Efficiency of zakat institutions in Malaysia: an application of data envelopment analysis

The aim of this paper is to measure the efficiency of zakat institutions in Malaysia during the period of 2003 to 2007. Using a Data Envelopment Analysis (DEA) technique, the results show that zakat institutions have exhibited mean technical efficiency of 80.6%. The results also suggest that pure technical inefficiency dominates the scale inefficiency effects in determining technical efficiency of zakat institutions in Malaysia. Further analysis of Spearman and Pearson correlation coefficients suggests that while higher Muslim population states tend to positively correlated to zakat collection, its correlation with efficiency score does not indicate a strong relationship, implying that it does not promise efficiency of zakat organization.1. IntroductionZakat is one of the five basic pillars in Islam. The term zakat has three different connotations; linguistically, theologically and legally. Linguistically, zakat means cleansing or purification of something from dirt or filth. Theologically, it means spiritual purification resulting from giving of zakat. Legally, zakat means transfer of ownership of specific property to specific individuals under specific conditions. It is an obligation of Muslims to give a specific amount of their wealth (with certain conditions and requirements) to beneficiaries called al-1 mustahiqqin with the main objective of the achievement of socioeconomic justice (Muhammad, 1980). Zakat institutions are trusted bodies that manage zakat in Muslim countries.In Malaysia, such zakat institutions are State Islamic Religious Councils (SIRCs). The institutions are expected to play a key role in promoting the socio-economic objectives of zakat in Malaysia. Thus, it is of prime importance that these institutions are being managed effectively and efficiently. Being a public service organization which is accountable to the stakeholders and Muslim public at large, these zakat institutions have been subjected to intense public scrutiny and criticism. Cursory examination would see various parties questioning the efficiency and effectiveness of these institutions in managing zakat affairs of their respective states. Given this continuously arising public concern, it is irony and surprising to find that research attempting to explore the efficiency of these zakat institutions is almost non-exist. Hence, this paper can be considered as the first to explore the productivity growth of zakat institutions in Malaysia. The structure of this paper is as follows. The next section provides an overview of the Malaysian zakat industry and literature on zakat and efficiency. Section 3 discusses the methodology and input-output specification. Section 4 reports the findings and the last section concludes.2. Literature ReviewIn Malaysia, all aspects pertaining to the administration of zakat are under the jurisdiction of the states through the SIRCs. There are a total of fourteen SIRCs, one for each of the thirteen states and one for the federal territory. Due to the demand of more efficient and effective collection and distribution of zakat funds in Malaysia, some of the Religious Councils have privatized an institution that responsible on the matter of collection (and distribution) part of zakat in those particular states. Eight Religious Councils have so far privatized, starting with Pusat Pungutan Zakat (PPZ), Wilayah Persekutuan in 1991, followed by Pusat Pungutan Zakat Selangor, Pahang and Pulau Pinang in 1995, and lastly Pusat Pungutan Zakat Negeri Sembilan and Melaka in 2000. (Ahmad et al., 2006). It was followed by Tabung Baitulmal Sarawak in 2001 and the latest was Pusat Zakat Sabah that has been privatized in 2007.Most studies conducted on zakat in Malaysia concentrates on various areas including theoretical (Mujitahir, 2003; Tarimin, 1995), legal and compliance (Idris, 2003; Ahmad, 2004), accounting (Abdul Rahman, 2002; Ismail & Sanusi, 2004), management (Nik Mustapha, 1991) and Muslim awareness and payment behaviour (Nor & Nor, 2004; Ahmad et. …