Proposed Core Principles for Zakat Management

A major initiative to transform the global zakat system is in progress. Led by experts from Bank Indonesia, BAZNAS, the apex zakat body in Indonesia and IRTI-IDB, a meeting to be held during the last week of this month in Jakarta will deliberate upon various issues relating to zakat management and to formulate the core principles “as a starting point for the frameworks and standards of zakat-based governance best practices…and to improve the quality of the zakat systems by identifying such weaknesses in the existing of supervision and regulation”. A draft document has been prepared for this purpose. I reproduce here some key sections of this document prepared by the concerned Working Group with a view to generating more discussions on this very important subject. (The entire document may be downloaded from this link  (http://www.zakat-chamber.gov.sd/english/files/zakah_core_principles.pdf)). I hope to share my own comments on specific principles in the blogs to come.

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The Basel Core Principles (BCPs) are the minimum standards for sound prudential regulation and supervision of banks and banking systems. The BCPs have already been conducted as a banking quality benchmark in more than 150 countries, so that the BCPs may represent the best role model for assessing the quality of the supervisory practices. By adapting the BCPs, the Zakat Core Principles represent an international standard of high-level principles to achieve and assess Zakat supervisory practices. This section adapts the 29 Basel Core Principles that were last revised in September 2012 (Basel Committee on Banking Supervision, 2012).

Exhibit  shows the comparison between core principles for effective banking supervision to the proposed principles for effective supervision of zakat institutions. There are 18 principles that are generally categorized into two main groups: powers, responsibilities and functions of zakat supervisor are explained in the first group (Principles 1 to 7) whilst prudential regulations and requirements for zakat institutions are given in the second group (Principles 8 to 18).

Exhibit: Supervisory Powers, Responsibilities and Functions

Basel Core Principles Zakat Core Principles
BCP 1  :     Responsibilities, objectives and powers ZCP 1      :   Objectives, independence, and powers
BCP 2  :     Independence, accountability, resourcing and legal protection for supervisors
BCP 3  :     Cooperation and collaboration
BCP 4  :     Permissible activities ZCP 2      :   Permissible activities
BCP 5  :     Licensing criteria ZCP 3      :   Licensing criteria
BCP 6  :     Transfer of significant ownership
BCP 7  :     Major acquisitions
BCP 8  :     Supervisory approach ZCP 4      :   Zakat supervisory approach
BCP 9  :     Supervisory techniques and tools ZCP 5      :   Zakat supervisory techniques and tools
BCP 10 :   Supervisory reporting ZCP 6      :   Zakat supervisory reporting
BCP 11:Corrective and sanctioning powers of supervisors ZCP 7      :   Corrective and sanctioning powers of zakat supervisor
BCP 12  :Consolidated supervision
BCP 13:Home-host relationships

Some principles in the Basle Core Principles (BCP) are still relevant to the zakat supervision. The proposed principles for zakat supervision consist of 18 core principles. ZCP-1 combines the BCP 1 – 3 and defines the objectives, independence, and powers of the zakat supervisory body. ZCP-2 and ZCP-3 represents the BCP-4 and BCP-5 on the permissible activities and licensing criteria. BCP-6 and BCP-7 are not relevant to zakat supervision. ZCP-4, ZCP-5, ZCP-6, and ZCP-7 represent BCP-8, BCP-9, BCP-10, and BCP-11 respectively on the supervisory approach, supervisory technique and tools, supervisory reporting, and corrective and sanctioning powers of supervisors. BCP-12 and BCP-13 on consolidated supervision and home-host relationship are not relevant to the zakat supervision.

Exhibit 4 (b)

Prudential Regulations and Requirements

Basel Core Principles Zakat Core Principles
BCP 14   :   Corporate governance ZCP 8     :   Good amil governance
BCP 15   :   Risk management process ZCP 9     :   Collection management
BCP 16   :   Capital adequacy
BCP 17   :   Credit risk
BCP 18   :   Problem assets, provisions and reserves ZCP 10   :   Disbursement management
BCP19 :   Concentration risk &large exposure limits
BCP 20   :   Transactions with related parties ZCP 11   :   Country and transfer risks
BCP 21   :   Country and transfer risks
BCP 22   :   Market risk ZCP 12    :  Reputation and muzakki loss risk
BCP 23   :   Interest rate risk in the banking book
BCP 24   :   Liquidity risk ZCP 13   :   Disbursement risk
BCP 25   :   Operational risk ZCP 14   :   Operational risk
BCP 26   :   Internal control and audit ZCP 15   :   Shari’ah control and internal audit
BCP 27   :   Financial reporting and external audit ZCP 16   :   Financial reporting and external audit
BCP 28   :   Disclosure and transparency ZCP 17   :   Disclosure and transparency
BCP 29   :   Abuse of financial services ZCP 18   :   Abuse of zakat services

ZCP-8 represents BCP-14 on good governance of zakat institutions. ZCP-9 combines the BCP-15, BCP-16, and BCP-17 on risk management process, capital adequacy, and credit risk into one principle i.e. zakat collection management. ZCP-10 combines BCP-18 and BCP-19 on problem assets, provision, and reserves and concentration & large exposure limit into zakat disbursement management. ZCP-11 combines BCP-20 and BCP-21 on transaction with related parties and country and transfer risk into country and transfer risk. ZCP-12 represents BCP-22 on market risk into reputation and muzaki loss risk. BCP-23 on interest risk in the banking book is not relevant. ZCP-13 represents BCP-24 on liquidity risk. ZCP-14 represents BCP-25 on operational risk. ZCP-15 represents BCP-26 on internal control and audit into Shari’ah control and internal audit. ZCP-16, ZCP-17, and ZCP-18 represent BCP-27, BCP-28, BCP-29 on financial reporting and external audit, disclosure and transparency, and abuse of financial services respectively.

Preconditions for Effective Zakat Supervision

An effective zakat supervisory process cannot be performed without the genuine cooperation between the zakat supervisors and all relevant authorities. There must be adequate systems in place to develop, implement, monitor and enforce supervisory tools and policies on the effective system of zakat supervision. The zakat supervisors should put in place strong external controls and risk management to responds a number of elements or preconditions that have a direct impact on the effectiveness of zakat supervision in practice. There are three preconditions for effective zakat supervision as follows:

  • A well established framework for zakat policy formulation.

All parties who are involved and responsible for the overall implementation of the zakat system should be identified on a clear framework for zakat policy formulation. This zakat policy framework is set out on zakat act, laws, regulations, or other arrangements. The framework reflects the need to manage mechanism for effective zakat supervision.

  • A well developed public infrastructure.

There are four elements of public infrastructure to support an effective of zakat supervision, namely:

  • comprehensive and appropriate national zakat accounting standards and rules;
  • a system of independent external audits and accountants;
  • availability of ‘amil officers who are competent and professional with transparent technical and Islamic ethical standards;
  • Availability of regional, economic, and social statistics.
  • A clear framework for collection and disbursement management.

Collection and disbursement activities as the main aspects of zakat management need to be supervised by the relevant authorities. A clear framework for collection and disbursement management help to optimize the function of zakat as a tool of poverty alleviation.

4.3. Proposed Principles for Zakat System

To retain as a flexible, globally, applicable standard, the Zakat Core Principles are formulated by the proportionality concept from a broad range of zakat institutions (from compulsory zakat management system to voluntary zakat management system). The main objective of the Zakat Core Principles is to strengthen a sound supervisory zakat management and a zakat safety net instrument among Muslim countries.

The Zakat Core Principles are the minimum standards to be applied by all zakat supervisions. In implementing compliance with a Principle, this section proposes the assessment criteria for each 18 Principles under a set of “essential criteria” and “additional criteria” for each Principle. Essential criteria are elements that should be present in to assess full compliance with a Zakat Principle. Additional criteria are elements that may be relevant to the countries with advanced zakat system. To achieve best zakat supervisory practices, a country may voluntarily choose to be assessed against the additional criteria, in addition to the essential criteria (Basel Committee on Banking Supervision, 2012).

The proposed zakat principles are further elaborated in this section. The following tables (Exhibit 5) propose the essential and additional criteria for each proposed Principle.

Exhibit 5 (a)

Zakat Core Principle 1-3

Zakat Core Principles Key Words
ZCP – 1

Objectives, independence, and powers

Laws, regulation, or other legal framework for zakat supervision is clearly defined to provide each responsible authority with the necessary legal powers and independent rule.
Essential criteria 1.     The main objective of zakat supervision is to promote the minimum standard for sound regulation and supervision of zakat management system.

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 shari’ah 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 shari’ah 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

Additional criteria 1.     Zakat system has to have a logical and operational relationship with central and local government activities.

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

 

ZCP – 2

Permissible Activities

Laws, regulations, or other arrangements clearly define the permissible activities of zakat institutions in accordance with the principles of shari’ah, including the field of zakat collections, zakat disbursement, and other religious charitable funds.
Essential criteria 1.     Sources of zakatable items must be clearly determined in the zakat act.

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.

Additional criteria 1.     The method of collection has to have formal permission from the zakat supervisor.

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.

 

ZCP – 3

Licensing Criteria

The licensing authority has the regulatory power to set criteria for licensing zakat institutions and reject applications that do not meet the criteria.
Essential criteria 1.     Licensing power is a part of regulatory power that is mentioned clearly in the zakat act.

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.

Additional criteria 1.     Selection criteria for the zakat management have to go through an appropriate fit and proper test.

 

Exhibit 5 (b)

Zakat Core Principle 4 – 6

Zakat Core Principles Key Words
ZCP – 4

Supervisory Approach

The zakat supervisor has a supervision scheme on an integrated basis covering all aspects of the zakat collection and zakat disbursement.
Essential criteria 1.     The zakat supervisor uses a methodology for determining and assessing the risk of shari’ah issues, internal control environment, and the optimization of zakat management system.

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

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

 

Additional criteria

 

ZCP – 5

Supervisory Techniques and Tools

The zakat supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and employs zakat supervisory resources which are subject to adequate validation and verification.
Essential criteria 1.     The zakat supervisor uses a clear framework of information system and strategic tools to regularly assess the processing, monitoring, and analysis of zakat management system as follows:

a)       analysis of financial statements and accounts;

b)       shari’ah 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.

Additional criteria

 

ZCP – 6

Supervisory Reporting

The zakat supervisor collects, reviews, and analyses zakat institutions’ performance.
Essential criteria 1.     The zakat supervisor has the power to require zakat institutions to submit supervisory information on a timely and accurate basis, such as their financial condition.

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.

 

Additional criteria 1.     The zakat supervisor uses an integrated IT system to support the reporting system.

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.

 

Exhibit 5 (c)

Zakat Core Principle 7-8

Zakat Core Principles Key Words
ZCP – 7

Corrective and sanctioning power of zakat supervisor

The zakat supervisor has an adequate range of supervisory tools to bring about timely corrective actions, the ability to revoke the license of zakat institutions and to recommend its revocation.
Essential criteria 1.   The zakat supervisor should set an appropriate range of supervisory tools to be used when a zakat institution is not complying with shari’ah laws, regulations, and supervisory actions.

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.

Additional criteria 1.   Zakat act guards against the zakat supervisor unduly delaying appropriate corrective actions.

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

 

ZCP – 8

Good Amil Governance

The zakat supervisor determines that zakat institutions have robust amil governance’s policies and processes covering shari’ah compliance, strategic tools, control environment, zakat management knowledge, and responsibilities of the zakat institutions’ Boards.

 

Essential criteria 1.     Shari’ah law, regulations, and the zakat supervisor determine that the concept and definition of amil still can be applied in the current zakat institutions. Amil deserve to get the share of zakat by not more than 1/8 or 12.5% of total zakat collected. If the share of zakat is not enough to pay their wage, it can be paid from non zakat wealth such as shadaqah, infaq, or tax.

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 shari’ah 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.

Additional criteria 1.     The zakat supervisor maintains plan for succession  to improve the quality of amil officers through certification

 

Exhibit 5 (d)

Zakat Core Principle 9

Zakat Core Principles Key Words
ZCP – 9

Collection management

The zakat supervisor determines that zakat institutions have adequate policies and processes for nisabassesment and zakatable assets.
Essential criteria 1.        Zakat act should designate the institutions that will charges and collects zakat[1]

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 shari’ah.

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).

Additional criteria 1.     It becomes necessary that the zakat supervisor identifies the zakat liability from “new forms of wealth” not known in the early days of Islam, eg the joint-stock company or corporation.

 

Exhibit 5 (e)

Zakat Core Principle 10

Zakat Core Principles Key Words
ZCP – 10

Disbursement management

The zakat supervisor determines that zakat institutions have adequate policies and processes to manage zakat funds and distribution system.

 

Essential criteria 1.     Shari’ah laws, regulations, or the supervisor require zakat institutions to formulate policies and processes for identifying and managing zakat funds. Zakat funds are an entity separate from government funds and revenues.

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:

˂ 3 months     : fast

3 – 6 months   : good

6 – 9 months   : fair

9 – 12 months : slow

˃ 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:

˃ 90 %        : highly effective

70 – 89 %   : effective

50 – 69 %   : fairly effective

20 – 49 %   : below expectation

˂ 20 %        : poor – zalim

4.     Shari’ah 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.     Shari’ah 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.

Additional criteria 1.     The zakat supervisor obtains and reviews disbursement information on national level to related parties.

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

 

Exhibit 5 (f)

Zakat Core Principle 11

Zakat Core Principles Key Words
ZCP – 11

Country and transfer risk

The zakat supervisor determines that zakat institutions have adequate policies and processes to control country risk and transfer risk of zakat in their international zakat transfer activities.

 

Essential criteria 1.     The zakat supervisor determines policies and processes to identify, measure, evaluate, monitor, report, control, and mitigate country risk and transfer risk. These processes provide a comprehensive view of country and transfer risk exposure, take into account macroeconomic conditions.

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.

Additional criteria

 

1.     The zakat supervisor, directly or indirectly, cooperates with the relevant foreign zakat supervisors to obtain additional information as needed (eg crisis situations).

 

ZCP – 12

Reputation and muzakki loss risks

The zakat supervisor determines that zakat institutions have an adequate management framework to handle contagion, reputation, and muzakki loss risks.
Essential criteria 1.        The zakat supervisor understands the overall structure of the zakat institutions in the wider environment, in particular contagion and reputation risks, may jeopardize the safety and soundness of the zakat management system.

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.

 

Additional criteria 1.        The zakat supervisor determines that there is an appropriate incentive to keep existing muzakki and attract new muzakki, such as tax deduction or excellent zakat services.

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

 

Exhibit 5 (g)

Zakat Core Principle 13-16

Zakat Core Principles Key Words
ZCP – 13

Disbursement risk

Zakat institutions should be able to mitigate disbursement risks such as financial position sound and misallocation of disbursement activities.
Essential criteria 1.     The zakat supervisor requires zakat institutions have established disbursement strategies, policies and processes to identify, assess, monitor and manage disbursement risks.

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.

Additional criteria

 

1.     To minimize misallocation problems, zakat institutions may have the measurement of had al-kifayahas minimum adequacy for the needs of individual rights.

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

ZCP – 14

Operational risk

The zakat supervisor determines that zakat institutions should have proper operational risk management to minimize potential fraudulent practices, anticipation towards system breakdown and any other potential disturbance.
Essential criteria 1.     The management unit should have proper methodology to identify, measure, mitigate and monitor the 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.

Additional criteria
ZCP – 15

Shari’ah control and internal audit

The zakat supervisor determines zakat institutions to have appropriate shari’ah control and internal audit frameworks to establish and maintain a properly controlled operating environment in the light of shari’ah.
Essential criteria 1.     Shari’ah laws, regulations or the zakat supervisor require zakat institutions to have internal control frameworks that are adequate to establish:

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, shari’ah control n internal audit function charged with:

a)    assessing whether existing policies, processes, shari’ah 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.

Additional criteria

Exhibit 5 (h)

Zakat Core Principle 16-18

ZCP – 16

Financial reporting and external audit

The zakat supervisor determines that zakat institutions maintain reliable records of financial statements, annual publication and external audit function.
Essential criteria 1.     The zakat supervisor holds the zakat institution’s Board and management responsible for:

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.

Additional criteria 1.     The zakat supervisor has the power to access external auditors’ working paper.

 

Zakat Core Principles Key Words
ZCP – 17

Disclosure and transparency

The zakat supervisor determines that zakat institutions regularly publish consolidated information that is easily accessible and fairly reflects their financial condition and performance.

 

Essential criteria 1.   Laws, regulations or the zakat supervisor require zakat institutions to publish periodic disclosures of information on a consolidated.

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.

Additional criteria

 

ZCP – 18

Abuse of zakat services

The zakat supervisor determines that zakat institutions have appropriate policies and processes to promote Islamic ethics and professional standards and to prevent criminal activities.
Essential criteria 1.   Zakat act establishes the duties, responsibilities, and powers of the zakat supervisor related to the zakat supervision of internal controls and regulations regarding criminal activities, such as terrorism, money laundering, and corruption.

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.

Additional criteria 1.   The zakat supervisor, directly or indirectly, cooperates with the relevant domestic and foreign financial sector supervisory authorities.

 

[1] In the period of the Prophet, there had been zakat collecting officers who were directly appointed. The zakat collecting activities already covered almost the whole peninsula. The Prophet had even a dedicated secretary to take care of zakat operation.

Mohammed Obaidullah | August 20, 2014

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