Paper written for the 11th Regional leadership Training Programme held in Hungary 21 July - 21 August 1999 by Prof Omar Hasan Kasule, Sr.
OUTLINES
1.0 FUND-RAISING
Fund-raising is hard work
Resources for work
Independence
Purposes achieved by fund-raising activities:
Dealing with donors:
Benefits of charity to the donor
What to donate
Who should donate
What to give for
Fund-raising campaigns
Getting high credibility for fund-raising:
Types of solicitations:
2.0 ZAKAT AS A MAJOR SOURCE OF FUNDS:
Zakat is a major source of funds
Maqasid al Zakat
Sources of zakat
Beneficiaries of zakat
Anonymous vs public giving
3.0 ORGANIZATIONAL FINANCIAL MANAGEMENT
Importance of finance
What is financial management?
Functions of the financial manager
Cash vs non-cash assets
Financial control
Financial Records
Financial Reports
Types of financial statements
Analysis of financial statements using financial ratios
Limitations of financial statements
Cost accounting
Financial accounting
Financial audits
Budgets
The common problems in financial management:
4.0 BAYT AL MAL
5.0 WAQF
Waqf can be for a dead person.
Examples of awqaf
Traditional purposes of awqaf
Today's purposes of awqaf
Types of awqaf
Establishment of awqaf
Ownership and management of awqaf
Legal protection of awqaf
Uses of awqaf
Investment guidelines for awqaf
6.0 INVESTMENTS
Allowable investments
How to invest wisely
Investment decisions
Generally low-risk investments
The rate of return
Control and management of investments
Investment opportunities
Halal investments
Trading companies
1.0 FUND-RAISING
Fund-raising is hard work: Fund-raising is hard work. It is not easy to convince a person to part with hard-earned money. You have to convince them that your activities are worthwhile and also conform to their values and expectations. You have to show that you are more deserving than the competing alternatives.
Resources for work: Three resources are needed to work: time, people, and finance. Any organization must be able to mobilize financial resources in order to carry out its activities and achieve its objectives. Fund-raising is the process of looking for the necessary resources.
Independence: To maintain independence the organization should rely on small contributions from many individual supporters. This also ensures that it has broad-based support and that it can not be controlled by special interest groups.
Purposes achieved by fund-raising activities:
- Money
- Change opinion
- Information
- Get new friends
Dealing with donors:
- You must start by understanding the psychology of donors
- How to identify potential donors?
- Types and characteristics of donors
- Cultivate donors and maintain their interest.
- Do not take the donor for granted.
- The heart of the potential donor must be won over by giving him a lofty objective and challenge.
- Remember that the donor has the alternative of spending that money on himself, his family, his relatives or give it to another organization.
- Getting donor loyalty
Benefits of charity to the donor: Donations for a good cause are a loan to Allah who will repay handsomely on earth and in heaven. Zakat paid from wealth cleanses whatever remains. Giving develops the donor's humanity and suppresses greed and selfishness. Generosity is good, miserliness is condemned. Generosity is a habit that has to be taught from the earliest stages of childhood. Those who have and do not give are losing themselves as good positive human beings. What you donate to good causes or in the path of Allah is for your good. It is the only wealth that actually benefits you. What you hoard is either for heirs or fate that will overtake you while you are still alive and you lose all that wealth.
What to donate: Donations should be from the surplus over basic needs of the donor and his family.
Who should donate: Both the rich and the poor should contribute each according to their ability. Everybody must be charitable even children. Give even if very little. If many people give each very little it cumulates to a lot.
What to give for: Giving should be only for good causes.
Fund-raising campaigns: The method of fund-raising used must be selected carefully for success. It has to be customized to the organization, the contributor, the project, and the socio-economic environment. Use of the media and volunteers.
Getting high credibility for fund-raising:
- Good reputation
- Serious, professional management
- Transparency and accounting for funds
- Successes in field work
- Building and nurturing supporters & sympathizers
Types of solicitations:
- Foundations
- Major donors
- Special events
- Direct mail -
- Products and publications
- Grass-roots fund-raising
- Training the board
- Working with volunteers
ZAKAT AS A MAJOR SOURCE OF FUNDS:
Zakat is a major source of funds. It is not a tax but a form of worship. The giver of zakat is grateful to the receiver for accepting his zakat. Zakat is not a voluntary charity.
Maqasid al Zakat are: (1) tazkiyat al nafs Taubah: 103 (2) help the poor (3) help muallafat qulubuhum (4) jihad (5) help traveller (6) tazkiyat al maal
Sources of zakat; (1) crops baqara: 267, an'am: 141 (2) monetary instruments eg gold, silver, notes taubah: 34 (3) trade goods eg real estate, food, drinks, cars (4) animals
The beneficiaries of zakat are mentioned in taubah:60: (1) faqir (2) miskin (less needy than faqir) (3) workers (4) muallafat al qulub (5) captured (6) in debt (7) sabil al Allah (8) travellers. The following categories can not get zakat: (1) rich (2) those capable of working (3) family of payor of zakat (4) non-Muslims (5) relatives of the Prophet.
Zakat payment taken for one year only
Anonymous vs public giving: Giving is best when it is anonymous. Start with the nearest relatives, organizations in your local area or your country. Charity begins at home.
01.5.1 ORGANIZATIONAL FUND-RAISING TECHNICS
Choose an organization that you know very well, Islamic or non-Islamic. Evaluate its fund-raising techniques using the following criteria:
01.5.2 FUND-RAISING CASES FROM THE SEERAH
Identify and describe the fund-raising techniques in each case using the following criteria:
01.5.3 PLANNING A FUND-RAISING CAMPAIGN
3.0 ORGANIZATIONAL FINANCIAL MANAGEMENT
Importance of finance: Finance is vital necessity for survival of all organizations.
What is financial management?: Financial management is more than book-keeping, making payments and getting receipts.
Functions of the financial manager: The financial manager must ensure the long-term survival of the organization by the proper management of financial resources in accordance with the organizational strategy. The functions of the financial manager are fund-raising, investment, planning and forecasting, coordination and control of financial resources. The last function includes: cash-flow management, inventory control, budgeting and budgetary control, cost control and financial control. The financial manager must be involved in all organizational decisions because almost all decisions have financial implications.
Cash vs non-cash assets: Decisions to liquidate assets in order to get cash are very difficult to make. An immediate cash situation may be relieved to the detriment of long-term survival.
Financial control: Any organization must operate with rigorous financial controls. The principles of financial management used by successful businesses should be used with some modifications in not-for-profit organizations.
Financial Records: Recording of financial transactions is a requirement of Islamic law enunciated by the holy Qur'an. The organization must have written accounting and auditing procedures. They should be as simple as possible and should be in conformity with local laws and regulations. Written records that are well kept and are available for inspection are a vital necessity. They improve management by having financial information readily accessible. They help build credibility and trust in the organization.
Financial Reports: Regular financial reports are necessary to build confidence in the organization. Three main types of reports are needed: income statement, balance sheet, and cash flow. Historic data for 3-5 years should be included to show trends.
Types of financial statements: There are three main statements: income statement, cash flow statement, and balance sheet. A income statement shows revenue and expenditure. A balance sheet shows assets, liabilities and equity. It indicates the organization's financial position at a specific point in time. A cash flow statement shows the impact of the organization's operating and investment activities on the cash position over a period of time. A statement of any revenue retained for investment should be attached where applicable.
Analysis of financial statements using financial ratios: A systematic and consistent way of reading, understanding, and analyzing financial statements must be adopted. Raw financial data can be made more interpretable by use of certain financial ratios. Liquidity ratios indicate the ability of the organization to cover short-term liabilities. Asset management ratios measure how effectively an organization is managing its assets. Graphing ratios for trend analysis is more informative than studying only one point in time.
Liquidity ratios: current ratio=current assets/current liabilities
Asset management ratios: inventory turnover, fixed asset turnover, total asset turnover
Profitability ratios: profit margin on sales, return on assets=income/assets, return on investment
Activity ratios
Limitations of financial statements
Cost accounting: Cost accounting is analysis of the cost of each project. It should involve computation of direct costs, overhead, and the contribution in the form of volunteer effort. Cost-benefit analysis attempts to evaluate projects relating to their cost. This is a necessary activity. It is however difficult in practice. The goals not be definable or measurable. Many of the costs are not measurable. Projects overlap and disentangling them is not or easy.
Financial accounting is....
Financial audits: Financial records should be audited on a regular basis. The audit could be internal and external. Auditing should not be looked at as a technical procedure by professional auditors alone. The leadership of the organization should take an active interest in checking records according to their ability. This will supplement the findings of the professionals. Internal audit and external audit
Budgets: A budget is an estimate of revenues and expenditures. It is a reflection of the organization's purposes and plans. The organization must have an annual budget and budget forecasts for 2-3 years should be regularly updated. Budgeting has many advantages. It enables optimum control, coordination and allocation of resources. Budgeting could have disadvantages that you have to watch out for. It takes time and may generate a lot of paper work. It may also stifle creativity and innovation in management when it acts as too tight a constraint. Several types of budgets are used: master budget, revenue and expenditure budget, capital expenditure budget, cash budget, and non-monetary input budget. A performance budget is based on the plan of activities or programs for a stated period of time and for which a definite amount of money is allocated. It enables cost-benefit evaluation. Zero budgeting is based on the premise that existing / continuing projects should not be automatically funded. New decisions must be made in each budgetary cycle. Zero budgeting enables the organization to be more focussed and to eliminate waste. Zero budgeting is difficult in practice because it leads to loss of confidence in the organization that can not make long-term commitments. Zero budgeting is time consuming and requires a lot of paper work. Most organizations budget incrementally. New budgets are changes in the previous ones. There are no drastic changes from year to year. This type of budgeting is easy but does not provide priorities an opportunity to rethink budgeting priorities and to be creative. Capital budgeting planning expenditures on assets such as real estate from which cash flow is expected to extend beyond 1 year. The payback period for such assets is time needed to recover the original investment.
The common problems in financial management:
The following are common problems in organizations: poor cash-flow management, deficits due lack of budgeting or budgetary control, lack of records that guide decision-making and evaluation, failure to collect receivables, poor purchase procedures, and lack of transparency and accountability. Cash flow management is in my experience the most difficult function for non-profit organizations that depend on intermittent donations. The incoming cash is not constant whereas obligations are constant and increase unpredictably. Deficit expenditure: Organizations should always spend within their limits. It is not allowed to borrow money unless it is for a short time to cover an expense for which a known source of revenue is known. In practice this is easier said than done. The rapid pace of life and growth in ambitious successful organizations are a recipe for deficit spending. The assumption is that the deficit will be covered by some future income. The risk taken is trading off achievement of an immediate goal by spending beyond means today for future financial viability; this is not easy. Strong charismatic leaders confident of their ability to raise funds in the future are better placed to take the risky decisions involved. When their assumptions prove wrong the organization may collapse. Failure to get receivables affects organization's functining. Aggressive management of receivables is necessary for survival. A good information system is a basic necessity. Purchases, if not controlled, are a budget buster. There must be centralized policies, procedures, and guidelines but actual purchase decisions must be decentralized to allow local initiative. The written policies must be prepared in such a way that there are no loopholes. Value analysis is a necessary part of purchasing to make sure you get the best value for your money. Whatever is bought must be of acceptable policy, concern over costs should not lead to compromising the quality so much that the purchased goods are useless. Purchasing officers must be good negotiators. Everything is negotiable: price, quality, and delivery time. Things bought and put in the inventory should be looked after carefully because they are assets and assets are money. Good record keeping is a must. Things must be easy to retrieve.
BAYT AL MAL
The concept of Bayt al Maal al Muslimeen needs further development and refinement both theoretically and practically.
WAQF
Waqf is giving up part of wealth and endowing it for a particular charitable contribution in order to gain Allah's blessings. Waqf endowments can not be sold, donated or inherited. It is either used for the purpose stated if it is real estate or is invested such that the profit is used for charitable purposes and the principal remains untouched
Waqf can be for a dead person.
Examples of awqaf include: mosques, land, well, school, inns for travellers, homes for the poor, drinking water, pantries for feed the poor, arms and provisions for jihad, cemeteries, kafn for the dead
In general the principal is not touched. The return from the waqf is what is spent.
Traditional purposes of awqaf
Today's purposes of awqaf
Types of awqaf
Establishment of awqaf
Ownership and management of awqaf
Legal protection of awqaf
Uses of awqaf
Investment guidelines for awqaf
INVESTMENTS
Viable organizations with long-term projects can no longer rely on adhoc financing. Long-term investments that can assure regular operating income are needed. This is in line with the institution of WAQF. This institution needs to be revived and developed.
Allowable investments
How to invest wisely
Investment decisions should balance resources between today's needs and needs in the future that will be covered by investment dividends. The concept of time-value of money is used. In an investment an estimate should be made of the cash needs at some date in the future then an amount of money that will have that future value is invested.
Generally low-risk investments should be selected. There are 2 types of risk: diversifiable and non-diversifiable. The diversifiable risk is decreased by investing in diverse projects. Diversifiable risks are preferable for Islamic organizations.
The rate of return should always be estimated by computations using some assumed probabilities for that type of investment.
Control and management of investments
Investment opportunities
There are several ways of investing: subsidiary businesses, partnerships, real estate, and halal stocks.
Halal investments are limited especially in non-Muslim countries.
Trading companies could be set up and their profits are used to support the organization. Even if the profit margin is small they could play a role by providing a service that the mother organization would have had to provide. When such a company is set up it should be run on strictly business lines and its management must be separated from that of the mother organization.
