Efficiency and governance of zakat institutions in Malaysia

Abstract

Zakat is one of the five pillars in Islam. It is an obligation of the Muslims to give a specific amount of their wealth to the beneficiaries with the main objective of the achievement of socioeconomic justice. Zakat institutions are trusted bodies that manage zakat in Muslim countries. In Malaysia, State Islamic Religious Councils (SIRCs) is responsible in managing and promoting zakat. It is of prime importance that these institutions are being governed and managed efficiently and effectively. Efficiency is defined as how well a system is performing, in generating the maximum desired output for given inputs. Governance is defined as the process of decisionmaking and the process by which decisions are implemented or not. The governance of the institution is important in ensuring good management including efficient collection and distribution of the zakat funds. This study examines the relationship between efficiency and governance of zakat institutions in Malaysia. First, the study analyzes the efficiency of fourteen zakat institutions in Malaysia from 2003 to 2007. Efficiency is measured by the Malmquist index, using a Data Envelopment Analysis (DEA) technique. The Malmquist productivity measures are decomposed into two components: efficiency change and technical change index. The results show that zakat institutions in Malaysia are found to be experiencing an improvement of TFP which mainly due to technical change compared to the efficiency change which reflects that improvement in technological progress has been a major contribution of efficiency. Secondly, Tobit Analysis is utilized to determine factors that influence the efficiency of zakat institutions in Malaysia. Board size, number of meeting, audit committee, number of branches, number of staff, zakat payment system used, existence of computerized zakat collection system, existence of website, decentralization system and corporatization are examined as the determinants of the efficiency. The results indicate that the use of zakat payment system and decentralization significantly and consistently improve efficiency of zakat institutions in Malaysia. Third, a governance index based on the United Nation Development Programme (UNDP)’s principles of good governance is developed in evaluating the practice of good governance principles of zakat institutions in Malaysia. This study demonstrates that efficiency scores and adoption of good governance principles are highly correlated. Overall, the findings of this study show the importance of ensuring efficiency of zakat institutions in Malaysia. Findings of this study highlight the urgency for the relevant authorities such as Development of Zakat, Waqaf and Hajj (JAWHAR), SIRCs and the government to initiate efficiency improvement measures of zakat institutions in Malaysia. However, the role of the government in supporting and facilitating the institutions is highly desired. Cooperation among related authorities and the stakeholders for the betterment of the institution of zakat will be important to ensure the achievement of noble objectives of socioeconomic justice is attainable.