Case

Waseela Foundation: Accounting Asian Journal of Management Cases

1–6
for Zakat © 2020 Lahore University of
Management Sciences
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DOI: 10.1177/0972820119884406
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Junaid Ashraf1 and Abdul Rauf1

Abstract
The case focusses on the issues faced by Waseela Foundation in its accounting system, specifically
in recording the receipt of zakat donations and utilization thereof. The existing accounting system is
simple and puts all types of donations into one pool. Expenses are paid out of that pool indiscriminately.
It is not acceptable to some zakat donors who have different interpretations regarding the use of zakat
funds. Mr Mustafa was given the task of redesigning the accounting system which would assure the
donors that their zakat was being managed and disposed of as per their instructions. Accounting for
donations in non-profits requires an elaborate system of recording and reporting that can distinguish
between different sources of donations and their utilization. This is important because some donations
have to be spent on specific purposes. Hence, unlike for-profit organizations, non-profit organizations
have to keep different sources of funds separate for recording and reporting purposes. Zakat poses
special accounting challenges because there are variations in interpretations of different schools of
thought with regard to avenues of spending the zakat. The case thus provides students with an excel-
lent opportunity to understand the intricacies of fund accounting for non-profits.

Keywords
Zakat Accounting, Donation Management, Civil Society Organizations, Not-for-profit, Restricted Funds

Discussion Questions
1. What is the existing accounting system at Waseela for the collection of donations and spending
money from the donation pool?
2. How would zakat donors evaluate the current accounting practices at Waseela? What would they
like to see in the system to satisfy them?
3. What changes should the foundation make in the accounting and reporting system to properly
account for zakat donations?

1
Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan.

Corresponding author:
Junaid Ashraf, Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore 54792, Pakistan.
E-mail: jashraf@lums.edu.pk
2 Asian Journal of Management Cases

4. Once a proper system of accounting is put in place and zakat starts pouring in, will it help the
foundation in setting up the hospital? What further challenges can arise? How can the manage-
ment address those challenges?
5. How can this learning be generalized and applied to other situations?

Ramadan, the month of fasting in the Islamic calendar, was to commence from Wednesday, 10 July
2013. Mr Mustafa, the executive director of Waseela Foundation (the Foundation), a Lahore-based
small charity, was thinking about creating an accounting and control mechanism that would help the
foundation tap potential zakat-funds (mandatory charitable almsgiving by Muslims). Mustafa knew that
for his organization to tap zakat funds an elaborate system of accounting and control was required.
In the earlier years, members supported the operations and bore the project management costs of the
foundation through their own donations, including zakat. However, in recent years, the foundation had
expanded its operations. New projects were being launched, and existing projects were being expanded.
It triggered the need to expand the foundation’s donation base. An important source of the donation was
zakat. In the past, because of conflicting interpretations of zakat that donors had about the use of their
funds, the foundation did not actively pursue these funds. However, the organization’s growing financial
needs, especially with regard to the expansion of the hospital project (details to come later), meant that
the management could not afford to rule out zakat donations any longer.

Waseela Foundation
Waseela Foundation was registered as a charity (as a non-religious, non-political and non-partisan
organization) under the Foundation Act 1860 in Lahore on 16 December 2008. The founding members
were corporate professionals from diverse backgrounds. The foundation aimed to develop a platform
from where a range of small welfare projects could be launched. The primary source of revenue was
donations and contributions from the board members and a network of close friends. From 2008 to
2013, the foundation ran multiple charitable projects. These included hospital services, humanitarian
assistance for natural disasters, capacity building of other NGOs and providing financial aid for marriage
and education to the poor. 

The Hospital Project

The foundation’s flagship project was a hospital that it established in 2008. It was a small hospital
that was being run on rented premises in Kamoke, a small city near Lahore. The annual lease rental
(including rent of premises, equipment and electricity cost) amounted to PKR 50,000. The services that
the hospital provided to the poor were virtually free. A nominal fee (2–5% of market price) was charged
to provide the patients with a sense of self-respect. The medicine was also given free of cost. The volume
of activities had reasonably increased over time (Table 2).
Hence, the foundation wanted to set up its own purpose-built hospital and buy sophisticated medical
equipment to cater to the health needs of the area. The board members felt that the existing model of
leasing was expensive and not viable in the long run. However, to set up a hospital in a foundation-
owned building was in itself an expensive project. This would require, as per estimation, PKR 4 million
for land, PKR 10 million for civil works and PKR 8 million for the purchase of hospital equipment
(Table 1). 
Ashraf and Rauf 3

Table 1.  Year-wise Budgeted Capital Expenditure for Waseela Hospital 2013–2016

2013 2014 2015 2016 Total

Equipment 4,000,000 4,000,000 – – 8,000,000
Purchase of Land – 4,000,000 – – 4,000,000
Construction of – – 5,000,000 5,000,000 10,000,000
Hospital
4,000,000 8,000,000 5,000,000 5,000,000 22,000,000
Source: Waseela Foundation.

This project forced the management to make an effort to expand its donor base. When the foundation
contacted prospective donors outside its close friendship circle, the donors raised questions on the utili-
zation of the zakat donations. Zakat payers wanted to ensure that zakat donations were kept separately
and utilized as per their interpretation of Islamic injunctions.

Basic Zakat Framework

Zakat was mandatory charitable almsgiving by Muslims and one of the key tenets of Islam. The basic
principles of zakat were enshrined in the primary sources of Islamic laws, that is, the Quran (Holy book
of Muslims) and the Sunnah (sayings and actions of Holy Prophet Muhammad—Peace Be Upon Him).
It was to be paid by all Muslims (men and women) who were mature, sane and had wealth above nisaab
(the prescribed threshold of net worth above which zakat payment was obligatory). The rate of Zakat was
2.5% of the accumulated wealth if it was above nisaab.
The basic rules of applicability of Zakat, collection from payers and utilization of the funds were
prescribed in the primary source of Islamic law, that is, the Quran and Sunnah. Nevertheless, the details
were subject to interpretations. The Quran clearly specified the heads for the expenditure of zakat:

The alms are meant only for the poor and the needy and those who are in charge thereof, those whose hearts are to
be reconciled, and to free those in bondage, and to help those burdened with debt, and for expenditure in the Way
of Allah and for the wayfarer. This is an obligation from Allah. Allah is All-Knowing, All-Wise. (Quran 9:60)

Zakat was a religious obligation with a promise of reward for zakat payers and a threat of punishment for
evaders. Therefore, Zakat payers were very cautious of handing over zakat donations to any third party
whom they did not trust. They wanted their zakat to be spent in accordance with their understanding of
Islamic law so that they could be the recipients of the divine reward.
Some prohibitions as per interpretations of prominent Islamic schools of thought included the
following:

• zakat disbursement to the descendants of the Holy Prophet (Peace Be Upon Him),
• zakat donations to non-Muslims,
• investments in terms of endowments, purchasing and building real state (including public facili-
ties/infrastructure), acquiring machinery, and
• making salary payments to people other than zakat administrators. This meant that with the excep-
tion of zakat administrators, zakat could not be given to someone as wages. Furthermore, owner-
ship of zakat donations must be transferred to the beneficiary without any condition.
4 Asian Journal of Management Cases

Table 2.  Income and Expenditure Account- For the Year Ended 30 June 2009–2012

2009 2010 2011 2012

Donations 1,072,245 1,836,702 2,357,496 3,322,109
Donations for flood victims/IPDs – 95,500 1,882,850 –
Contribution – 24,650 6,940 –
OPD fee – 113,860 74,020 126,425
Total receipt 1,072,245 2,070,712 4,321,306 3,448,534
Hospital project cost* 1,222,100 1,897,219 1,652,836 2,016,565
Flood victims project expenses – – 2,107,384 –
IDP relief expenses – 95,500 – –
Education assistance – – 30,325 –
Marriage assistance – 15,000 50,670 –
Self-employment assistance – 10,000 – –
Travelling – 13,300 50,855 28,530
Website development – 12,000 1,700 2,200
Audit fee 15,000 15,000 15,000 15,000
Bank charges 200 3,338 2,319 3,910
Total expenses 1,237,300 2,061,357 3,911,089 2,066,205
Surplus for the period 165,055 9,355 410,217 1,382,329
Source: Waseela Foundation.
Note: * indicates breakup of the hospital cost is given in Table 3.

Table 3.  Breakup of Hospital Project Cost

2010 2011 2012 2013*

Payment to doctors 1,413,878 694,000 303,585 1,920,000
Other medicines purchased – 137,393 42,339 200,000
Salaries of staff 363,074 838,284 761,709 1,000,000
Communication charges 15,600 23,567 4,360 60,000
Rent – 42,000 128,700 150,150
Consultancy fee – – 50,000 –
Electricity – 7,742 50,178 100,000
Printing and stationery 37,503 4,105 18,450 50,000
Hospitality charges 1,720 15,251 42,540 50,000
Awareness creating expenses – – 30,000 60,000
Repair and maintenance 7,812 14,570 40,475 75,000
Others—supplies/cleaning charges 10,350 6,547 108,051 150,000
Audit fee 15,000 15,000 30,000 30,000
Non-cash adjustments (depreciation /accruals) 32,282 145,623 406,178 500,000
1,897,219 1,652,836 2,016,565 4,345,150
Source: Waseela Foundation.
Notes: * indicates that the figures for the year 2013 were taken from the budget of the foundation.
Ashraf and Rauf 5

There were five ‘classical’ schools of thought among Muslims named after the scholars who pioneered
these schools: Hanafi, Maliki, Shafi’i, Hanbali and Jafari. Unlike some other matters, as far as zakat was
concerned, the interpretations of these five schools were quite identical.
The traditional scholars believed that Islam encouraged Muslims to help the poor and devastated
communities irrespective of their colour, race, tribe and religion. Similarly, it motivated Muslim philan-
thropists to spend money on community welfare and public infrastructure projects. Zakat was a particu-
lar type of almsgiving exclusive to poor Muslims in order to empower them.
On the other hand, Muslims had more flexibility in non-obligatory charity. They could give non-zakat
donations for other purposes. However, some of the modern-day scholars (in all of the above schools)
disagreed with the prohibitions given in the classical schools. They believed that zakat could be given to
non-Muslims. Zakat money could also be spent to establish welfare projects (e.g., hospitals) and to meet
operational expenses (e.g., salaries of doctors).
The importance of zakat donations for civil society organizations can never be overemphasized.
While the number of people paying zakat was huge, there was a greater increase in the number of zakat-
recipient institutions (which collected and disbursed zakat). This situation had resulted in an ever-
increasing competition amongst organizations to attract zakat funds. Therefore, in the competitive fund
market, organizations that fail to attract zakat payers would face sustainability issues.
Islamic analysts estimated that zakat donations across the world ranged from US$200 billion to
US$1,000 billion a year.1 The low end of the estimate was 1,500% of the global humanitarian aid contri-
bution2in 2011. According to a British poll in 2011, Muslims gave more donations compared to any other
community.3 Even in non-Muslim countries like the UK and USA, zakat donations generated by Muslims
surpassed non-Zakat donations.

The Accounting System at Waseela

The existing process of donation collection and disbursement was quite simple. Mr Mustafa described
the rationale as follows:

Our objective is to ensure that all funds received should be properly safeguarded and utilized to achieve the stated
mission of the organization. To make our system simple and easy, we follow the zakat interpretation of those
modern-day scholars who are liberal in the disposal of zakat funds. We have also fatwa (a ruling/decision by an
Islamic scholar) on our system.

Stemming from this philosophy, the process objective defined by the management was limited to ensuring
accurate recording of all donations received on a timely basis and in the proper reporting period. The
focus was not on managing donations into different categories to ensure disposal of these donations to
the satisfaction of the donors.
All donations were received by the front desk officer against pre-printed and pre-numbered donation
receipts (Figure 1). These donations were then recorded in the donation register with details of the name
of donor, amount, date and donation receipt number. At the day end, the front desk officer prepared a
daily donation receipt summary and forwarded it to the accounts department. The Accounts department
would record the amount as donation income in the books of the foundation.
Expenditures were incurred on different projects and recorded under different heads. However, all
payments were made out of the general pool of funds, indiscriminately. The budgeting and planning
process was informal. Major expenditure decisions were usually made in board meetings. However,
minutes were taken and maintained for all board meetings.
6 Asian Journal of Management Cases

Figure 1.  Donation Receipt

Source: Waseela Foundation.

In the past, given the complexity involved in spending zakat money and keeping the accounting sys-
tem simple, the foundation had decided not to pursue zakat funds. The foundation management sub-
scribed to the ‘modern’ school of Islamic thought, which believed that zakat income could be spent on
any charitable venture. Also, the foundation had advised its potential donors that they should only give
zakat if they exclusively subscribed to the modern school of thought. The decision significantly affected
their zakat collections. Consequently, most of the prospective donors refused outright to contribute their
zakat to the foundation because it could not assure them compliance with their interpretations of Islamic
injunctions.
Finally, the board realized that tapping zakat donations on a regular basis and building a trusted rela-
tionship with the donors were imperative for the success of the organization, especially the hospital
project. Hence, Mr Mustafa was given the responsibility to devise a mechanism of accounting for the
zakat donations. Mustafa’s immediate task was to propose a zakat-friendly accounting system.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

Notes
1. ‘Analysis: A Faith-based Aid Revolution in the Muslim World’. The New Humanitarian (IRIN), June 1, 2012.
http://www.irinnews.org/report/95564/analysis-a-faith-based-aid-revolution-in-the-muslim-world,  accessed
January 2016.
2. 1 United Nations Office for the Coordination of Humanitarian Affairs (OCHA). ‘Global Humanitarian
Contributions in 2011: Totals by Donor’. Financial Tracking Service. https://ftsarchive.unocha.org/onlineRe-
port/onlineReport.aspx?RepID=18&Param=2011&Year=2011&Type=PDF&URL=404;https://ocha-fts-prod-
web-eastus2:80/reports/daily/ocha_18_2011.pdf&Refer=ftsarchive.unocha.org, accessed January 2016.
3. ‘Muslims Give More to Charity than Others, UK Poll Says’. NBC News, April 2, 2014. http://newsdef.nbcnews.
com/_news/2014/04/02/23354128-muslims-give-more-to-charity-than-others-uk-poll-says, accessed January
2016.