Zakah (Islamic Tax) and Banks’ Performance: Mediating Effect of Third-Party Funds

Abstract

Studies on the allocation of Zakah (Islamic tax) in banking are important components in improving the performance of banks. Financial performance represents the financial condition of a company in a certain period that comprises fundraising and distribution. This research aimed to examine the effect of Zakah allocation on financial performance, with third-party funds as a mediating variable in Indonesian Islamic banking. This new variable has never been analyzed by previous studies. By applying the purposive sampling method, almost all of the general Islamic banks were selected as the samples in the period from 2013 to 2016. The data were obtained from the annual financial statements of those banks and analyzed with the help of partial least squares software. The results demonstrate that the allocation of Zakah and third-party funds positively influence financial performance. More important, third-party funds mediated this relationship. The results have several implications for policy making to improve performance in Islamic banking industries.