Validity of zakat ratios as Islamic performance indicators in Islamic banking: a congeneric model and confirmatory factor analysis

Abstract

Purpose There is much debate in the literature about how the performance of Islamic banks (IBs) should be measured. Basically, IBs’ business models are different from that of conventional banks; thus, the performance of IBs should be measured by using a Sharīʿah-based approach. This paper considers zakat (Islamic tax) as an alternative indicator to measure the performance of IBs. This paper aims to examine whether zakat ratios can be used as Islamic performance (ISPER) indicators for IBs besides the conventional performance (COPER) indicators. Design/methodology/approach The investigation covered a sample of 214 yearly observations of 37 IBs located in Indonesia, Malaysia, Bahrain, Saudi Arabia and the United Arab Emirates for the period 2007–2015. This study used a single-factor congeneric model and confirmatory factor analysis, performed using the AMOS 23.0 software. Findings The findings assert that the discriminant validity of multi-bank performance, as measured by ISPER [zakat on assets (ZOA) and zakat on equity (ZOE)] and COPER indicators (return on assets, return on equity and operational efficiency in terms of assets), is very high. Hence, ISPER and COPER measurements are valid, either together to measure the multi-performance of IBs from both the Islamic and conventional perspectives, or independently as each measurement is valid to measure the Islamic and conventional performance if it is used separately. Research limitations/implications This paper does not investigate whether the findings are constant across time. This represents one of the limitations of this study. Practical implications It is strongly recommended that IBs calculate and disclose zakat ratios, particularly ZOA and ZOE, in their annual reports. Researchers and academicians should use these ratios for measuring the ISPER of IBs, either along with COPER or separately. Originality/value Empirical evidence is provided in this paper on the development and validity of zakat ratios as ISPER indicators in the Islamic banking industry. Zakat ratios are suitable indicators that can measure IBs’ performance and achieve the goals of IBs as well as those of Islamic economics. Technically, zakat has a dynamic ability to reflect the profitability of IBs. The more the IBs generate profit, the more they pay zakat. Furthermore, the greater the total assets of IBs, the higher the amount of zakat that they should pay. Thus, zakat ratios can be used as profitability measurements as in the case of tax ratios.

Zakat administration reformation towards an effective and efficient zakat revenue generation

“…Based on the analysis conducted, this study emphasises that for a zakat institution to generate more sustainable funds, inputs should be used before a strategy can be formulated in the transformation process that ultimately determines the institution's outputs or performance. These findings are in line with previous studies such as Hudaefi et al (2022), Nomran and Haron (2022) and Oktavendi and Mu'ammal (2022). Although their studies do not directly examine the sustainability of zakat institutions, studies on zakat compliance behaviour are relevant in justifying the sustainability of zakat in the future.…”

“…Riyadi (2014) dan Sharif and Wahid (2019) stated that Shariah banks could manage zakat funds with interest-free bank products in addition to the role of board members and healthy Shariah banking organisations to manage zakat professionally. This statement is supported by Nomran and Haron (2022), who found that zakat can be used as one of the measures of bank performance. Each zakat payer, individual or company must have a bank account for each of their zakat affairs.…”

“…The zakat institution can work with the bank to determine the amount of zakat they should pay through the bank account. This is possible because the amount of money in their bank account can indicate that an individual or company has reached the nisab for zakat payments (Riyadi, 2014; Sharif and Wahid, 2019; Nomran and Haron, 2022). With today’s technological advances, zakat payments can be made through bank accounts.…”

Triangulating Moderate Impact of Social Media Marketing Communication Between Performance Expectancy, Effort Expectancy and Social Influence on Business Performance in Cashew Industry in Sri Lanka

“…The result of x 2 / df = 2.365 indicates a good model t because the recommended value for model t is less than 3 (Anwar et al, 2018, Sakaya, 2023. According to previous research, GFI = 0.908, AGFI = 0.890, CFI = 0.967, TLI = 0.960 and NFI = 0.944 imply good model tness (Rajeh et al, 2015, Bangwal and Tiwari, 2019, Nomran and Haron, 2022. RMR = 0.009 and RMSEA = 0.078 also generated good model t (Rajeh et al, 2015, Anwar et al, 2018, Ts, 2022, Sakaya, 2023.…”

“…As a result, data analysis was required to determine whether they t the characteristics of a normal distribution and to test skewness and kurtosis. The skewness values for ve variables were < 3.00 within the range of (-1 to +1) (Nomran andHaron, 2022, Pattnaik andPattnaik, 2021), and the kurtosis values are within the range of (-1 to +1), which is appropriate for SEM research (Sakaya, 2023). The common method bias (CBM) was investigated by following the procedures indicated by Sakaya ( 2023), which included using multiple scales to measure the study's proposed variables.…”