IIUM Institute of Islamic Banking and Finance.

(IIiBF)

INDIVIDUAL ASSIGNMENT:

Literature review on zakat paying in Malaysia

ASST PROF DR: Syed Marwan

ISLAMIC FINANCIAL SYSTEM (IFS)

By:

MOHAMED ABDIWAHID HASHI (G1819903)

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Contents
1. Introduction 3
2. Literature review 4
Overview of zakat 4
Zakat administration in Malaysia 5
3. Issues and gaps 6
1. Issues pertaining to zakat management 6
2. Issues pertaining to zakat collection 8
3. Issues pertaining to zakat distribution 9
4. The importance of zakat on the sustainability and efficiency of Islamic financial
institutions 11
5. Conclusion 12
6. References 13

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 Literature review on zakat paying in Malaysia

1. Introduction
Zakat is undoubtedly one of the most widely discussed and analyzed aspects of the
Islamic economy. This is perhaps because Zakat is one of the five principal pillars of
Islam along with Shahadah (declaration of faith), Salat (daily prayers), Sawm (fasting
during Ramadan) and Hajj (pilgrimage to Makkah).

Zakat also mentioned repeatedly in Quran and some Hadith. (Mahyuddin and
Abdullah, 2011) mentioned in their research that the term zakat has been mentioned
58 times in the AL Quran. It has been mentioned 32 times in isolation and 26 times
together with salah (prayers).

Allah (S.W.T) said in Surah Al baqarah: “Those who behave and do righteousness
establish daily prayers and pay poor will have their reward with their Lord” (Al-
Baqarah 2: 277).

Past research on the concept of zakat and poverty alleviation describes how zakat has
in one way or another helped to improve the welfare of people and bridge the gap
between the rich and the poor in society. It is a medium of creating equality among
people in the society (Mujaini, 2005, Ahmad Fahme et al., 2013). Some scholars
consider zakat as a social insurance for members of the Muslim community through
which a better future is granted (Mahyuddin and Abdullah, 2011) (Bilqis, April 2017)
have cited in their research.

Zakat payment has been specified by Allah (s.w.t.) through His Messenger
Muhammad (pbuh) with objectives to achieve. In fact, the population of a country is
not similar in terms of their economic standing. There are the rich, the poor, the
needy, the orphans, single parents and so on.

Zakat has a number of objectives. Purification of one’s wealth is one of the objectives.
Other objectives of zakat are to discourage the concentration of wealth and to reduce
the amount of poverty. Furthermore, the main objective of zakat is to achieve socio-
economic justice, poverty eradication and economic growth. The ultimate objective is

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to seek the pleasure of Allah, while taking into consideration the requirements of the
shari’ah.

Well managed zakat system will certainly have a positive impact on the socio-
economic positions of the poor and needy between the Ummah.

The next part of the paper presents the literature review beginning with the meaning
of zakat followed by zakat administration in Malaysia. In the third part issues and
gaps pertain the practice of zakat in Malaysia was clearly presented. In the fourth
section states the importance of zakat on the sustainability and efficiency of Islamic
financial. The final part is the conclusion.

2. Literature review
Overview of zakat
Zakat literally means to grow and to increase (Qardhawi, 2000). The term zakat has
three different connotations; linguistically, theologically and legally. Linguistically,
zakat means cleansing or purification of something from dirty or filth. Theologically,
it means spiritual purification resulting from giving of zakat. According to Maududi
(1988), person’s wealth is impure if he does not pay the right of Allah’s servant from
the wealth bestowed by him. It also means growth or increase which has two
dimensions; first, spiritual development by pleasing Allah, and second, redistribution
of income (as Islam forbids accumulation and hoarding) which will lead to greater
enjoyment and in turn, will stimulate production and growth.

Legally, zakat means transfer of ownership of specific property to specific

individuals under specific conditions. Muslims have the obligation to give a specific
amount of their wealth (with certain conditions and requirements) to the specified
beneficieres and in fact, the payment of zakat is one of the five pillars of Islam.

There are many evidences from Quran and Sunnah for the obligation of zakat.

“And establish prayer and give zakah and obey the Messenger - that you may
receive mercy’’.Surah an-Nur (Verse 56)

“Take, [O Muhammad], from their wealth a charity by which you purify them and
cause them increase, and invoke [ Allah’s blessing] upon them. Indeed, your
invocations are reassurance for them. And Allah is Hearing and Knowing’’.Surah At-
Tawbah (verse 103)

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There are two types of zakat. One is Zakat Al-Fitri and Zakat Al-Mal (of wealth).
Zakat Fitri: is a one off payment that is made once in every Muslim Hijri calendar
year at any time between the first day of the month of Ramadan and the first day of
Shawal. All Muslims are obliged to pay this, regardless of their age, status or wealth.
The amount of zakat payable is approximately 3kg of staple food in the relevant
country or an amount of money that is equivalent to the price of the food.

Zakat al-Mal is an annual payment based on the amount of wealth owned by an

individual Muslim or organization. This payment is obligatory upon any individual
Muslim or organization that has completed the requirement of Nisab (minimum
taxable amount) and Haul (one Muslim Hijri calendar year). The payment is 2.5% out
of the total wealth deemed for zakat. For zakat of Al-mal, there are a few categories
under it, including zakat of business, zakat of saving, zakat of income, zakat of gold
and silver, zakat of poultry (for instance like cow, goat and so on), zakat of fruits and
grain, zakat of entrenchment, zakat of investment as well as zakat of Employees
Provident Fund (EPF) saving (Muharman et. al., 2011).

There are eight groups of people who are the recipients of Zakat, as mentioned by
Allah in His Holy Quran (QS: At-Tawbah: 60), including al-Fuqara’
(needy/strained), al- Masakin (poor/deficient/lacking), amil (has right to collect
zakat), mualaf (convert/reconciled to Islam), al- Riqab (slave), al-Gharimin (people in
debt), fi-sabililLah (Allah’s cause) and Ibn as-Sabil (traveler/wayfarer). Allah s.w.t
has determined these categories when He says:

“Sadaqat (zakat) are for the poor and the needy, and those employed to administer
(the Zakat), for those whose hearts are to be won over (Muallafat-al-Qulub), and for
the freeing of human beings from bondage, and (for) those who are burdened with
debts, and (for every struggle) in Allah’s cause, and (for) the wayfarer: (this is) an
ordinance from Allah, Allah is All-Knowing, full of Wisdom.” (9:60)

Zakat administration in Malaysia

In Malaysia, zakat is managed under the respective states authority as part of the
administration of the State Islamic Religious Council (SIRC). The law on zakat is
governed by each state’s own zakat law (Bakar, 1998). SIRCs are fully responsible in
managing zakat affairs including its collection and distribution. Each state has its own
SIRC but they are all referred to as zakat institutions in the Malaysian context.

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Although the approach in managing zakat varies from one state to another, the main
aim remains the same (Wahab, et al., 2011).

The respective state authority involved in zakat administration carries out the
following responsibilities: promotion, collection and distribution of zakat; organized
assistance to the poor and needy; including other asnaf in accordance to guidelines
prescribed by the Syariah (Ahmad, Othman, & Salleh, 2015).

Zakat administration in the various states and federal territories have gone through
phases of development and restructuring with a view to strengthen the institution of
zakat machinery in delivering efficient service to the community as a whole.

(Azman, Mohammad, & Syed Mohd Najib, 2012) have citied on their research from
Al Qardhawiyy that the effectiveness of the zakat institution in carrying out its duties
would depend on a number of factors viz. the expansion of new resources for zakat,
the collection of zakat from tangible and intangible properties, systematic zakat
management, efficient zakat distribution and the thoroughness of implementation of
Islamic rules (Al-Qardhawiyy, 2001).

3. Issues and gaps

Although the administration of zakat has undergone many improvements in terms of
infrastructure, human capital, delivery system and governance transparency, there are
still issues that need to be tackled to ensure that the administration of zakat is moving
on the right track. In order to empower zakat institutions in Malaysia a number of
issues need to be addressed (Mohammad et al., 2011).

1. Issues pertaining to zakat management

The objective of zakat management is to achieve the best possible outcome in the
timely collection and distribution of zakat as ordained in Islamic Shariah (Rahman
et.al 2003, p. 40).

The efficiency of the zakat system cannot be viewed independently of the extent of
trust that zakat payers may allocate to it. The whole idea of zakat management is to
help Muslims perform this pillar of Islam and establish its primary function as a
means to alleviate poverty. But if trust is not sufficiently maintained between
Muslims and zakat centre, the potential or majority zakat payers would prefer to pay

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out zakat directly to their own relatives who are poor or needy, rather than deal
through the zakat centre (Wahid et.al, 2004, p.145).

Creativity and innovation are important elements to ensure the relevance of zakat
organizations in modern Muslim societies (Mujaini, 2005). According to Abdul
Rahim (2006), zakat practitioners need to change their mind-set and be opened to new
techniques in administering zakat (Abdul Rahim, 2006, p. 95). Al-Qardhawi (1999)
indirectly recommended that zakat practitioners must be creative and innovative in
facing new challenges such as changing needs and modern demands. Zakat
administrators must ensure that the concept of ijtihad (diligence) should be
incorporated in their management of zakat funds (Mujaini, 2005). Innovations on
worldly affairs and ijtihad in the context of zakat must be part of their management
practice (Abdul Hamid, 2003, p.96; Mujaini, 2005). In the modern management of
zakat, practitioners must be knowledgeable for them to look at creativity and
innovation as something that can assist them to achieve the objectives of zakat.

An issue mentioned in more than one research was the factors that influence the
individual dissatisfaction towards zakat institutions in Malaysia.

Ahmad (2006) in his research by using primary data, he found out that satisfaction
towards the zakat management significantly influences individual compliance
behaviour towards formal institution. He found out that 57% of 753 respondents were
not satisfied with the current distribution of zakat in Malaysia which significantly
affect their payment of zakat to zakat institutions. The result indicates that to attract
more people to formal institutions, they should first increase the individual
satisfaction. This can be done by constantly improving zakat management,
maintaining good will, becoming more transparent and conducting more productive
distribution scheme (Ahmad, 2006, p. 181).

Another research, Wahid et al. (2009) highlighted the issues of transparency and
unclear Method of zakat distribution as the main reasons of dissatisfaction towards
zakat institutions in Malaysia. The majority of zakat payers in Malaysia are not
satisfied with the way zakat institutions distributed the Zakat; they have felt that the
process of distribution is uncertain and the information regarding to the zakat
Distribution is unclear (Wahid et al., 2009, p. 1).

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Further research, Hafizah et al. (2016) found that there was an issue relating how
zakat collection funds were misused by agents appointed by State Islamic Religious
Council (SIRC) as zakat funds collector. The zakat institutions are medium for payers
to pay zakat and responsible in distributing the funds that collected from zakat payers
to the recipient (asnaf). For the record, although the collection zakat has increased the
funds collected are higher compared to the amount that distributed to the asnaf. That
problem is the reason why the previous researchers study about how the funds being
handled by the institutions and lead to the finding of the issues of misuse of funds by
the agents of SIRC that responsible as collectors. All this finding from the previous
research has led to the major factors that affect the intention to pay zakat by payers
through zakat institutions which is trust. The institution has failed to increase the level
of trust of the payers against zakat institutions. The issues of misuses fund have made
the payers trust to pay their zakat through institutions decreasing. There was finding
from previous research that shows some individual payers refused to pay their zakat
through institutions. They prefer to pay zakat directly to the asnaf rather than pay to
the institution of zakat. Mohammad et al. (2016), mentioned in their research, when
zakat payers perceived that the institution is not doing enough in helping the poor,
they will stop to pay zakat through the channel and distribute them directly to the
qualified recipients.

2. Issues pertaining to zakat collection

Presently, the development of zakat institution in Malaysia is getting better especially
in terms of zakat collection (Hairunnizam et. al, 2008; p. 805). The total of zakat
collection in Malaysia has been increased drastically from year to year that it goes to
the total of zakat collection for each state. The growth of the zakat collection is due to
some factors, for instance, likes e-zakat development. Most of the zakat institutions in
Malaysia nowadays have started to develop e-zakat by adopting Web-based Internet
application that makes zakat information available electronically to all the people
(Shawal, 2009; p. 3). This kind of marketing strategy has increased awareness among
Muslims in order to obligate zakat. Furthermore, the use of computer technology also
has increased its effectiveness and efficiency in collecting zakat from year to year
(Muharman et. al., 2011).

However, there are some issues relating to zakat collection that past researchers
stated, (Mohd Shahril Ahmad Razimi, 2016) explained in their research that the

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Zakat fund collections are sometime decreasing even the population at one area in
quite a number. This proved by Zakat Selangor report, explained that over 2 million
Muslim in Selangor, only 160,000 people paid the zakat. The ratio of population who
paid was just 12.5% which is small ratio compare to non-zakat payers. There is a big
issue when public are not aware of their obligation to pay the zakat. The method of
collecting the zakat should be changed, as normally do like pay at the mosque, at the
counter open in public area and also at zakat counter, the new approach should be
developed in order to keep the public aware about zakat. And this method is still
being used to collect zakat. Referring to Azman et.al.(2012), he said that zakat
collection method should be changed from waiting at the counter into new proactive
ways such promoting, briefing and educate all Muslim in public and private sector. A
new approach such as auto deduction from monthly salaries helps the zakat institution
collect the zakat with minimum effort.

The luck of understanding on Islamic principles and misunderstanding of the different

between zakat and tax will also decrease zakat fund collections.

In the study of Fuadah, et al. (2015) identified that one of the factors that would affect
the intention to pay zakat by payers is their level of understanding Islamic principles.
There was some finding that payers of zakat have misunderstood about tax and zakat.
They thought since they already paid their tax so that they do not need to pay their
zakat. This is because they did not fully understand what the meaning of zakat is.
Zakat is obligatory on the Muslims while tax is a civil obligation in other words; zakat
obligation is from Allah while tax is government obligation.

3. Issues pertaining to zakat distribution

The success of zakat collection and distribution mainly depends on the good
governance of zakat institution. However, distribution of zakat is very significant to
the Muslim country and community especially to eliminate poverty, improve
economic growth and also the meaning of life (Wahab et.al. 2012).

Although the management of zakat collection is getting better from year to year, then
the issue of zakat distribution still cause problems, arguments as well as discussions.
The issue with zakat distribution is essential since it might cause dissatisfaction
among the people who pay zakat which later on might lead them to pay zakat directly
to asnaf, without going through zakat institution. Zakat payers are the funders of zakat

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institutions to implement the zakat system. They need to be convinced so that they
will pay zakat through zakat institution, not directly to asnaf.

Past researchers illustrated some issues relating zakat distribution.

One of these issues is the lack of capability of zakat institutions to recognise exactly
the zakat recipients every year (Muhammad Syukri, 2006). For example in 2001, the
total recipients in the list were 9,600 people but increased to 9,800 in June 2002 as
report by Pusat Urus Zakat Pulau Pinang (PUZ) according to (Muharman et. al.,
2011).

Another problem that may disrupt the distribution process is bureaucracy that causes
the operation to become slow-down and time consuming. For instance in Kuala
Lumpur Federal Territory, those who really need zakat should follow the procedure
such as filling the form, must have supporting relevant document and finally will be
interviewed by SIRC in a particular zone or place (Zainal Abidin, 2001; p.74) but the
dignity of the needy and poor should be revealed publicly somehow disrupt the
process (Muharman et. al., 2011). Further evidence, for applying education aid from
zakat institution, it takes years for students to get the fund (Azman et al., 2012).

The issue of zakat distribution using the periodical form of direct payment where
asnaf (zakat recipient) is given zakat money monthly or annually was further
discussed in many researches. In general, direct payment of zakat especially for non-
productive asnafs such as the disabled and elderly is still acceptable, however, the
distribution of zakat in the form of capital finance to the poor and needy in order to
encourage business activities among asnaf was recommended by many researchers.

Ahmed (2004, p. 64), suggests that zakat distribution should be able to provide the
necessary inputs such as human, physical and financial capital in order to reduce the
poverty of the able bodied group. According to him, specific programs have to be
designed to provide support for skill development, provision of physical capital such
as taxis and sewing machines, and financial capital to start a business so that the poor
can be fully employed and earn a living(Fuadah, et al. 2015).

(Afzalur Rahman, 1986, p. 260). He also pressures that zakat funds should be used to
provide necessary technical equipment and machinery to artisans and craftsmen. He

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believes that direct cash disbursement will not be effective in bringing about any
better changes to the eligible recipients (Fuadah, et al. 2015).

4. The importance of zakat on the sustainability and efficiency of

Islamic financial institutions

Bank Negara Malaysia recently announced the Value-Based Intermediation (VBI)

initiative with the aim to encourage the Islamic financial services industry to the next
level of growth that is sustainable and with a clear value proposition. VBI aims to
deliver the intended outcomes of Shariah through practices, conduct and offerings that
generate positive and sustainable impact to the economy, community and
environment.

Islamic finance is a model that links finance with the real economy and balances
rewards and risks in a fair and transparent manner. As a system, it helps to stimulate
economic activity and entrepreneurship whilst addressing poverty and inequality,
ensuring financial and social stability, and promoting comprehensive human
development and fairness.

For instance, the international Islamic financial institution Islamic Development Bank
(IDB) has stated that its mission is to promote comprehensive human development,
with a focus on the priority areas of alleviating poverty, improving health, promoting
education, improving governance and prospering the people.

Zakat and waqaf are essential tools towards achieving economic growth. If properly
executed, it can play a major role towards unemployment and poverty elimination,
eventually contributing towards the economic growth of the Muslim societies. In the
case of zakat, through proper distribution among the recipients of zakat, each and
every individual can then be assured of a minimum standard of living. In key Islamic
finance jurisdiction such as Malaysia, IFIs have thus far played its role towards the
fulfilment of zakat. For example, both Bank Islam Malaysia Berhad (BIMB) and
Maybank Islamic offer online zakat services so as to help both the IFIs and the
Muslim society to fulfil their obligations and create greater awareness on the
importance of zakat towards achieving the community social agenda. The average
figures for the distribution of zakat in Malaysia among the recipients also present a

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stable scenario where around 40% of the total zakat is channelled to the poor and
needy.

Finally various socio-economic financial tools that are designed to provide financial
assistance to the poor include the Shariah-compliant micro-small medium enterprises
(MSMEs), and small and medium enterprises (SMEs) are promoting real economic
development in Islamic financial institutions. Alongside the socio-economic financial
tools, Islamic financial system can also further tap into both the zakat and waqf
system as part of serving the real economy. As part of attaining real economic
development, the overall Islamic financial system has taken various steps to promote
MSMEs and SMEs. In key Islamic finance jurisdiction such as Malaysia, MSMEs and
SMEs play a key role towards the economic growth of the country.

5. Conclusion
In conclusion, Malaysia can be considered as one of the outstanding and excellent
country in managing of zakat.

Zakat management can be looked at the transfer from the current practice to the
beyond of the religious perspective. This is because; the main objective of zakat is the
achievement of socio economic justice. Therefore, it is important for zakat to be
managed in the most efficient way. The whole idea of zakat management is to help
Muslims perform this pillar of Islam and establish its primary function as a means to
alleviate poverty.

However, if trust is not sufficiently maintained between Muslims and zakat centre, the
potential zakat payers would prefer to pay out zakat directly to their own relatives
who are poor or needy, rather than deal through the zakat centre. Issues such as zakat
fund not fully distribute dissatisfaction from zakat payers and delaying the payment of
zakat should be tackled immediately so that the zakat centre can avoid the payment
done by zakat payer through the unofficial channel or in other word the zakat payer is
paying zakat direct to the zakat recipients.

Zakat administration, on the other hand, should play an important role in monitoring
the activities of the involved recipients besides providing them with necessary skills,
so that they can optimize the zakat funds channelled to them and avoid unnecessary
misspending.

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The disbursement of zakat for income generation has also been viewed as a strategic
measure to solve the serious problems of poverty and unemployment in the majority
of Muslim countries. It is believed that the use of zakat funds for income generation
programs can reduce the poverty problem besides fostering sustainable economies.
Most previous studies confirmed that the utilization of zakat funds for income
generating activities, such as setting up small and cottage industries and providing
necessary training for poor communities, will improve income and reduce the poverty
rate. Through this program, zakat funds can finance the economic activities of the
eligible recipients based on their skills and capabilities.

Lastly, the effectiveness of zakat in helping the poor is depends on the method of
distribution and also the purpose of it. This method however, needs to be strengthened
and analysed from time to time so it will serve the purpose to help the poor to have a
better life. Often, there are various and interesting issues occurred in zakat
management, collection, distribution and poverty field which may gain interest from
researchers of Islamic scholar as well as economic researchers. This study not only
explore in-depth for those issues, but may also allow researchers to suggest solutions
and produce new knowledge to solve issues related to zakat. Therefore, further
research need to be done in the area on zakat paying in Malaysia.

6. References
ISLAMIC FINANCE: PROMOTING REAL ECONOMIC DEVELOPMENT. (2015). MIFC Bank negara
Malaysia .

Asri Mohd Ali, M. a. (2013). FACTORS THAT INFLUENCE THE ZAKAT COLLECTION FUNDS: A
CASE IN KUANTAN. South East Asia Journal of Contemporary Business, Economics
and Law.

Azman Ab Rahman, M. H. (JUNE 2012). Zakat Institution in Malaysia: Problems and Issues.
GJAT | VOL 2 ISSUE 1 | 35.

Bilqis, F. J. (April 2017). Identifying the poor and the needy among the beneficiaries of zakat:
Need for a zakat-based poverty threshold in Nigeria. International Journal of Social
Economics, Vol. 44 Issue: 4, pp.446-458.

FUADAH JOHARI, A. F. (2015 ). A Review of Literatures on Current Zakat Issues: An Analysis

between 2003 - 2013. International Review of Research in Emerging Markets and the
Global Economy (IRREM) Vol: 1 Issue 2.

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Merican, D. ’. (2017). Islamic Finance And Sustainable Economy.

Mohd Shahril Ahmad Razimi, A. R. (2016). Zakat Management in Malaysia: A Review.

American-Eurasian Journal of Scientific Research 11 (6), 453-457.

Muharman Lubis, N. I. (2011). Enhancement of zakat distribution management system: case

study in Malaysia.

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