Good Governance in Strengthening the Performance of Zakat Institutions in Indonesia

Good Governance in Strengthening the Performance of Zakat Institutions in Indonesia

Author: Euis Amalia,  Ahmad Rodoni, , and  Hani Tahliani

Abstract

Good governance is a crucial issue in strengthening the performance of zakat institutions. This research aims at elaborating good governance from the perspective of Islam and analyzing factors contributing to good corporate governance in a number of zakat institutions in Indonesia. Confirmatory Factor Analysis (CFA) is applied to measure the contribution of each indicator to five principles of Good Governance in Zakat institutions; namely, transparency, accountability, responsibility, independence and fairness. With the assistance of Partial Least Square (PLS), version 3, it is shown that the principle of transparency contributes 60.4 percent; the principle of accountability 4.82 percent; the principle of responsibility 6.41 percent; and the principle of independence 53.3 percent. Therefore, it can be concluded that good governance in zakat institutions has been well implemented in some aspects, but have not yet been implemented comprehensively. This research is significant in that it contributes guidelines on zakat management, it provides teaching materials for higher education and a reference for formulating policies and regulations related to the standardization of good governance in zakat institutions.

1. Introduction

Good governance is a crucial issue in the context of strengthening the performance of zakat institutions. As a public organization, the performance of zakat institutions especially in management and service are the benchmark for the growth of public trust. Urgency of implementation of good governance in various public institutions is aimed to promote effective and efficient managerial performance to protect the interest of the board of directors, management staffs, stakeholders, shareholders, and customers. Principles of transparency, accountability, responsibility, independence, and fairness are dimensions shaping the framework in achieving good governance in public institutions.

As public entities, zakat institutions are expected to perform well especially in their role to provide service to the poor and underprivileged. In the concept and system of Islamic economy, zakat institutions are a pivotal instrument especially in redistributing wealth from the rich (muzakki) to the poor (dhuafa). As an Islamic institution, the zakat institution should comply with the ethical and moral values of Islam. The principles of Amanah (trustworthiness), transparency, accountability and Sharia compliance are among the characteristics differentiating zakat institutions from conventional institutions. Islam does not have specific concepts on corporate governance, but it has ethical and moral values that can be constructed as a framework of good governance. As explained in the article by Maria Bhatti and Ishaq Bhatti (200) entitled Development in Legal Issues of Corporate Governance in Islamic Finance, Islamic legal approaches and business ethics based on maqashid Sharia (the noble purposes of Sharia) provide a framework for Islamic corporate governance. The basic principles taken from Islamic values supporting this framework are the concept of hisbah, shura (shuratic decision-making process), disclosure and transparency, bookkeeping and final account, and religious audit. These values can be used to formulate policies and regulations for Islamic institutions, thereby helping to achieve good corporate governance.

In the context of zakat management in Indonesia, Islamic values have been incorporated into a specific law, Law No. 23 of Year 2011 on Zakat Management. Based on this law, there are two models of zakat management in Indonesia: (1) Zakat managed by the State through specific government bodies and (2) Zakat managed by Non-government Organizations [10]. Based on the law, zakat in Indonesia should be managed professionally by accommodating values and principles of good governance. Good governance in zakat management is a system for organizing and controlling the company to create value-added for all stakeholders [20]. Professional management is expected to improve the performance of zakat institutions in Indonesia by maximizing their potential. Based on the research conducted by IPB, Indonesia has the potential to annually collect zakat valued at IDR 217 trillion. The chairman of the National Zakat Management Board (BAZNAS), Bambang Sudibyo, mentioned that with several adjustments, BAZNAS estimated that the potential value of zakat nationally increases from 217 to 274 trillion [22]. Unfortunately, this potential is not realized. Based on BAZNAS data, the zakat collected at the national level is an estimated 3–4 trillion per year. Responding to this situation, Irfan Syauqi Beik (2009) states that a number of government policies are not yet effective in realizing the full potential value of zakat. On the other hand, there is no specific regulation providing guidelines for measuring good governance in Indonesian zakat institutions. Therefore, good governance is still interpreted differently by different zakat management institutions, especially due to different indicators that they apply. In other words, good governance has been applied only partially and sporadically. Therefore, it is urgent to study the implementation of good governance in a number of Indonesian zakat institutions. This research focuses on analyzing factors contributing to good governance in several Indonesian zakat institutions. These factors can be used as a reference in designing standards of good governance in Indonesian zakat institutions with the aim of improving their performance.

Research on zakat has been conducted by various Muslim scholars. Norazlina and Abdul Rahim set forth their findings in an article titled—The Framework Efficiency of Zakat Institutions in Malaysia: An Application of Data Envelopment Analysis. The result shows that zakat institutions in Malaysia on average have an 80.6 percent efficiency. In addition, by using the Spearmen and Person Correlation Models, it is determined that in several countries, a high Muslim population correlates positively with zakat collection and turn out. Another study conducted by Emily (2016) is titled—Corporate Governance in Islamic Financial Institutions. The study shows that corporate governance has become a major issue because general failure in business institutions is mostly caused by their failure to implement good corporate governance. Enforcement of good governance principles in an integrated manner is essential to business institutions because it allows them to compete globally, to meet the demands of investors and policymakers, and to serve customers better. Furthermore, specifically for Islamic financial institutions, corporate governance is important to help them compete with conventional financial institutions.

Chapra and Ahmed (2002) have conducted a survey related to corporate governance in various Islamic institutions at three levels; namely, regulator, Islamic bank and depositors. In their view, the growth and development of Islamic banking require good governance to reach large markets in financial sectors and to promote moral integrity in managing and using funds. Corporate governance is implemented through specific mechanisms and instruments that promote effective and accountable managerial performance to maximize benefits for shareholders and customers. In this context, all functions will be able to run well including internal surveillance, risk management, transparency, accountability, fairness, Sharia compliance, external audit, regulation and supervision enforcement. Existing research on good governance focuses more on Islamic financial institutions more than non-financial institutions like zakat institutions. Different from other research, this article analyzes the implementation of good governance in zakat institutions with a different approach; namely, Confirmatory Factor Analysis (CFA). This approach is used to identify factors contributing to good governance in a number of Indonesian zakat institutions. This research aims to enrich perspectives on good corporate governance in zakat institutions on a theoretical level. It also aims to serve as a teaching resource reference for universities, especially on the subject of zakat, as well as a reference for policymakers in developing regulations on good governance for zakat institutions.

2. Methods

This research involves the collection of qualitative data and quantitative statistical analysis of data [8]. Statistical analysis applies the Second Order CFA model, which is a measurement model consisting of two levels. At the first level, CFA demonstrates connections between variables as indicators of related latent variables. At the second level, CFA demonstrates connections between latent variables at the first level as indicators of latent variables at the second level. CFA modeling in this research examines each indicator's contribution to the dimensions of good governance and measures the contribution of each dimension, namely, principles of transparency, accountability, responsibility, independence and fairness toward the realization of principle of Good Governance with the assistance of Partial Least Square (PLS), version 3.

This research uses a structured questionnaire where the respondent can choose among the answers provided. The questionnaire includes 27 indicators classified in accordance with the five principles of Good Governance; namely, (1) transparency (2) accountability (3) responsibility (4) independence and (5) fairness. These principles are taken from various sources and theories adapted from previous research. Respondents in this research are leaders and staff of zakat institutions. The sampling uses a purposive sampling method; namely, non-probabilistic sampling based on certain criteria or considerations (Masri Mansoer, 2009). Out of 10 existing zakat institutions, only 4 were willing to share their data and information. These were BAZIS Jakarta Capital Region, BAZNAS Municipality of Bogor, BAZNAS District of Karawang and BAMUIS BNI.

3. Results and Discussion

The questionnaire was distributed to all staff of the zakat institutions, from the directorates to the lower-level staff in all four zakat institutions who agreed to participate. A total of 55 questionnaires were distributed and 42 were answered. Out of the 42 questionnaires answered, 2 were not suitable for data processing and analysis. In total, 40 questionnaires went to data processing and analysis. In a period of three weeks, questionnaires were distributed, and replies were received. The 40 questionnaires which went into data processing consisted of replies from four zakat institutions. BAZIS DKI returned 20 questionnaires or (50%). BAZNAS Municipality of Bogor returned nine questionnaires or (22.5%). BAZNAS District of Karawang returned six questionnaires or (15%). BAMUIS BNI returned five questionnaires or (12.5%). These institutions were selected in accordance with particular criteria. All are legally recognized, have been operating for more than five years, and were willing to participate as respondents in the research.

Results of estimation parameter and path diagram

Below is a path diagram of CFA in two levels along with parameter of result estimation that describes connections between indicators and the dimensions of transparency, accountability, responsibility, independence and fairness. It also describes the connection of the five dimensions with the implementation of good governance. An indicator is said to be valid at first-order CFA and second-order CFA if its loading score exceeds 0.5. If the loading score is less than 0.5, this means that the indicator will be erased as it cannot be loaded to the construct representing it (Willy Abdillah dan Jogiyanto, 2015).

4. Conclusion

Good governance is a crucial issue in the context of strengthening the performance of zakat institutions. CFA was conducted to evaluate each indicator's contribution to the five principles of Good Governance in Zakat Institutions; namely, transparency, accountability, responsibility, independence and fairness. With the assistance of PLS version 3, it has been shown that the principle of transparency contributes 60.4 percent; the principle of accountability 4.82 percent; the principle of responsibility 6.41 percent; and the principle of independence 53.3 percent. It has been demonstrated that the four factors are able to measure/evaluate GCG in zakat institutions and to evaluate the lowest and highest contribution from each indicator.

First, the highest contribution in transparency is i4x1 (Availability of information on amount of fund collected) that contributes as much as 0.848 and the lowest contribution is i7x1 (Availability of financial report (collection, distribution, utilization)) that contributes 0.778. Second, the highest principle in accountability is i5x2 (Able to be responsible for every authority given to every division) that contributes 0.800 and the lowest contribution is i2x2 (Availability of Supervisory Board specifically assigned to ensure that the zakat institutions comply fully with Sharia law and other regulations) that contributes 0.640. Third, the highest contribution in responsibility is i1x3 (Availability of data and information on compliance with law and regulation (minimum violation of service code of ethics)) that contributes 0.811 and the lowest contribution is i2x3 (Implementation of regular internal and external audit (financial, managerial and Sharia)) that contributes 0.790. Fourth, the highest contribution in independence is i3x4 (Objective decision-making and free from pressure or intimidation from any party) that contributes 0.744 and the lowest contribution is i1x4 (Professional management of zakat institutions) that contributes 0.704. Therefore, it can be concluded that good governance in zakat institutions has been well implemented in some aspects, but has not yet been implemented comprehensively. This research is significant in that it contributes guidelines on zakat management, it provides teaching materials for higher education, and it provides a reference for formulating policies and regulations related to the standardization of good governance in zakat institutions.

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Authors: Euis Amalia,  Ahmad Rodoni, and  Hani Tahliani from UIN Syarif Hidayatullah Jakarta, Indonesia. Editor: Ustaz Sofyan Kaoy Umar, e-mail: ustazsofyan@gmail.com. The research paper was partly displayed, for the need for full display must directly see the original source:

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