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Paying zakat is an obligation of the rich Muslims to give a specific amount of their wealth (with certain conditions and requirements) to beneficiaries called al-mustahiqqin with the main objective of the achievement of socioeconomic justice. 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 in Malaysia. Thus, it is of prime importance that these institutions are being managed efficiently. The purpose of this paper is to analyse the efficiency of zakat institutions in Malaysia. This study uses the Malmquist Productivity Index to estimate productivity and efficiency of zakat institutions in Malaysia and the Tobit model to determine the factors affecting efficiency of zakat institutions in Malaysia. The data consists of a panel of fourteen zakat institutions in Malaysia during the period of 2003 to 2007. Our results suggest that Total Factor Productivity (TFP) of zakat institutions in Malaysia increased at an average rate of 2.4 per cent during the study period and is mainly attributed to technical progress rather than efficiency components. The empirical findings based on the Tobit regression suggest that zakat payment system, computerised zakat system, board size, audit committee and decentralisation significantly affect the efficiency of zakat institutions in Malaysia.
Keywords: Efficiency, Data Envelopment Analysis (DEA), Zakat, Zakat Institutions, Malaysia.