process are in place that provide scrutiny over Executive decision making – this does not mean, the Executive are deprived of decision making – This is one bicycle that requires both tyres to run in sync for good governance.   Trustees approve the strategy and budget. The Executive run the charity and provide timely and robust feedback to Trustees so that they are adequately and collectively assured and informed.   It is insufficient for the CEO to rely on informal relationships with the Chair of Trustees or a small of group of trustees.   It is not enough for due diligence to be done by management; Trustees must have systems in place that can adequately assure them that due diligence is actually done   Often when asked, trustees assume due diligence of donors and partners is done by management because they are paid to do it. When public funds and donor monies are involved, this is not sufficient or a responsible answer by any standard.   There is a stark difference between assumption and assurance. When someone else’s money is involved which is the case with donor monies in charities, trustees should not be relying on assumptions and mere alone representations from the executive.   A system of internal control, policy and independent assurance on their effectiveness is something that should be in place as a standard in large charities.   The Muslim charities are often lacking in this area, often because trustees have never experienced similar systems in place elsewhere and there is no compulsion within the sector for such systems to exist. This attitude needs to change – the level of funds and risks involved in the sector demands this.   Submitting true and fair statutory returns on time matters and it’s the trustees that are ultimately responsible Charities with annual income above £1m require a statutory audit of their year end financial statements. The External Auditors are required to give an “opinion” on whether the charity’s financial statements are true and fair presentation of charity finances and activities.   There are two main types of opinion – Unqualified opinion: means a clean opinion where the auditors consider the financial statement true and fair. Qualified opinion: means a bad / adverse opinion where the auditors raise serious concerns over the financial statements.   Human Appeals submitted 2017, 2018 and 2019 (last three years) financial statements consistently show a qualified opinion disclaimer from its External Auditors.   The reason for these qualified disclaimers is due to unreliable financial records and a risk of material misstatement in its reported income and expenditure. The qualified opinion also relates to a material uncertainty that the auditors felt exists that may cast significant doubt on the charity’s ability to continue as a going concern.   This is a damning verdict on the state of Human Appeal finances, how they are managed and recorded from an independent Auditor.

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

Blogs

Islamic Schools the Untold Story of Governance

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I recently visited an Islamic school that had not prepared its last 3 years of annual accounts. The Charity Commission had threatened to take them over, so in response they sought my help. After giving the Chairman a roasting for not giving financial accountability the due importance demanded by the regulators and Islam, I discussed the underlying reasons and explored solutions.   This is not the first time, I have come across a private Islamic school in financial difficulty. The same story repeats itself. Having worked as a senior Auditor in the Education sector with KPMG, I have a good understanding on how good governance looks like in the Education sector.   With Islamic schools there is an often an untold story – they are criticised when things go wrong but nobody tries to actually understands the underlying issues, never mind coming up with solutions.   The reality Islamic schools are often set up by someone passionate about Islamic education on a voluntarily basis and with the support of the community. Personal funds, donations and Qard-e-Hassan loans are the traditional funds that are used to purchase the building, employ teachers and for other upfront costs.   I am yet to find a school where student fees alone cover the running costs therefore reliance is placed on donations and ongoing Qard-e-Hassan loans.   The Governors are never fully remunerated from the School due to Charity Commission restrictions. They often dedicate their full time as Chief Executive and give personal guarantees on the personal loans for the school. Their reputation becomes intertwined with the school. The founding Governor is often consumed by the day to day operations and cash flow challenges.   It is surprising how some of these schools sometimes achieve good Ofsted reports on their academic achievements despite lack of resources. I put this down to the barakah placed by God due to the sincerity of the Governors, staff and parents.   So what does this mean? These unique features of Islamic schools have some implications. These are symptoms from the issues highlighted earlier.   Qualified staff and teachers cannot be afforded by such schools – reliance is placed on staff working for religious reasons and not for money, volunteers, family friends or on inexperienced staff. This directly impacts on the overall governance and standards of the school. As staff gain experience, they often leave for better paid positions elsewhere.   Due to personal sacrifices by the founding Governors, it becomes difficult for the Governors to delegate authority to Management giving rise to internal conflict and high senior staff turnover.   Cash flow becomes a bigger priority over financial control and accountability due to the loss making situation of the school. Unrecorded debt, the reasons for losses, spend without invoices to avoid VAT is not challenged or addressed. This very attitude contributes to a culture of ambiguity and secrecy.   Those among the community that give significant donations or Qard-e-Hassan loans to the school ascertain a position where they start to influence student admissions and staff employment. This compromises quality and standards.   So what should be done? In my view and based on my professional experience, some simple steps can significantly improve this dire situation.   1.Before embarking on setting up a school, always prepare a business plan – Good business plans help to explore eventualities, mitigate risk, assess financials at the outset and plan accordingly and helps to ensure stakeholders are engaged in a transparent manner.   2.The school must be self-sustaining. If student fees alone cannot help to breakeven then the school must be supported by other reoccurring income i.e. trading activities, grants. Again this should be explored through business planning. Donations and Loans should not be used to fund core activities. This poses financial uncertainty.   3.As a Governor the following financial KPIs must not be ignored: a. Bank reconciliations – never underestimate the importance of this. The Governors should ensure it regularly happens and must be aware of the implications. Bank reconciliations are the back bone of financial control. b. Always be backed by a good Independent Accountant – Volunteers or sympathisers as Accountants may not be forthcoming in making sure issues are highlighted. c. Ensure the annual accounts preparing process takes place. This provides a good opportunity to assess the financial health to plan for future.   4. It is not sufficient for Management / staff of schools to demand one way delegation – Management / staff should also introduce sufficient checks and balances to provide independent assurance to Governors that delegated authority is not abused.   5. Regular self-assessment against readily available checklists or by professional can help to high light issues before they are picked up by external regulators. These assessment should cover financial and non-financial aspects. Regular self-assessment is common feature among good governed organisations.   These simple steps can instantly make a difference and promote Good Governance in Islamic schools. There is no such thing as a perfect organisation.   In my view gaps are not issues as long as these gaps have action plans against them. Issues and Gaps are growing sins without action plans.   By Nasir Rafiq BA ACA – Governance Expert   Managing Director Dua Governance Chartered Accountants and Business Advisors

Blogs

UK Muslim INGO sector and its challenges – commentary on the ODI report

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I have reviewed the HPG working paper on UK humanitarian aid in the age of counter-terrorism: perceptions and reality by the Oversees Development Institute (ODI). The paper sets out the views of different stakeholders and makes some general recommendations. The paper lays bare some very important issues often ignored and hidden by the donating public and politicians, impacting and hurting beneficiaries on the ground. My views on the report are as follows:   I have no doubt and agree with Banks and the Charity Commission on the money laundering risk around Muslim NGOs due to the high risk areas they operate within to reach those that are effected.   Banks are private businesses that need convincing that INGOs behave responsibly and are able to “demonstrate” good control through good governance and internal control framework – often the lack of it and the inability to demonstrate it, raises the risk for the banks, resulting in transfers or accounts being blocked.   The Charity Commission regulation and inspection is lacking – the compliance standard bar is very low. This has an effect on charity behaviour of just complying with the minimum, always risking non-compliance. One great example is year-end accounts that need to be filed within 10 months after the year-end – The INGOs take 9 to 10 months to finalise these, meaning it is only after this period (9-10 months) the charity can determine its true and fair year-end income, spend and reserve position. The quality of accounts is another matter.   The ODI report has an omission – the external auditors of INGOs were not engaged for their views. These are the only independent checks the INGOs really have on their accounts. These audits take account of money laundering risks and the control environment and transfers to field offices. I am surprised the ODI report missed this – hence may present an incomplete picture.   With my audit experience of the Muslim INGO sector, in my view the issue is not of new guidance but complying with the existing. In my view and experience there appears to be an issue of complacency among INGOs trustees, inability of the Executive, poor capacity of organisations and a culture of taking risks.   I came across a lack of appetite to improve governance and control from the Trustee level beyond talk. The issue of control at Trustee level is often confusingly restricted to banking controls and appointment of officers. Accountability, Delegation, Internal Audit framework, Evaluations and Risk Management with the Muslim INGO sector is poor when compared to mainstream charities and standard practice, especially in the context of operating within high risk areas. This partly because of the inability and inexperience of management in understanding these controls and not being able to implement them.   The other issue is of capacity that is wrongly driven by donor behaviour – the issue of overhead creates an environment where INGOs start competing on low overheads, exposing themselves to risk and non-compliance as management and systems are starved – 100% donation policy within INGOs is wrong and must be discouraged.   For an INGO to operate responsibly with donor money as per “regulation” in the current climate, up to 15% – 20% support costs can be justified depending on INGO business model and life cycle. Donors should be focused on governance and how the money is spent – this is where quality of year accounts and trustee reports are vital and often ignored.   The issue of culture of taking risks among Muslim NGOs must also be addressed. The ability and confidence of saying “No” or pulling out when the it is clear that the “minimum” cannot be achieved in implementing controls in high risk areas. The culture of over-riding controls to reach beneficiaries compromises the true essence of risk management. Muslim INGOs operate in a very difficult environment, often delivering where governments with all their resources fail. The plight of those affected cannot hold back those that are inspired by faith – the current climate requires that in such circumstances a responsible risk management approach is adopted – Muslim INGOs need to learn to work with each other on the ground – meaning if you cant deliver as per regulation then give to the INGO that can – this is a bitter pill to swallow but a pill that may be required.   Lastly, the recommendations made by the ODI report are general and are of common sense nature. I would have expected them to go further. In my view an environment needs to be created where driven by donors and the Charity Commission, INGOs compete each other on improving governance with a star style system like that in the US. This needs to be introduced in consultation with the banking sector so that the banks can ignore noise and rely on something credible and tangible.   Despite the issues identified in the report and my observations, I have great admiration of those that work in this sector, often on low or no salaries, inspired by faith, at times risking their lives and comfort. They are the best of humanity and must be supported by all.   By Nasir Rafiq BA ACA – Governance Expert

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