From traditional to impact philanthropy

From traditional to impact philanthropy: Creating a legacy for GCC family businesses

Published: March 30, 2017

Executive summary

Family businesses in Gulf Cooperation Council (GCC) countries1 are the region’s largest contributors to social and charitable causes, but they have yet to unlock the full potential of their philanthropic activity. Many of them embrace philanthropy in addition to their religious obligations of zakat (charitable giving). The annual philanthropic capital of only 100 of the largest GCC family businesses is estimated at a minimum of US$7 billion. However, most of these businesses rely primarily on ad hoc donations and grant-making. Globally, leading family businesses are behind some of the largest philanthropic institutions, conducting major social and health initiatives. Like these giants, GCC family businesses could have a significant impact on their community, business, and family by transforming the way they practice philanthropy.

For family businesses to make the transition to “impact philanthropy,” they would need to acquire advanced capabilities that allow them to continue “doing good” while also “doing well.” First, they need to institutionalize their philanthropic activity to improve strategic decision-making and better define the scope of work. The benefits of this would include reinforced family cohesion and enhanced core organizational capabilities in philanthropic focus areas. Second, they should take a proactive approach to philanthropy by using innovative financing tools as well as non-financial products and services. This would improve efficiency, maximizing the value of each dollar spent and possibly generating financial returns to sustain their philanthropic activity. Third, they should implement clear assessment frameworks to measure the outcomes of their projects.

This transformation would deliver the necessary capabilities to improve the performance and sustainability of future initiatives while building a lasting legacy around family names. GCC governments have a role to play in enabling this transformation, mainly by improving the regulation and governance of the third sector.2 In turn, this would increase the sector’s contribution to GDP through job creation and community development.

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Philanthropic capital in GCC family businesses

Globally, family firms are behind the world’s wealthiest charitable institutions, with tens of billions of dollars involved. In the GCC, family businesses already represent around 90 percent of the private sector economy.3 They are also significant players in the region’s third sector, alongside non-governmental organizations (NGOs), nonprofit organizations (NPOs), cooperatives, social enterprises, and charities. Their philanthropic contributions include at a minimum the religious obligation to give money to charity, that is, paying their zakat obligations (see Zakat in the GCC). Most wealthy families in the GCC make additional contributions (sadaqa). We have seen founders of some of the largest family businesses specifying in their will that a major portion of their fortune (sometimes up to 25 percent) should be reserved for charity.

Zakat in the GCC

Zakat, one of the five pillars of Islam, is an annual religious obligation (fard) that requires Muslims who meet certain criteria of wealth to give alms, in accordance with Islamic law (sharia). It is voluntary in some Islamic countries and mandatory in others. It is not mandatory for companies, except in Saudi Arabia and, to a lesser extent, Kuwait.

Personal zakat is set at 2.5 percent of any amount or asset of a value above a minimum amount (nisab) that has been idle in an individual’s accounts for more than 12 months. The definition of nisab may vary from one country to another; in Saudi Arabia it is set at $3,000.

There is no government control over personal zakat contributions, so donors are free to contribute to the charity or cause of their choice, and they typically exceed their dues. Some individuals also donate the interest from their bank accounts.

Corporate zakat is calculated as a percentage of a company’s net worth. Zakat is only mandatory for businesses in Saudi Arabia if the company is owned by a Saudi or GCC national. It is set at 2.5 percent. In Kuwait, businesses are required to pay 1 percent of their profits either as zakat or as a state budget contribution.

At the end of the fiscal year, companies need to submit their financial statements as well as their zakat statement to the regulating authority: for example, the Department of Zakat and Income Tax in Saudi Arabia, or the Zakat House in Kuwait. These authorities then choose how to assign zakat amounts for social causes, such as supporting poor families, widows, and orphans. Additional zakat donations to approved non-profits can be written off as business expenses and are not subject to income tax.

Strategy& estimates the annual philanthropic capital of 100 of the largest family businesses by net worth at a bare minimum of around $7 billion (see Exhibit 1). This considerable amount has the potential to diversify the economy and contribute to GDP, create jobs, and address critical issues in key areas such as healthcare, education, and the like.

GCC family businesses have substantial untapped philanthropic potential

Conclusion

The transition to impact philanthropy can help GCC family businesses achieve a greater impact in their community. Taking their cue from global leaders, GCC family businesses must transform the way they “do good,” by taking a formal, proactive, and sustainable approach to philanthropy, capable of achieving social change with higher impact and visibility.

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From traditional to impact philanthropy: Creating a legacy for GCC family businesses

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