Productivity growth of zakat

institutions in Malaysia
An application of data envelopment analysis
Norazlina Abd. Wahab
Islamic Business School, Universiti Utara Malaysia, Kedah, Malaysia and
IIUM Institute of Islamic Banking and Finance,
International Islamic University Malaysia, Kuala Lumpur, Malaysia, and
Abdul Rahim Abdul Rahman
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Abstract
Purpose The purpose of this paper is to analyze the changes in productivity of zakat institutions in
Malaysia from 2003 to 2007. The data consist of a panel of 14 State Islamic Religious Councils (SIRCs)
in Malaysia. Efciency is measured by the Malmquist Index, using a data envelopment analysis (DEA)
technique.
Design/methodology/approach This paper uses Malmquist Productivity Index, using a DEA
technique. The Malmquist productivity measures are decomposed into two components: efciency
change and technical change index.
Findings The results showed that total factor productivity (TFP) has increased slightly for the
whole industry, which is mainly due to the technical change rather than the efciency change. Further
decomposition of the efciency change into its pure technical and scale efciency components suggest
that the pure efciency is found to be a more important source of efciency change than scale
efciency component.
Originality/value This paper investigates the productivity and efciency of zakat institutions in
Malaysia. It will be of value to provide evidence to the policy makers to improve the efciency of the
institutions.
Keywords Zakat, Total factor productivity, Efciency, DEA, Malaysia, Productivity rate
Paper type Research paper
1. Introduction
Zakat is one of the ve basic pillars in Islam. The term zakat has three different
connotations; linguistically, theologically and legally. Linguistically, zakat means
cleansing or purication of something from dirt or lth. Theologically, it means
spiritual purication resulting from giving of zakat. Legally, zakat means transfer of
ownership of specic property to specic individuals under specic conditions. It is an
obligation of Muslims to give a specic amount of their wealth (with certain conditions
and requirements) to beneciaries called al-mustahiqqin with the main objective of the
achievement of socio-economic 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 inMalaysia. Thus, it is of prime importance that these institutions are beingmanaged
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Zakat
institutions
in Malaysia
197
Studies in Economics and Finance
Vol. 29 No. 3, 2012
pp. 197-210
qEmerald Group Publishing Limited
1086-7376
DOI 10.1108/10867371211246876
effectively and efciently. 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 efciency 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 nd that research attempting to explore the efciency of these zakat
institutions is almost non-exist. Hence, this paper can be considered as the rst 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 efciency. Section 3 discusses the methodology and input-output
specication. Section 4 reports the ndings and the last section concludes.
2. Literature review
In Malaysia, all aspects pertaining to the administration of zakat are under the
jurisdiction of the states through the SIRCs. There are a total of 14 SIRCs, one for each
of the 13 states and one for the federal territory. Due to the demand of more efcient
and effective collection and distribution of zakat funds in Malaysia, some of the
religious councils have corporatized an institution that responsible on the matter of
collection (and distribution) part of zakat in those particular states. Eight religious
councils have so far corporatized, 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 corporatized in 2007.
Most studies conducted on zakat in Malaysia concentrates on various areas including
theoretical (Mujitahir, 2003; Tarimin, 1995), legal and compliance (Idris et al., 2003;
Ahmad, 2004), accounting (Rahman, 2003; Ismail and Sanusi, 2004), management
(Nik Mustapha, 1991) and Muslim awareness and payment behaviour (Nor et al., 2004;
Ahmad and Wahid, 2005; Idris et al., 2003). However, there are very few studies that
examined the performance of zakat institutions. Some studies focused on the performance
of zakat collection and distribution (Noor et al., 2005) and some other studies measure the
impact of privatisation on the performance of zakat institutions (Nor et al., 2001; Ahmad
and Wahid, 2005). It can be seen that there is no study which comprehensively examining
the efciency of Malaysian zakat institutions.
In terms of efciency, economic efciency is dened in economic theory as a term
describing howwell a systemis performing, in generating the maximumdesired output
for given inputs with available technology. Efciency is improved if more output is
generated without changing inputs. An economic system is more efcient if it can
provide more goods and services for society without using more resources. For instance,
Husain et al. (2000) and Ibrahim and Salleh (2006) are among studies that explores the
efciency of public sector in Malaysia. Husain et al. (2000) that studied the efciency of
Road Transport Department (RTD) using data envelopment analysis (DEA) found out
that out of 46 service units, only 11 service units score above 50 percent of efciency
scores. Ibrahim and Salleh (2006) for instance, in their studies of local governments in
providing local public goods and services, found that the overall result showed that most
of the local governments in Malaysia are cost inefcient, and that municipality councils
were more inefcient than the district councils.
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3. Research methodology and input-output specication
This paper aims to investigate the efciency of all SIRCs in Malaysia. The study
adopts the generalized output-oriented Malmquist index, developed by Fare et al. (1989),
to measure the contribution from the progress in technology (technical change) and
improvement in efciency (efciency change) to the growth of productivity in
Malaysian zakat industries. The Malmquist indexes are constructed using the DEA
and estimated using a program developed by Coelli (1996) called DEAP version 2.1.
Following Fare et al. (1989), the Malmquist index of total factor productivity growth is
written as follows:
M
0
x
t
; y
t
; x
t1
; y
t1

D
t1
0
x
t1
; y
t1

D
t
0
x
t
; y
t

D
t
0
x
t1
; y
t1

D
t1
0
x
t1
; y
t1

_ _
D
t
0
x
t
; y
t

D
t1
0
x
t
; y
t

_ _ _ _
1=2
1
where M is the Malmquist productivity of the most recent production point (x
t1
,
y
t1
) relative to the earlier production point (x
t
, y
t
). The notations D
t
0
x
t1
; y
t1

represent the distance from the period (t 1) observation to the period t technology.
The rst ratio on the right hand side of equation (1) measures the change in relative
efciency (i.e. the change in how far observed production is from maximum potential
production) between years t and t 1. The second term inside the brackets
(the geometric mean of the two ratios) captures the shift in technology (i.e.
movements of the frontier function itself) between the two periods evaluated at x
t
and
x
t1
. That is:
D
t1
0
x
t1
; y
t1

D
t
0
x
t
; y
t

Efficiency change
D
t
0
x
t1
; y
t1

D
t1
0
x
t1
; y
t1

_ _
D
t
0
x
t
; y
t

D
t1
0
x
t
; y
t

_ _ _ _
1=2
Technical change
Essentially, the former investigates how well the production function process
converts inputs into outputs (catching up the frontier) and the later reects the
improvement in technology. According to Fare et al. (1994), improvements in
productivity yields Malmquist index values greater than unity. Deterioration in
performance over time is associated with a Malmquist index less than unity. The
same interpretation applies to the values taken by the components of the overall TFP
index.
Four distance measures that appear in equation (1) are calculated for each operator
in each pair of adjacent time periods using mathematical programming technique.
Assume that there are f 1,. . ., F rms that produce r 1, . . . , R outputs y
t
f ;r
using
n 1, . . . , N inputs x
t
f ;n
at each time period t 1, . . . , T. Under DEA, the reference
technology with constant return to scale (CRS) at each time period t from the data can
be dened as:
Zakat
institutions
in Malaysia
199
G
t
x
t
; y
t
: y
t
r
#

F
f 1
z
t
f
y
t
f ;r
_ _
r 1; . . . ; R

F
f 1
z
t
f
x
t
f ;n
# x
t
n
n 1; . . . ; N
z
t
f
$ 0 f 1; . . . ; F
2
where z
t
f
refers to weight on each specic cross-sectional observation. The assumption
of CRS may be relaxed to allow variable return to scale (VRS) by adding the following
restriction:

F
f 1
z
t
f
1VRS 3
Following Fare et al. (1994), this study used an enhanced decomposition of
the Malmquist index by decomposing the efciency change component calculated
relative to the CRS technology into a pure efciency component (calculated relative to
the VRS technology) and a scale efciency change component which captures changes
in the deviation between the VRS and CRS technology. The subset of pure efciency
change measures the relative ability of operators to convert inputs into outputs while
scale efciency measures to what extent the operators can take advantage of returns to
scale by altering its size towards optimal scale.
Construction of the Malmquist index of rm f
0
between t and t 1 needs four
distance functions that calculated using DEA approach, that is:
D
t
0
x
t
; y
t
; D
t1
0
x
t
; y
t
; D
t
0
x
t1
; y
t1
; D
t1
0
x
t1
; y
t1

These distance functions are the reciprocals of the output-based Farrells measure of
technical efciency. The non-parametric programming models used to calculate the
output-based Farrell measure of technical efciency for each rm f
0
1, . . . , F, is
expressed as:
D
t
0
x
t
f
t ; y
t
f
t
_ _
21
max1
f
0
4
Subject to:
1
f
0
y
t
f ;r
#

F
f 1
z
t
f
y
t
f ;r
r 1; . . . ; R

F
f 1
z
t
f
y
t
f ;n
# x
t
f ;n
n 1; . . . ; N

F
f1
z
t
f
1 VRS
z
t
f
$ 0 f 1; . . .F
5
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The computation of D
t1
0
x
t1
; y
t1
is similar to equation (5), where t 1 is
substituted for t. The calculation of two mixed-distance function of the Malmquist
index can be achieved by comparing observations in one time period with the best
practice frontier of another time period. The inverse of the mixed-distance function for
observation f
0
can be obtained from:
D
t
0
x
t1
f
t
; y
t1
f
t
_ _ _ _
21
max1
f
0
6
Subject to:
1
f
0
y
t1
f ;r
#

F
f 1
z
t
f
y
t
f ;r
r 1; . . . ; R

F
f 1
z
t
f
y
t
f ;n
# x
t1
f ;n
n 1; :::; N

F
f1
z
t
f
1 VRS
z
t
f
$ 0 f 1; . . .F
7
To measure changes in scale efciency, the inverse output distance functions under the
VRS technology will be calculated by adding equation (3) into the constraints in
equations (5) and (7). Technical change (TECHCH) is calculated relative to the CRS
technology. Scale efciency change (SECH) in each time period will be constructed as
the ratio of the distance function satisfying CRS to the distance function under VRS,
while the pure efciency change (PEFFCH) is dened as the ratio of the own-period
distance functions in each period under VRS. With these two distance functions with
respect to the VRS technology, the decomposition of equation (1) will become:
M
0
x
t
; y
t
; x
t1
; y
t1

D
t
0
x
t1
; y
t1

D
t1
0
x
t1
; y
t1

_ _
D
t
0
x
t
; y
t

D
t1
0
x
t
; y
t

_ _ _ _
1=2

D
t
0
x
t
; y
t

D
t1
0
x
t1
; y
t1

_ _

D
t
oc
x
t
; y
t

D
t1
0
x
t
; y
t

D
t1
o
x
t1
; y
t1

D
t1
oc
x
t1
; y
t1

D
t
oc
x
t
; y
t

D
t
0
x
t
; y
t

D
t
o
x
t1
; y
t1

D
t
oc
x
t1
; y
t1

_ _
8
where:
D
t
0
x
t1
; y
t1

D
t1
0
x
t1
; y
t1

_ _
D
t
0
x
t
; y
t

D
t1
0
x
t
; y
t

_ _ _ _
1=2
Technical change
D
t
0
x
t
; y
t

D
t1
0
x
t1
; y
t1

_ _
Pure efficiency change
D
t
oc
x
t
; y
t

D
t1
0
x
t
; y
t

D
t1
o
x
t1
; y
t1

D
t1
oc
x
t1
; y
t1

D
t
oc
x
t
; y
t

D
t
0
x
t
; y
t

D
t
o
x
t1
; y
t1

D
t
oc
x
t1
; y
t1

_ _
1=2
Scale efficiency change
Zakat
institutions
in Malaysia
201
where EFFCH denotes the efciency change calculated under the CRS technology and
PEFFCH is efciency change calculated under VRS (Fare et al., 1994).
Due to data availability issues, three outputs and two inputs are considered for this
study to investigate efciency of 14 SIRCs in Malaysia for the period of 2003-2007. There
are two main approaches in the literature to the choice of inputs and outputs in DEA,
namely the production approach and the intermediation approach. Under the production
approach, an institution is dened as a producer. The intermediation approach on the
other hand, assumes that a rmact as an intermediary. For the purpose of this study, the
productionapproachwill be adoptedinthe denitionof outputs andinputs usedwhereby
it assumes that zakat institutions are primarily producing zakat funds and zakat payers
(in a way of dakwah, promotion and, etc.) and distribute it to the asnaf. Hence, the
outputs used in this study are total collection of zakat, total distribution of zakat and total
number of zakat payers, while the inputs are number of staff and total expenditure[1].
Based on Table I, of all 14 SIRCs, Selangor is found to have the highest gure for most
variables used since the state of Selangor is the largest concentration of Muslim
population in Malaysia with 16.75 percent of Muslimpopulation in 2007 (Department of
Statistics Malaysia, 2010). On the other hand, Perlis is found to have the lowest value of
outputs and inputs, simply due to the fact that the state of Perlis is the smallest state
in Malaysia with the smallest Muslim population in the country (which recorded only
1.21 percent of total Muslim population in 2007) (Department of Statistics Malaysia,
2010). TE and TDare very close since distributed zakat funds are considered part of the
expenditure spent by the religious councils in the management of the councils affairs.
4. Results and analysis
i) Production frontier and efciency
The basic component of the Malmquist Productivity Index is related to measures of
efciency. This study initially reports the efciency of the 14 SIRCs (rms) fromthe year
2003 to 2007 in Tables II and III under the constant returns to scale (CRS) and variable
returns to scale (VRS), respectively. The values of unity imply that the rm is on the
frontier in the associated year, while the value less than unity imply that the rm is
below the frontier or technically inefcient. Thus, the lower the values from unity, the
more inefcient it is compared to the values closer to unity.
Based on Tables II and III, Johor, Pulau Pinang, Kedah and Sarawak are consistently
efcient, both under CRS and VRS version of technology. In addition, Kuala Lumpur and
Selangor are also found to be consistently efcient under VRS version of technology. On
the contrary, Negeri Sembilan, Melaka, Kelantan, Terengganu and Perak are the least
efcient institutions for CRS and VRS version consistently.
Mean Median Maximum Minimum SD
Input
No. of staff 127 100 461 22 91
Total expenditure 37,742,331 25,727,861 214,767,671 1,957,135 42,735,550
Output
Total collection 42,079,560 27,771,981 202,193,541 5,102,537 42,224,646
Total distribution 32,111,273 20,392,516 174,520,057 3,036,304 34,232,324
No. of zakat payers 304,079 62,408 2,100,562 1,482 505,887
Table I.
Descriptive statistics of
inputs and outputs of the
SIRCs, 2003-2007
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The values in Tables II and III showthe percentage of the realized output level compared
to the maximumpotential output level at the given input mix. For instance, in2004, Negeri
Sembilan produced 78.1 percent of its potential output level and Perlis produced
85.5 percent of its potential output under CRSversion. Under VRSof the same year, Melaka
produced 51.8 percent of its potential output while Selangor produced at its maximum
potential output, 100 percent. As indicated by the weighted geometric mean in Tables II
and III, the average efciency for the whole industry slightly increase for the period
2003-2004, but showed a slight decrease in 2005-2006. On average, efciency performance
of Malaysian zakat institutions was relatively higher based on VRS than on CRS.
ii) Productivity performance of individual institution
Tables IV-VI report the performance of the institutions from the year 2003 to 2007
in terms of TFP change and its two subcomponents, technical change and efciency
No. SIRCs 2003 2004 2005 2006 2007
1. Kuala Lumpur 0.977 0.926 1.000 0.885 0.702
2. Selangor 1.000 0.881 0.752 0.834 0.748
3. Negeri Sembilan 0.677 0.781 0.671 0.686 0.675
4. Melaka 0.497 0.513 0.529 0.562 0.483
5. Johor 1.000 1.000 1.000 1.000 1.000
6. Pahang 0.954 1.000 1.000 0.801 0.788
7. Kelantan 0.325 0.363 0.337 0.336 0.331
8. Terengganu 0.783 0.795 0.596 0.623 0.593
9. Perak 0.568 0.647 0.607 0.600 0.608
10. Pulau Pinang 1.000 1.000 1.000 1.000 1.000
11. Kedah 1.000 1.000 1.000 1.000 1.000
12. Perlis 0.836 0.855 0.881 1.000 1.000
13. Sabah 0.722 0.836 1.000 0.898 0.977
14. Sarawak 1.000 1.000 1.000 1.000 1.000
Mean 0.810 0.828 0.812 0.802 0.779
Table II.
Efciency of the State
Religious Councils
(SIRCs), 2003-2007 (CRS)
No. SIRCs 2003 2004 2005 2006 2007
1. Kuala Lumpur 1.000 1.000 1.000 1.000 1.000
2. Selangor 1.000 1.000 1.000 1.000 1.000
3. Negeri Sembilan 0.683 0.787 0.705 0.724 0.727
4. Melaka 0.497 0.518 0.529 0.593 0.533
5. Johor 1.000 1.000 1.000 1.000 1.000
6. Pahang 1.000 1.000 1.000 0.893 0.962
7. Kelantan 0.462 0.534 0.389 0.464 0.515
8. Terengganu 0.804 0.868 0.597 0.683 0.759
9. Perak 0.611 0.698 0.625 0.634 0.745
10. Pulau Pinang 1.000 1.000 1.000 1.000 1.000
11. Kedah 1.000 1.000 1.000 1.000 1.000
12. Perlis 1.000 1.000 1.000 1.000 1.000
13. Sabah 0.772 0.939 1.000 1.000 0.996
14. Sarawak 1.000 1.000 1.000 1.000 1.000
Mean 0.845 0.882 0.846 0.856 0.874
Table III.
Efciency of the State
Religious Councils
(SIRCs), 2003-2007 (VRS)
Zakat
institutions
in Malaysia
203
change, respectively. The value of the Malmquist TFP productivity index and its
components that less than unity implies a decrease or deterioration in productivity.
Conversely, values greater than unity indicate improvements of productivity in the
relevant aspect. Subtracting 1 from the number reported in the table gives an average
increase or decrease per annum for the relevant time period and relevant performance
measure. Note that these measures capture performance relative to the best practice in
the sample.
Table IV reveals the changes in the Malmquist-based total factor productivity
index. As shown in the results, Kelantan and Perak had positive productivity changes
for all years of 2003-2004, 2004-2005, 2005-2006 and 2006-2007. In contrast, Pulau
Pinang recorded slight deterioration in TFP for years 2003-2006. However, there were
some improvements of TFP change for Selangor. In addition, Perlis had the highest
average TFP growth at an annual rate of 9.8 percent, Perak came next with an annual
No. SIRCs 2003-2004 2004-2005 2005-2006 2006-2007 Mean
1. Kuala Lumpur 0.964 1.223 0.860 0.978 0.998
2. Selangor 0.831 0.918 1.095 1.056 0.969
3. Negeri Sembilan 1.160 0.918 1.015 1.176 1.062
4. Melaka 0.977 0.945 1.080 0.920 0.979
5. Johor 1.004 0.788 0.981 1.030 0.945
6. Pahang 1.096 1.189 0.824 1.152 1.055
7. Kelantan 1.122 1.048 1.026 1.075 1.067
8. Terengganu 0.976 0.820 1.038 1.111 0.980
9. Perak 1.144 1.041 1.003 1.194 1.093
10. Pulau Pinang 1.044 0.994 0.992 1.222 1.059
11. Kedah 0.943 0.976 1.238 0.958 1.022
12. Perlis 0.969 1.001 1.266 1.185 1.098
13. Sabah 1.202 0.880 0.919 0.954 0.981
14. Sarawak 1.178 0.923 1.144 0.972 1.048
Mean 1.038 0.969 1.027 1.065 1.024
Table IV.
SIRCs relative Malmquist
TFP change between
time period t and t 1,
2003-2007
No. SIRCs 2003-2004 2004-2005 2005-2006 2006-2007 Mean
1. Kuala Lumpur 1.017 1.132 0.972 1.233 1.084
2. Selangor 0.943 1.075 0.989 1.177 1.042
3. Negeri Sembilan 1.005 1.070 0.992 1.196 1.063
4. Melaka 0.948 0.915 1.016 1.071 0.986
5. Johor 1.004 0.788 0.981 1.030 0.945
6. Pahang 1.046 1.189 1.028 1.172 1.107
7. Kelantan 1.004 1.128 1.031 1.090 1.062
8. Terengganu 0.960 1.094 0.992 1.168 1.050
9. Perak 1.005 1.109 1.015 1.178 1.075
10. Pulau Pinang 1.044 0.994 0.992 1.222 1.059
11. Kedah 0.943 0.976 1.238 0.958 1.022
12. Perlis 0.948 0.972 1.115 1.185 1.050
13. Sabah 1.039 0.735 1.023 0.877 0.910
14. Sarawak 1.178 0.923 1.144 0.972 1.048
Mean 1.004 0.998 1.035 1.104 1.035
Table V.
SIRCs relative technical
change between time
period t and t 1,
2003-2007
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rate of 9.3 percent and Kelantan ranked third with an annual rate of 6.7 percent.
Overall, the TFP change slightly decreases by 3.1 percent in 2004-2005 but slowly
increased after that.
The Malmquist TFP index is further decomposed into two components, technical
change and efciency change. Technical change measures the benets of better
technology and capital equipments or simply put innovation (the frontier effects) while
efciency change is attributed to the practices of best available techniques, which
involve the efcient use of inputs (catching up effect). The decomposition of TFP would
make a distinction in terms of policy formulation since changes in either one component
will require different policy direction. The results of technical change and efciency
change are reported in Tables V and VI. Table V presents the index values of technical
progress/regress as measured by average shifts in the best practice frontier from
period t to t 1. According to the results, Pahang, Kelantan and Perak are
the institutions that experienced technical progress from year 2003 to 2007, while the
other institutions experienced both technical progress and regress.
Over the period of analysis, Sarawak recorded the highest change in technical
progress (17.8 percent) in 2003-2004 and Pahang recorded the highest change in
technical progress (18.9 percent) in 2004-2005, Kedah recorded the highest change in
technical progress (23.8 percent) in 2005-2006 while Kuala Lumpur recorded the highest
change in technical progress (23.3 percent) in 2006-2007. Table IV also displays that
technical progress has been experienced by nine institutions (2003-2004), seven
institutions (2004-2005), eight institutions (2005-2006) and 11 institutions (2006-2007).
On the average, the year 2004-2005 is found to has been the year of technical regress
(20.2 percent) while the other periods the institutions recordedtechnical progress. Out of
14 institutions, three institutions (Melaka, Johor and Sabah) are found to have technical
regresses. Pahang is found as the most technical progressive institution (10.7 percent)
while Sabah is found as the most technical regressive institution (29.0 percent).
Table VI displays changes in relative efciency for each individual institution.
The results indicate considerable variation across institutions and times. Only ve
institutions ( Johor, Pulau Pinang, Kedah, Perlis and Sarawak) are found to be efcient
No. SIRCs 2003-2004 2004-2005 2005-2006 2006-2007 Mean
1. Kuala Lumpur 0.948 1.080 0.885 0.793 0.921
2. Selangor 0.881 0.854 1.108 0.898 0.930
3. Negeri Sembilan 1.154 0.858 1.023 0.983 0.999
4. Melaka 1.031 1.032 1.063 0.859 0.993
5. Johor 1.000 1.000 1.000 1.000 1.000
6. Pahang 1.048 1.000 0.801 0.983 0.953
7. Kelantan 1.117 0.929 0.996 0.986 1.005
8. Terengganu 1.016 0.749 1.046 0.951 0.933
9. Perak 1.138 0.939 0.988 1.013 1.017
10. Pulau Pinang 1.000 1.000 1.000 1.000 1.000
11. Kedah 1.000 1.000 1.000 1.000 1.000
12. Perlis 1.022 1.030 1.136 1.000 1.046
13. Sabah 1.157 1.196 0.898 1.088 1.079
14. Sarawak 1.000 1.000 1.000 1.000 1.000
Mean 1.034 0.971 0.992 0.965 0.990
Table VI.
Changes in SIRCs relative
efciency between time
period t and t 1,
2003-2007
Zakat
institutions
in Malaysia
205
(and therefore showed no change in efciency) in all periods from 2003 to 2007. For the
other institutions, there are periods with positive, negative or no changes in efciency.
For the whole period of analysis, the results further indicate that, on average, Sabah
records the highest efciency change with 7.9 percent, followed by Perlis with
4.6 percent, Perak with 1.7 percent and Kelantan with 0.5 percent six institutions
(Kuala Lumpur, Selangor, Negeri Sembilan, Melaka, Pahang and Terengganu) are found
to be the institutions that experienced efciency deterioration with 27.9 percent,
27.0 percent, 20.1 percent, 20.7 percent, 24.7 percent and 26.7 percent, respectively.
Of all the periods of 2003-2007, only the period of 2003-2004 record a positive efciency
change while the other periods record negative efciency change.
In order to identify a change in scale efciency, the efciency change is further
decomposed into two subcomponents, namely pure efciency change (PEch) and scale
efciency change (SEch), the results of which are reported in Table VI. The subset of
pure efciency change measures the relative ability of operators to convert inputs into
outputs while scale efciency measures the extent the operators can take advantage of
returns to scale by altering its size towards optimal scale.
Based on Table VII, the results show that the scale efciency appears to be less
important source of growth to efciency change as compared to the pure efciency
change component for most zakat institutions in Malaysia. Four institutions
( Johor, Pulau Pinang, Kedah and Sarawak) recorded no changes in annual growth
for both the pure and scale efciencies during the period of 2003-2007. Relative to
other institutions, Kuala Lumpur records the highest deterioration of scale efciency
of 20.203 percent in 2006-2007. In terms of pure efciency, Terengganu records the
highest deterioration by 20.31 percent in 2004-2005. In contrast, Kelantan records the
highest growth in scale efciency with 27.5 percent in 2004-2005 while Sabah records
the highest growth in pure efciency with 21.6 percent in 2003-2004. During the entire
period of study, only the years between 2004 and 2005 is identied as the years
of pure efciency deterioration as well as the years of scale efciency improvement.
2003-2004 2004-2005 2005-2006 2006-2007
No. SIRCs PEch SEch PEch SEch PEch SEch PEch SEch
1. Kuala Lumpur 1.000 0.948 1.000 1.080 1.000 0.885 1.000 0.793
2. Selangor 1.000 0.881 1.000 0.854 1.000 1.008 1.000 0.898
3. Negeri Sembilan 1.152 1.002 0.896 0.958 1.027 0.997 1.004 0.979
4. Melaka 1.041 0.991 1.023 1.009 1.120 0.949 0.899 0.955
5. Johor 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
6. Pahang 1.000 1.048 1.000 1.000 0.893 0.897 1.077 0.913
7. Kelantan 1.156 0.966 0.728 1.275 1.194 0.834 1.110 0.888
8. Terengganu 1.079 0.941 0.689 1.088 1.144 0.915 1.111 0.856
9. Perak 1.141 0.998 0.896 1.047 1.014 0.974 1.175 0.862
10. Pulau Pinang 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
11. Kedah 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
12. Perlis 1.000 1.022 1.000 1.030 1.000 1.136 1.000 1.000
13. Sabah 1.216 0.952 1.065 1.123 1.000 0.898 0.996 1.092
14. Sarawak 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Mean 1.054 0.981 0.943 1.029 1.025 0.968 1.025 0.942
Notes: PEch pure efciency change; and SEch scale efciency change
Table VII.
Changes in efciency
components by SIRCs
between time period t and
t 1, 2003-2007
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Overall, the results suggest that the technical and size of the institutions do matter
in determining the institutions productivity and efciency level.
We now turn our discussion on the developments of the returns to scale of zakat
institutions in Malaysia. The following Table III displays the results of developments
in returns to scale of zakat institution in Malaysia.
Table VIII displays the results of zakat institutions returns to scale. As the table
shows, over the ve periods, the zakat institutions were experiencing a U-shape trend
of inefcient zakat institutions, from 67.2 percent in 2003 and 64.3 percent in 2004, to
42.9 percent in 2005 before it rose up to 64.3 percent in 2006 and 2007. It is apparent
from the table that, the number of zakat institutions experiencing economies of scale
(IRS) has decreased substantially from two (14.3 percent) in year 2003 to none
(0 percent) in 2006 and in 2007, after it rose up to four (28.6 percent) in 2005. In contrast,
zakat institutions that are experiencing diseconomies of scale (DRS) dominate the
inefcient zakat institutions in all years except in 2005. For instance, in year 2003, there
were six (42.85 percent) zakat institutions experiencing diseconomies of scale and it
rose up to eight (57.1 percent) in 2004 and nine (64.3 percent) in 2006 and 2007 before it
declined to two (14.3 percent) in 2005. The share of scale efcient zakat institutions
(operating at CRS) on the other hand, are quite stable, where the share of efcient zakat
institutions has increased from six (42.85 percent) in year 2003 to eight (57.1 percent) in
year 2005 before it declined to ve (35.7 percent) in year 2007. Hence, there are a lot of
improvements should be undertaken by zakat institutions to improve overall efciency
if scale inefciency resulted from the scale inefcient institutions could be undertaken.
iii) Productivity performance of the industry
Table IX summarizes the performance of Malmquist productivity index of the zakat
institutions in Malaysia between 2003 and 2007. On the average, Perlis records the
highest growth in TFP with 9.8 percent while Sabah and Perlis records the highest
growth in efciency (7.9 percent) and technical changes (10.7 percent), respectively.
Johor, on the other hand, records the lowest growth in TFP with 25.5 percent which is
mainly due to technical regress (25.5 percent).
On average, the improvement of TFP of zakat institutions in Malaysia is mainly
due to technical change (3.5 percent) while efciency change contributed a negative
change (20.1 percent). Furthermore, the efciency change is largely contributed by
pure efciency (1.1 percent) while scale efciency contributed a negative change
(20.2 percent) to the efciency change. This indicates that the size of the institutions
does not matter in affecting efciency changes. The ndings of substantial growth in
technical change and negative growth in efciency components suggest that an
increase in TFP of zakat institutions in Malaysia is due to improvement in technical
2003 2004 2005 2006 2007
No. of
ZIs %share
No. of
ZIs %share
No. of
ZIs %share
No. of
ZIs %share
No. of
ZIs %share
CRS 6 42.9 5 35.7 8 57.1 5 35.7 5 35.7
DRS 6 42.9 8 57.1 2 14.3 9 64.3 9 64.3
IRS 2 14.2 1 7.2 4 28.6 0 0 0 0
Total 14 100 14 100 14 100 14 100 14 100
Table VIII.
Returns to scale in zakat
institutions in Malaysia
Zakat
institutions
in Malaysia
207
aspect rather than the innovation in efciency components. On average, zakat institutions
in Malaysia are found to be experiencing a technical progress.
5. Conclusion
The results from this study have important implications for the Malaysian
zakat industry. As a whole, TFP has increased (of at least 2.4 percent) throughout the
period of 2003-2007. It should also be noted that the very presence of TFP growth in the
industry was mainly due to technological improvement (3.5 percent). This result
therefore indicates that the Malaysian zakat industry has great potential to further
increase its output through an improvement in the technology and capital equipments.
Further decompositionof the efciencychange into its pure technical andscale efciency
components suggest that during the period of study, pure technical efciency has
resulted in Malaysian zakat institutions to increase. Comparing among the SIRCs, it is
found that Perlis records the highest growth in TFP with 9.8 percent, followed by Perak,
Kelantan, Negeri Sembilan and Pulau Pinang. It seems to show that corporatization of
some SIRCs does not affect the productivity and efciency of the institutions. However,
further study needs to be conducted to conrm the hypothesis.
In terms of the returns to scale, the results suggest that most zakat institutions were
operating at non-CRS. Hence, there are a lot of improvements could be undertaken by
zakat institutions to improve overall efciency if scale inefciency resulted fromthe scale
inefcient institutions could be undertaken. Owing to its limitations, the paper could be
extended in a variety of ways. First, the scope of this study could be further extended to
investigate factors that inuence the productivity and efciency of the institutions.
Second, future research into the efciency of zakat institutions could be extended to the
effect of efciency of zakat institutions on social performance of Muslim society in
Malaysia. Despite these limitations, the ndings of this study are expected to contribute
signicantly to the existing knowledge on the operating performance of zakat institutions
in Malaysia.
No. SIRCs TFPCH TECHCH EFFCH PECH SECH
1. Kuala Lumpur 0.998 1.084 0.921 1.000 0.921
2. Selangor 0.969 1.042 0.930 1.000 0.930
3. Negeri Sembilan 1.062 1.063 0.999 1.016 0.984
4. Melaka 0.979 0.986 0.993 1.017 0.976
5. Johor 0.945 0.945 1.000 1.000 1.000
6. Pahang 1.055 1.107 0.953 0.990 0.963
7. Kelantan 1.067 1.062 1.005 1.028 0.978
8. Terengganu 0.980 1.050 0.933 0.986 0.946
9. Perak 1.093 1.075 1.017 1.051 0.968
10. Pulau Pinang 1.059 1.059 1.000 1.000 1.000
11. Kedah 1.022 1.022 1.000 1.000 1.000
12. Perlis 1.098 1.050 1.046 1.000 1.046
13. Sabah 0.981 0.910 1.079 1.066 1.012
14. Sarawak 1.048 1.048 1.000 1.000 1.000
Mean 1.024 1.035 0.990 1.011 0.980
Notes: TFPCH total productivity change, TECHCH technical change, EFFCH efciency
change, PECH pure efciency change, and SECH scale efciency change
Table IX.
Summary of Malmquist
productivity index of
SIRCs means, 2003-2007
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Note
1. Total expenditure (TE) is the input that refers to overall expenditure spent by the religious
council (and its subsidiary) in managing all its responsibility.
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About the authors
Norazlina Abd. Wahab is a Lecturer at the Islamic Business School in the College of Business,
Universiti Utara Malaysia, and a PhD Candidate at the IIUM Institute of Islamic Banking and
Finance, International Islamic University Malaysia. Norazlina Abd. Wahab is the corresponding
author and can be contacted at: norazlina.aw@uum.edu.my
Professor Abdul Rahim Abdul Rahman is a Professor at the Kulliyyah of Economics and
Management Sciences, International Islamic University Malaysia.
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