Ramadan lockdown and the impact on the UK Muslim Charity Sector
Friday, May 1st, 2020
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 50% reduction in Ramadan income
Due to the lockdown these charities will 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 by 50% of the expected levels or the levels raised in the last reported accounts.
This can wipe off £40m in total income and around 18% of the total yearly income. Given some costs for Ramadan have already been incurred, this will have an immediate impact on charity finances and the ability of charities to raise funds during the remainder of the year.
II – Payroll – £40m with 1300 employed with many self-employed
In the last reported period, the selected 20 charities spent around £40m on wages and salaries. Using an average salary of £27,410, it can be estimated that these 20 charities employed around 1300 employees.
The total annual wage costs of these 20 charities is around 11% of the total annual income – this is competitive and better than the wider mainstream sector average.
This does not include staff employed abroad on local partner payroll and funded by these 20 charities or those that are on self employed contracts. The number of people that rely on these charities for their sole income is far higher than the reported figure in the accounts.
Ramadan effect – jobs at risk
The sudden drop in income in one month will increase pressure on charities to reduce their overall costs, salaries being the largest costs will need to be reduced. Although the Government has announced to support 80% of the furloughed staff, this will have little effect on charities.
Furloughed staff will not be able to generate income, jeopardising the ability of the charity to continue employing staff after the lockdown when the funds are no longer there to support them.
The self-employed income support from the Government does not come in until mid-June 2020 – this is after Ramadan and may make it difficult for the self-employed to support the charities during Ramadan.
III – Cash reserves and liquidity – Charities had £107m in cash at year-end
At the end of the last reported period, 20 charities held cash balances of £107m – this was 68% of the total funds they held. This shows the biggest asset these charities have on their balance sheet is cash and the cash they raise is not significantly used to procure assets in UK.
The last reported period showed that six charities had cash balances below the sector average of 68% making them less liquid than others. During the month of Ramadan if the expected cash is not raised then these charities may suffer immediate cashflow issues.
IV – Low unrestricted funds can harm long term viability
On average the unrestricted income accounted for 23% of the total income raised. This is the portion of income where donors do not restrict the income to a project. Unrestricted income traditionally will include gift aid and Zakat monies that the charity can spend on any project that is eligible for Zakat.
During Ramadan, charities raise a significant portion of unrestricted funds by way of Zakat and Gift Aid. A significant drop in income during Ramadan will have a bigger effect of reducing unrestricted funds available for Muslim charities.
Charities held around half (46%) of their total funds as unrestricted. However, seven charities held unrestricted funds below the total average during the last reported period. If unrestricted income is significantly reduced then these charities will have less flexibility to use unrestricted funds to cover deficits in projects, overheads or charity activities that are funded by unrestricted income.
The response from the charities must be robust
Charities must act to protect themselves and the beneficiaries they serve. The response has to be immediate and for the long term. Economists are predicting a long period of economic down turn and recession and the Muslim charities must adjust to this new reality so that they can continue for the long term. I recommend the following key actions:
1. Cashflow forecasting should drive decision making
Trustees and management must base their short- and long-term decision making on a credible cashflow forecast. This must include all cash income and spend and should aim to keep the cash levels at a certain level. The target cash level will be different for each charity based on their strategic priorities and short / long term plans.
The cashflow forecast should be for at least 24 months and the assumptions should be realistic, so that risk is managed properly.
All Auditors will require to assess the going concern of each charity they audit. This means they will need confidence that the charity will be operating without any significant disruption for at least 12 months from the date they sign the accounts – they will need to rely on a credible cashflow.
2. Reducing costs should be led by strategy and plans
All charities will have to tighten their belts and reduce cost. Reducing the wrong costs or at levels more than required can have a detrimental impact on long term fundraising, programme quality and / or levels of compliance required to protect staff and beneficiaries.
Costs should be reduced within the context of an overall strategy and long-term plans.
3. Hidden overheads must not remain hidden
Overseas project overheads can become leaks like that in a water bucket. These overheads are not separately reported as part of the annual accounts and are shown as part of the charitable expenditure on projects. The bigger the overheads, the more funds are required to deliver the actual project overseas.
Charities must consider the costs of project delivery before committing to further spend. This may require pulling out from countries where it is too expensive to deliver projects or consider joint delivery with partners that may be able to deliver cost effectively using economies of scale. These decisions should be based on facts and figures and not mere emotions, which is often the case in the Muslim sector.
4. Annual reporting must approve
We are heading towards difficult times and during these times, charities must work to improve donor confidence in them. This can only be achieved with good audited accounts that donors can use to assess performance and compare. Within the Muslim charity sector many accounts are not user-friendly or provide sufficient detail.
Large charities should consider moving to charity specialist large audit firms. The challenge provided by such firms has an effect of improving the overall external reporting and financial governance.
5. Charities should consider merging to reduce back office costs
Many Muslim sector charities deliver the same service and operate a similar operating model with little that differentiates them. They should consider merging to save back office costs and possible project delivery costs abroad.
Branding can still be maintained with existing trustees still having influence and control. Where there is a will there is way. Muslim charities should be able to provide value for money to UK donors and this is one avenue through which value can be provided. This will also ensure charities can be protected in a tough future economic environment so that they can continue to provide valuable and life saving service to their beneficiaries.
Nasir Rafiq is the Founder and Director of Dua Governance Chartered Accountants and Business Advisory. He is a widely experienced Chartered Accountant (ICAEW) and Charity Financial Governance Expert.