Zakat Research: Some Empirical Findings

There is a growing body of theoretical and empirical research in the field of Islamic social finance in general and zakat in particular. In these blogs I seek to highlight some useful findings from such research. Below, three research papers in the field of zakat have been reviewed and their major findings highlighted.

Norazlina Abd. Wahab and Abdul Rahim Abdul Rahman (2011) Efficiency of Zakat Institutions and Its Determinants, Paper presented at 8th International Conference on Islamic Economics and Finance, Doha, Qatar

This is an empirical study to determine efficiency of zakat institutions in Malaysia. Efficiency measures seek to capture how productive inputs are turned into outputs. Efficiency is improved if more output is generated without changing inputs. Using Data Envelopment Analysis (DEA) methodology on five year data for fourteen zakat institutions for the period 2003-2007, the researchers sought to measure three different types of efficiency, i.e. technical, pure technical and scale efficiency. The study used the following three variables for outputs: (i) total collection of zakat, (ii) total distribution of zakat and (iii) total number of zakat payers and two for inputs: (i) number of staff and (ii) total expenditure. The results suggest that zakat institutions have exhibited mean technical efficiency of about eighty percent. Further, higher scores for scale efficiency compared to technical efficiency suggest that efficiency of zakat institutions in Malaysia may be due to the scale or size of the institutions rather than its technical aspect.

The study also sought to identify the key determinants of efficiency measures by examining their association with ten different measures namely, number of branches available; number of staff; types of zakat payment systems offered; availability of operational website; availability of computerized zakat system; board size; meetings per year; availability of audit committee; decentralization; and corporatization. The study found that only two of the above: types of zakat payment system offered and decentralization were consistently significant in affecting zakat institutions’ efficiency.

The following observations were made based on the findings.

• Number of branches is positively associated with technical efficiency (though not significantly) implying that branch expansion led to marginal gains in efficiency.
• Number of staff is negatively and significantly associated with technical efficiency implying loss of efficiency with increase in size of manpower, perhaps due to increase in delays and complexity.
• Of the three proxies for technology – total zakat payment systems offered, existence of operational website and existence of computerized zakat system – the first was observed to have a significant positive association. For example, the institution with highest efficiency was offering eleven alternative zakah payment systems, such as, internet banking, short-messages-services (SMS), ATM machine, kiosk machine, credit card, phone-banking and e-debit system.
• Interestingly in this study, higher number of board meetings was associated with lower efficiency. And surprisingly, existence of audit committees also was associated with lower efficiency. Neither did corporatization lead to improvement in the efficiency of zakat institutions in Malaysia.
• Decentralization was observed to be a critical determinant having a significant positive impact on efficiency. In the Malaysian context, this translates into a transfer of authority from the traditional structure of Sultan/Raja/Yang Dipertua Negeri to others i.e. the state government, or further down. Zakat institutions benefitted from greater responsiveness of decentralized authority at the lower levels of management to local stakeholders.

Abdul Rahman, A. R. (2007). Pre-Requisites for Effective Integration of Zakah into Mainstream Islamic Financial System in Malaysia, Islamic Economic Studies, 14(1 & 2)

This paper argues in favor of developing objective and fair measures of zakah on business wealth, standardizing zakah accounting practices and developing a performance measure system as prerequisites for effective integration of zakah institutions into the formal financial system. While accepting the contention that fixed assets of a business should be exempt from zakah and that zakat is payable on net current assets, the author asserts that the net working capital method or the net owner’s equity method may not be a reliable method of computing zakatable wealth of a business as modern financial markets offers multiple avenues for raising funds and financing a business. The methods may be flawed as many large and profitable companies with high levels of short-term debt and therefore, negative net current assets may be exempt from paying zakah. He proposes the use of net growing capital method that requires adjustment of the net current assets by adding back items such as the short term debts used to finance fixed assets, to pay off long term debt or reduce capital stock and subtracting long term debts used to finance current assets. Further, once zakat liability is computed for a business it should be treated as a substitute for tax liability on corporate income to avoid double charge.

In the second part the paper argues in favor of standardizing accounting practices for zakah. It examines the standards developed by AAOIFI and votes in favor of the valuation principle – based on cash equivalent value rather than historical costs – and argues in favor treating receivables on a net basis with provision for bad debts. The paper makes a strong case for “adequate” disclosures in financial statements of Islamic businesses of the following: (i) the amount of zakah due or paid; ii) the method of zakah measurement used; iii) the ruling of Shariah supervisory board (in the case of Islamic banks) on matters pertaining to zakah; and, iv) the obligation on zakah due from the subsidiaries; the equity investment account; and other investment account (in the case of Islamic banks).

In the third part the paper highlights the need to develop performance reporting systems for zakah institutions in order to improve their accountability to the society. It reports empirical findings of a very useful survey[1] administered on senior executives in charge of zakah collection, zakah distribution and overall performance of zakah organizations, the State Islamic Religious Councils in Malaysia. The study examines the usage of several performance measures for zakah institutions.

The performance measures relating to zakah collection that were used in all zakah organizations are: (1) Amount of zakah collected (Actual vs. budget) and (2) Amount of zakah collected (current year vs. previous years). The measures that were used widely in most zakah organizations (70-99%) are: (1) Operational cost in collecting zakah (current year vs. previous years), (2) Operational cost in collecting zakah (actual vs. target), (3) Number of zakah payers (excluding zakat al fitr) (current year vs. previous years), (4) Number of complaints made by zakah payers per annum, (5) Number of promotional campaigns undertaken each year (actual vs. target) and (6) Number of zakah payers (excluding zakah al fitr) (actual vs. target). The measures that were used sparingly in zakah organization (69% and less) are: (1) Average length of time to settle complaints made by zakah payers, (2) Proportion of zakah collected to the no. of individual zakah payers (3) Proportion of the number of zakah payers to the total number of Muslims in a state (4) Average waiting time for an individual to be entertained by staff (5) Proportion of zakah collected to the operational cost in collecting zakah, and (6) Proportion of operational cost in collecting zakah per individual zakah payer. The paper also examined the perception of executives towards these measures and found that the ‘proportion of the number of zakah payers to the total number of Muslims in a state’ and the ‘average waiting time for an individual to be entertained by staff’ were perceived to be highly useful even though they were rarely used.

The performance measures relating to zakah distribution that were widely used by zakah organizations (70-99%) are: (1) Amount of zakah distributed to each of eight Asnaf (current year vs. previous years); (2) Amount of zakah distributed to each of the 8 Asnaf (actual vs. budget); (3) Number of zakah recipients (current year vs. previous years); (4) Number of zakah recipients for each scheme (current year vs. previous years); (5) Number of zakah recipients (actual vs. target); (6) Average number of days taken from approval to zakah fund received by beneficiaries; (7) Number of complaints received from zakah recipients; (8) Number of zakah recipients for each scheme provided using zakah funds (current year vs. target); (9) Average number of days taken from processing application form to approval of zakah funds for distribution process; (10) Operational cost in distributing zakah (actual amount vs. target); (11) Operational cost in distributing zakah (current year vs. previous years); (12) Proportion of total zakah distributed to the total amount of zakah collected and (13) Proportion of amount distributed to the poor and needy as to the total amount distributed per annum. The performance measures relating to zakah distribution that were not widely used by zakah organizations (69% and less) are: (1) Proportion of amount of zakah distributed to the number of zakah recipients; (2) Number of complaint letters received; (3) Proportion of operational cost in distributing zakah to the total amount of zakah distributed; (4) Proportion of amount of zakah distributed to the Asnaf – poor to the number of Asnaf – poor registered with zakah institution; (5) Average length of time taken to settle complaints made by zakah recipients; (6) Proportion of amount of zakah distributed to the Asnaf – needy to the number of Asnaf – needy registered with zakah institution; (7) Proportion of operational cost in distributing zakah to the number of zakah recipients; (8) Average waiting times taken for an individual to be entertained by staff; (9) Number of zakah recipients successfully listed out of poverty line fixed by SIRC (Current year vs. Target); (10) Number of complaints reported via appointed ‘Amil (Current year vs. Previous years); (11) Proportion of zakah recipients registered with Bayt al mal to the total of poor and needy in Muslim Society; and (12) Number of zakah recipients who become zakah payers.

In general the study observed that the percentage of use of a particular measure was governed by the quantum and complexity of information demanded to compute such measure as also the monitoring costs involved in generating such information.

Mohd Rahim bin Khamis, Ariffin Md Salleh and Abd Samad Nawi (2011) “Compliance Behavior of Business Zakat Payment in Malaysia: A Theoretical Economic Exposition” Paper presented at 8th International Conference on Islamic Economics and Finance, Doha, Qatar

The study undertakes a thorough review of available literature on zakah compliance and identifies the following determinants.

1. Level of religiosity (Ram, 2010; Zulkifli and Sanep, 2010; Kamil, 2002; Zainol, 2008; Muhammad Muda et al., 2005)
2. Level of knowledge (Safri, 2006; Hasan and Sahnaz, 2005; Muhammad Alayuddin, 2008; Kamil and Ahmad Mahdzan, 2001)
3. Length of business operation (Mohamad Alayuddin, 2008)
4. Organization factor (Zulkefli et al., 2006; Muhammad Muda et al., 2005; Zulkifli and Sanep, 2010; Hasan and Sahnaz, 2005) which incurred the trustworthiness from Muslim business entrepreneur to the zakat institution beside the accountability, transparency, fairness and responsibility in managing zakat funds
5. Government incentive (Ram, 2010; Barjoyai, 2001) where the incentive is referring to the zakat deduction given by government to Muslim business entrepreneur. This incentive is a different approach that has been given by government to zakat on income.
6. Law enforcement (Kamil, 2002; Zainol, 2008; Ram, 2010; Zulkifli and Sanep, 2010)

[1] Jamaliah, A. M and Abdul Rahim, A. R. (2005), “Performance Measurement Practices of Public Service Religious Organizations in Malaysia”, British Accounting Association (BAA) Annual Conference, UK: University of Heriot Watt, Edinburgh