Proposed Core Principles for Zakat Management

Objectives, independence, and powers

2.  The effective zakat system should have a solid legal foundation in terms of zakat act.

3.  The ruling zakat act is adequate and comprehensively translated into operational regulation.

4.  The elements of independence and power to regulate have to be clearly mentioned in the articles of zakat act. Zakat funds should be managed independently in accordance with Shariah rules.

5.  Zakat act and its operating rules and regulations have to be recognized by other relevant acts and regulations.

6.  The zakat act should clearly define regulatory and supervisory structures that cover Shariah rules.

7. The zakat supervisor has the power to:

a) get full access to zakat institutions’ Boards, management, staff and records;

b)  review the overall activities of a zakat institution, both collection and disbursement;

c)  impose an appropriate corrections, sanctions and revoke the zakat institution’s license when a zakat institution is not complying with the rules

2.  The zakat supervisor has to have sufficient local and cross border cooperation with other regulatory bodies.

Permissible Activities

2.  General criteria of zakat collection should be mentioned in the zakat act.

3.  General criteria of zakat disbursement should be mentioned in the zakat act.

4.  Zakat supervisor publishes available a current list of licensed zakat institutions that is easily accessible to the public.

5.  Zakat institutions can also manage infaq, shadaqah and other religious charitable funds that are defined in the zakat act.

6.  Zakat supervisor publishes available a current list of licensed zakat institutions that is easily accessible to the public.

2.  Methodology to allocate zakat fund, particularly in allocating productive zakat fund, has to get approval from zakat supervisor.

3.  Zakat institutions may collect Corporate Social Responsibilty (CSR) fund that is classified as infaq and shadaqah.

Licensing Criteria

2.  Licensing process includes providing licenses to operate the zakat institutions.

3.  The zakat act identifies the authority responsible for granting and withdrawing a licensed zakat institution and manpower.

4.  The criteria for licensing zakat institutions are set by the licensing authority.

Supervisory Approach

2.  The zakat supervisor assesses zakat institutions’ compliance with shariah regulations and other legal requirements.

3.  The zakat supervisor has a clear framework or process for assuring zakat management activities being fully performed by shariah regulations and legal requirements.

Supervisory Techniques and Tools

a)  analysis of financial statements and accounts;

b)  shariah compliance analysis;

c)  collection model analysis;

d)  disbursement model analysis;

e) analysis of good amil governance.

2.  The zakat supervisor evaluates the performance of the zakat institutions’ internal audit function in identifying strategic areas.

3.  The zakat supervisor may use of independent third parties, such as financial auditors.

4. The zakat supervisor attempts appropriate monitoring to check that zakat institutions have addressed supervisory concerns.

Supervisory Reporting

2.  The zakat supervisor provides a clear instruction for periodic reports that clearly describe the zakat accounting guidelines.

3.  The zakat supervisor utilizes policies and procedures that determine the validity and integrity of supervision information.

2.  The zakat supervisor uses the accounting standards and rules that are widely acceptedinternationally.

3.  The zakat supervisor collects mustahik database from all zakat institutions to optimize the effectiveness of disbursement.

Corrective and sanctioning power of zakat supervisor

2.  The zakat supervisor has a broad range of measurement to take timely corrective actions or to impose sanction expeditiously.

3.  The zakat supervisor imposes sanctions not only to the zakat institutions but, when and if necessary also to management and/or the Board, or individuals therein.

2.  The zakat supervisor may use rating assessment to enhance the corrective actions from zakat institutions.

Good Amil Governance

2.  The zakat supervisor provides guidance to zakat institutions on expectations for sound amil governance.

3.  The zakat supervisor regularly assesses a zakat institution’s amil governance policies and practices commensurate with shariah regulations and systemic importance.

4.  The zakat supervisor establishes the amil governance structures and requirements that are appropriate for nominating and appointing such manpower of honesty, trustworthy, upright, and virtuous.

5.  The zakat supervisor determines that the zakat institution’s Board:

a)  approves and actively oversees implementation of the zakat supervisory direction and strategy;

b)  establishes and communicates Islamic culture and values through code of conduct;

c)  establishes fit and proper standards in selecting amil officers who have good characters,  integrity, and three basic knowledge (zakat collection, zakat disbursement, and financial management);

d)  establishes conflicts of interest policies and a strong control environment; and

e)  ensures the effectiveness of amil governance over the zakat institutions entire management.

6.  The zakat supervisor has the power to recommend changes in the composition of the zakat institution’s Board if it is proved legally that any individuals are not fulfilling their duties.

Collection management

2. The zakat supervisor determines the period of zakat collecting immediately (except in time of disaster)

3.  The zakat supervisor should ensure that zakat institution has made the collection proactively

4.  The zakat supervisor determines the rate of zakat (nisab) depend on the source of income or the extent of property accumulation in the light of the shariah.

5.  The zakat supervisor determines that zakat institutions have appropriate policies and processes for regularly evaluating the various types of zakatable assets.

6. The zakat supervisor determines that zakat institutions’ Board obtains timely and appropriate information on the classification of zakatable assets.

7.  The zakat supervisor should ensure that zakat institution has made the collection proactively. In order to achieve the primary objective of poverty alleviation, zakat institutions needs to prioritize a larger proportion of zakat fund than other charitable funds.

8.  The zakat supervisor determines the period of zakat collecting immediately (except in time of disaster).

Disbursement management

2. The zakat supervisor determines that zakat fund from the latest collection period must be distributed maximum for 1 year. The disbursement period can be categorized as follows:

Below 3 months  : fast

3 – 6 months  : good

6 – 9 months  : fair

9 – 12 months : slow

Above 12 months  : zalim

3.  The zakat supervisor assesses the level of disbursement management by using disbursement-to-collection ratio (DCR). This ratio quantifies the ability of zakat institution to distribute zakat fund by dividing total disbursement by its total collection. The DCR is expressed as a percentage that can be categorized as follows:

Above 90 %  : highly effective

70 – 89 %  : effective

50 – 69 %  : fairly effective

20 – 49 %  : below expectation

Below 20 %  : poor – zalim

4.  Shariah rules, regulations, and the zakat supervisor require zakat institutions to formulate policies and processes to spend zakat for the benefit of (Surah At-Taubah verse 60):

–  the poor (fuqara);

–  the needy (miskin);

–  those who are deputed to collect zakat;

–  those whose hearts are to be reconciled;

– freeing the slave;

–  the indebted;

–  those on the way of Allah; and

–  Wayfarer.

5.  The zakat supervisor requires that zakat institutions have a procedure to give a priority scale of the eight ashnaf.The poor (fuqara) and the needy (miskin) are the most important groups that must be given the first priority and the largest amount in the distribution of zakat.

6.  Zakat is distributed based on priority after considering principles of equity, justice, and territorial proximity.The zakat supervisor assesses whether distribution of zakat is adequate within its locality of origin and/or its disbursement beyond it. To solve its respective domestic problem, it should be given priority in securing the right of the poor from the same territorial of collected location.

7.  The zakat supervisor determines that zakat institutions have policies and processes to prevent persons benefiting from the disbursement arrangements.

8. Shariah rules, regulations, and the zakat supervisor set prudent and appropriate requirements to control and constrain large disbursement to a single counterparty or a group of connected counterparties such as by auction. The supervisor also determines that zakat institutions monitor related party disbursement on an ongoing basis.

2.  The zakat supervisor determines that zakat institutions have a productive disbursement programs.

Country and transfer risk

2. The donor supervisor assesses a scale priority of recipient country through poverty level, calamity impact and the closest territorial from its donor country.

3.  The donor supervisor limits the range of activities by identifying a clear definition and assessment of the eight ashnaf.

4.  Donor and recipient supervisors share appropriate information on a timely basis in line with the informal or formal arrangements (such as memorandum of understanding) to enable the exchange of confidential information.

Reputation and muzakki loss risks

2.  The zakat supervisor imposes prudential standards to identify, assess, evaluate, monitor, report, control, and mitigate reputation risk.

3.  The zakat supervisor addresses all major aspects of reputation risk in the national zakat system, including periods when contagion and reputation risks could increase.

4. The zakat supervisor requires zakat institutions’ strategies, policies and processes for the management of reputation risk to minimize muzakki losses. The zakat supervisor also requires the Board to ensure that these policies and processes are implemented effectively.

5.  The zakat supervisor requires that zakat institutions have adequate socialization and education programs to enhance the well-informed public about zakat.

2.  The zakat supervisor determines that zakat institutions have established appropriate information technology policies and processes to ease a periodic report to the muzakki.

Disbursement risk

2.  To mitigate misallocation of disbursement, the zakat supervisor determines that zakat institutions have a comprehensive assessment for each ashnaf.

3.  The zakat institutions should have proper financial planning, recording and management to prevent mismatch allocation of fund distribution.

4.  The financial management is up-dated in a frequent manner so that the management has an accurate figure of financial position to meet all financial obligations timely.

5.  The zakat supervisor determines that the Board and management obtain, understand, and review sufficient information on how the level of risk relates to financial position and disbursement activities.

2.  Zakat institutions may further enhance a sound disbursement risk management through collaboration with other financial sectors such as Islamic banking and awqaf sector.

Operational risk

2.  Zakat institutions have an appropriate internal process for covering potential fraud, technical failure of the IT system, and any other factors that may disturb the zakat institutions from their daily operations.

3.  Laws, regulations, or the zakat supervisor require the zakat institutions must be equipped with good governance structure to ensure that responsibility and accountability are in place.

4.  Zakat institutions should have dedicated unit to take care of operational risk.

Shariah control and internal audit

a) organizational structure;

b)  zakat accounting policies and processes; and

c)  segregation of zakat funds and other charitable funds.

2.  The zakat supervisor determines that the internal audit function:

a)  has sufficient and qualified resources that are suitably trained, have relevant experiences and have sufficient authority to perform their role;

b)  is well informed for every changes made by the Boards;

c)  has full access to any members of staff and data that are relevant with its duties; and

d)  has an regular audit plan.

3. The zakat supervisor determines that zakat institutions have an adequately staffed, permanent, independent, shariah control n internal audit function charged with:

a)  assessing whether existing policies, processes, shariah control and internal control are effective, appropriate and remain sufficient for zakat institution’s performances; and

b) ensuring that policies and processes are complied with.

Financial reporting and external audit

a) ensuring that financial statement are prepared in accordance with accounting practices that are widely accepted nationally; and

b)  ensuring that the financial statement issued annually to the public bear an independence external auditor’s opinion.

2.  Laws, regulations, or the zakat supervisor has the power to establish the standard and scope of work for external audits that cover areas such as the asset valuations and the percentage of disbursement effectiveness.

3.  The zakat supervisor has the power to reject and rescind an unprofessional external audit.

Disclosure and transparency

2.  The zakat supervisor determines that the required disclosures are both qualitative and quantitative information including financial performance, disbursement activities, accounting policies, management, and amil governance.

3.  The zakat supervisor or another government agency effectively reviews and enforces compliance with disclosure standards.

Abuse of zakat services

2.  The zakat supervisor determines that zakat institutions have adequate policies and processes that promote Islamic ethics and professional standards and prevent the zakat institutions from being used, intentionally or unintentionally, for criminal activities.

3.  The zakat supervisor report to the financial intelligence unit or relevant authorities about such suspicious activities and incidents in order to keep the safety, soundness or reputation of the zakat institutions.

4.  The zakat supervisor determines policies and processes that are integrated and appropriate to identify, assess, monitor, manage and mitigate risks of money laundering and the financing of terrorism with respect to countries, regions, disbursement products, and zakat services.

5.  The zakat supervisor determines that zakat institutions have sufficient controls and systems to identify, prevent, and report potential abuses of zakat services, including money laundering and the financing of terrorism.

6.  The zakat supervisor has power to take appropriate action against a zakat institution that does not comply with its obligation regarding criminal activities.