Accountability and Governance in Zakat Institutions – II

In Part I of Accountability and Governance in Zakat Institutions, we presented a broad comprehension of the concepts of accountability and governance from the standpoint of Islamic organizations, such as, the ZIs and also their foundations in the Shariah. In this part, we move to more specific operational procedures and discuss the requirements that must be met by ZIs in the interest of accountability and good governance.

Governance Mechanism

Every ZI should have a governing board or a Board of Directors entrusted with the task of managing it. The governing board would have the ultimate authority of oversight of the ZI’s operations and its staff and therefore, should be active, independent and free of self-dealing. There must be regularly scheduled appraisals of the CEO’s performance. Adequate controls must be in place for disbursement, such as, board approval of the budget, fund raising practices, establishment of a conflict of interest policy and establishment of accounting procedures sufficient to safeguard zakat funds.

It is important that the board must have a minimum number of evenly spaced meetings per year of the full governing body with a majority in attendance. There must be a clear policy regarding voting procedure. As a general rule, directly or indirectly compensated person(s) should not serve as voting member(s) of the board or as the board’s chair or treasurer. No transaction(s) in which any board or staff members have material conflicting interests with the ZI resulting from any relationship or business affiliation. 

Assessing Effectiveness

The Board must regularly assess its effectiveness in achieving the ZI’s mission. It should ensure that the ZI has defined, measurable goals and objectives in place, a defined process in place to evaluate the success and impact of its program(s) in fulfilling the goals and objectives of the organization and that also identifies ways to address any deficiencies. There should be a clear board policy of periodically assessing the ZI’s performance and effectiveness and of determining future actions required to achieve its mission. The Board should demand, for its approval, a written report that outlines the results of the aforementioned performance and effectiveness assessment and recommendations for future actions.

Prudence & Transparency 

The Board must generally ensure that the ZI spends its funds honestly, prudently and in accordance with statements made in fund raising appeals; that all informational material used in solicitations must be accurate and not misleading. 

The Board must ensure that the expectation of donors (muzakkii) as also their religious obligation is fulfilled, i.e. zakat funds must flow to designated beneficiaries. This requires the implementation of systems that ensure a clear separation between for-profit and not-for profit activities. Empirical evidence shows that an organization undertaking both types of activities under one-roof suffers from conflicting organizational cultures. For instance, beneficiaries accustomed to receiving grants and donations may turn out to be extremely poor in terms of credit discipline when they are financed on a for-profit basis. The slow but steady transformation of the BMT model (originally conceived as a house of zakat and house of for-profit financing) into “for-profit financing only” institutions is a pointer to the difficulties of commingling both types of funds and activities.

Given the Shariah restrictions on the utilization of zakat unlike other forms of charity and non-profit operations, it is extremely important to maintain an iron wall of separation between them and maintain a distinct identity and accounting system for zakat management. The commingling of funds may affect credibility of the organization, given the clear positive discrimination by Sharīah in favor of the poorest of the poor under zakat-financed welfare activities. Some quick steps in this regard would involve creating a separate zakat account to receive all zakat donations, segregating salaries and other admin expenses for zakat office/ account. Where welfare activities are undertaken under one roof, e.g. schools, hospitals for both poor, not-so-poor and rich, establish systems to keep track of mustahiq, e.g. through issue of tickets by zakat office.

There is also the need to separate the mobilization and distribution functions of zakat in the interest of efficiency as these require different kinds of skill-set for their success.

ZIs must put in place sound accounting practices. They must follow a zero tolerance policy for dishonesty, frauds and fund leakages. They must have a system of frequent reporting of results based on sound accounting practices. They must put in place effective cost control system and make sure that the zakat amount utilized by the organization as amil zakat to defray collection and administrative expenses of the zakat office is always below the maximum threshold of 12.5 percent of zakat mobilized as allowed by Sharīah. The accounting and reporting system must enable adequate and efficient monitoring with use of ICT. 

Transparent & Timely Reporting 

A ZI must make available to all, on request, complete annual financial statements prepared in accordance with generally accepted accounting principles. It must include in the financial statements a breakdown of expenses that shows what portion of these expenses was allocated to program, fund raising, and administrative activities. It must accurately report the ZI’s expenses, including any joint cost allocations, in its financial statements. It must have a  board-approved annual budget for its current fiscal year, outlining projected expenses for major program activities, fund raising, and administration. All its transactions must be subjected to independent external audit.

Many ZIs make extensive use of volunteers to take care of their activities at all levels. In the interest of transparency, there should be adequate disclosure of the number of volunteer man-hours as well as the activities that involve such volunteers.

WZF Technical Note on Amil Governance

Indeed, some of the above prescriptions are already a part of the Technical Note on Amil Governance released by the World Zakat Forum in its latest conference at Melacca in December 2018. At a macro level, it requires a Zakat Act to be in place that should cover amil governance, defining amil in terms of the general responsibility of zakat institution in managing zakat and providing for the rights and obligations of amil. Among other things, it specifically requires the regulation to govern the utilization of infaq and sadaqah funds for amil operational cost if the fund that comes from amil right is not sufficient. The board of zakat institution is responsible for the guidance of good amil governance relating to collection,  management, and disbursement of zakat, the accountability and responsibility mechanism, the code of ethics that regulates relation of amil and other stakeholders.

There must be regular assessment of good amil governance policy and implementation based on indicators and measurement tools with reward and corrective actions in place system. Governance should be supervised by a special division in the organizational structure, appointed and regulated by the board or director of ZI.

The document enumerates the following role for the Board and Management of ZIs.

• Approve and actively oversees implementation of the zakat supervisory direction and strategy;
• Establish and communicate Islamic norms and values through code of conduct;
• Establish fit and proper standards in selecting amil officers who have good characters, integrity, and three basic knowledge (zakat collection, zakat disbursement, and financial management);
• Establish conflicts of interest policies and a strong control environment;
• Ensure the effectiveness of amil governance over the zakat institutions’ entire management.

While the Board of ZI is responsible in evaluating the performance of ZI’s management, there should be an institution that is responsible to supervise and evaluate the performance of Board itself, set up under the Zakat Act or Memorandum of Association among ZIs. This performance evaluation is executed based on an objective, measurable, and reliable assessment system and procedure.

An interesting aspect of the document is the requirement that every ZI must have a program for development of human resources. However, it may be noted that the issue of certification and development of amil is best resolved at the meso level by associations/ training bodies and not at the micro level. Other meso level initiatives included in the document include continuous training and capacity building of the ZIs, development of standard operating procedures (SOP) of Zis, which regulates the overall zakat process, including the zakat collection, management, allocation, reporting, and plan and measures in case of violation. The Board of a given ZI is responsible in ensuring the implementation of SOP to be inline with the institution’s mission.

The issue of risk management is also covered in the framework. The risk management procedures are to be defined in the zakat regulations. Further, the ZIs are required to report periodically and regularly to all relevant stakeholders such as public and the government. The reports will include annual audited financial reports conducted by authorized auditors, report on collection and distribution of zakat, and the Shariah audit report. Last, but not the least, the framework demands the existence of clear provisions regarding Shariah and regulatory compliance.

As rightly mentioned in the document, the some aspects of the framework can be implemented at the micro level, and others at the macro level. Indeed, some aspects of the framework are better dealt with at the meso level, e.g. human resource development, development of SOPs and other standards.