Muslim Charities

Accounting & Finance

Bank Account Closures & UK Muslim Charities

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The Nigel Farage’s bank account closure with a bank for the rich has hit a nerve for the Government and the media. The calling of the banking leaders to Downing Street and the resignations of the Group CEO and its subsidiary Banks CEO shows this was no little crisis. This whole saga as it played out questioned the role of banks in our lives and wider society. I deal with banking issues regularly for my charity clients, large and small. I have seen many examples, good and bad, so it’s imperative to understand the role each plays to understand the real issues. The Banks and their role in business and society Banks are private businesses, set up to make money for their shareholders. They are not politically aligned (we think so). Yes, during the banking crisis of 2008, the Government stepped in and now owns 39% of the NatWest Group – this is rare and did not change the business objectives of the bank. Banks are subject to stringent anti money laundering and government sanctions regime with hefty fines when it goes wrong. All designed to regulate the banking conduct to the government domestic and international needs hence international events and wars make this a constant changing environment for sanctions. The introduction of the Politically Expose Person (PEP) protocols to stop corruption by people misusing public office adds another dimension to banking responsibility and risk management. Nigel Farage was picked up by his bank as a PEP but what made the story interesting is that after he made a subject access request, he found that his political views were also considered as a reputation risk for this niche bank and its niche clientele. “The Nigel Farage story has shaken the very foundations of trust in the wider banking system”. This has shaken the very foundations of trust in the wider banking system. Given the control banks have on individuals and entities, this very notion that banks consider political views when not obliged by regulations, becomes problematic. So where do the Muslim charities in the UK fit into all of this? The impact of 9/11 was a game changer for Muslim charities operating in the West. Muslim charities suddenly found themselves working in high-risk countries subject to sanctions or where sanctioned entities operated. The resulting sanctions regime instantly choked many international charity banking facilities without explanation. No regard was given to any legal or illegal activity as the “perception” of the “ability” to breach sanctions started to dictate the banks risk management process and de-risking. The Muslim sector became guilty until proven otherwise. The International relief sector already had inherent risks of money laundering, aid diversion and fraud for banks to consider, for the Muslim charity sector, it became just that more challenging to convince banks in this new environment. “As a result of de-risking of banks, many individuals unfairly paid the price and their associated charities despite having done nothing wrong or illegal” Another dark side of this additional scrutiny by banks was the spotlight on Trustees. Their social media profile and historical news coverage on the web searches started to become a vital part of the bank’s due diligence. The banks started to de-risk charities based on unfounded risks and perceptions relating to trustees. Many individuals unfairly paid the price and their associated charities despite having done nothing wrong or illegal. Despite this, the Muslim charities in UK generally responded positively. Charities improved their due diligence processes and vetting of partners and responding to banking queries. Many Muslim charities now use the same due diligence software to vet their partners and staff as the banks. Despite the pressures since 9/11, the Muslim sector in UK has exponentially grown with talks of annual income reaching £1bn in UK. This could not have been possible without the partnership Muslim charities have with their banks. However, in transferring money abroad charities continue to face blocks and funds returning. In some instances, and surprisingly, banks have been trigger-happy in closing banking facilities without any explanation. Even charities with just UK operations also affected. So, what should be done, a question I am often asked. My response: 1. Financial Standards must not only be improved, but they should also be exhibited. The Muslim community bruised by constant unfair and malicious media headlines, at times feels as if the whole world is against them. So, when a bank asks legitimate questions, some wrongly see this as an attack on their faith, creating an “us and them” narrative. This approach risks undermining real issues relating to good governance, compliance systems, proper due diligence, and effective audit trails for “end use of funds”. “Muslim sector should confidently and boldly market and exhibit the progress made in addressing compliance and governance issues” Muslim sector should confidently and boldly market and exhibit the progress made in addressing compliance and governance issues. Muslim organisations should sign up to a standard that works for banks and helps to demonstrate good financial governance. Sometimes the race to raise monies creates pressure to look good before donors with emotional marketing material in the year-end financial statements, ignoring the needs of other key stakeholders like banks. Muslim charities like all charities should learn from the mainstream charities that practice good governance. Often such charities, in their annual audited financial statements, will discuss their governance or when it fails against their actions plans and risk management extensively. They do this to assure their stakeholders that they understand the risks relevant to them and how they mitigate these risks. 2. Effective or meaningful third-party check or oversight over the banks decision to close an account. When a charity finds itself with a bank closure notice, it finds limited alternative options for new banking facilities. This has a devastating impact on the vital and often life and dignity saving work charities deliver. “There is no effective or meaningful third-party check or oversight over the banks decision to close an account” There is no process to ensure

Media & Insights

Accountability of Muslim charities – We talk to British Muslim TV (Sky 752)

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“Accountability of Muslim Charities” – Nasir Rafiq talks to Mohammed Shafiq on BMTV Questions live during Ramadan 2021, Wednesday, 28 April 2021, 4pm. Nasir Rafiq is the Founder Director of Dua Governance Chartered Accountants and Business Advisors. He is Financial Governance Expert and provides a wide ranging accounting, internal audit and financial advisory services to a large portfolio of Muslim charities of all sizes in UK. Nasir regularly writes a professional blog for those involved in the charity sector. He analysed the accounts of top 20 Muslim charities to assess the impact of lock downs during Ramadan. Link https://bit.ly/3bPB4a6. He also analysed the overheads of Muslim charities. Link https://bit.ly/3veyX7p.

Accounting & Finance

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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