Validity of zakat ratios as Islamic performance indicators in Islamic banking: a congeneric model and confirmatory factor analysis
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 consider...
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| Format: | Article |
| Language: | English English English |
| Published: |
Emerald Publishing Limited
2021
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/91375/7/91375_Validity%20of%20zakat%20ratios%20as%20Islamic%20performance%20indicators%20in%20Islamic%20banking_Scopus.pdf http://irep.iium.edu.my/91375/8/91375_Validity%20of%20zakat%20ratios%20as%20Islamic%20performance%20indicators.pdf http://irep.iium.edu.my/91375/19/91375_Validity%20of%20zakat%20ratios%20as%20Islamic%20performance%20indicators%20in%20Islamic%20banking.pdf http://irep.iium.edu.my/91375/ https://www.emerald.com/insight/content/doi/10.1108/IJIF-08-2018-0088/full/html https://doi.org/10.1108/IJIF-08-2018-0088 |
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| Summary: | 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 theAMOS 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. Keywords: Confirmatory factor analysis, Islamic banks, Islamic performance measurement, Single-factor congeneric model, Zakat ratios |
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