The roles of property rights and transaction costs on the institutional zakat performance

Zakat is the third pillar of Islam and is regarded as the social security system for the development of Muslim communities. Currently, however, the performance of the zakat institution, especially in Malaysia, is still considered to be below the expected level. The zakat institution seems to only perform as a charity organisation instead of as a social security institution. This study is conducted to investigate the structures of the zakat institution and how these ‘structures’ could determine 'zakat institution performance'. Two aspects of the institutional structures are measured in this study, namely property rights and transaction costs. In terms of zakat performance, it is estimated based on two types of performance, which are socio-economic and psychological performance. With regard to the institutional structures, three objectives have emerged. The first is to examine to what extent securing the property rights of zakat and transaction costs could produce an impact on zakat institution performance. Secondly, this study endeavours to investigate whether the transaction costs perform as mediators when referring to the relationship between property rights and zakat performance. Third, this study is attempted to develop an institutional innovation for zakat through an open innovation strategy. A total of 428 respondents among zakat payers agreed to participate in this study, and the data was analysed using partial least square – structural equation modelling (PLS-SEM) approach. The results of the analysis found that property rights and transaction costs produce a moderate impact on the zakat institution’s performance. Transaction costs performed as the ‘complementary partial mediation’ between property rights and socio-economic performance and as ‘full-mediation’ between property rights and psychological performance. Based on the results and with the combination of the open innovation strategy, the institutional innovation of zakat was developed, so then it could perform as the social security institution. Seven elements have been proposed to be integrated into the zakat institution. The integration of the elements under the wings of zakat would be able to reduce the costs involved in the processes of the zakat transaction, as well as to ensure that the category of asnaf’s rights on zakat will be protected.