Fostering Sustainable Islamic Financial Development: Evidence from Zakat Funds in Selected Countries

Abstract

Purpose

This study aims to examine the influence of IQ and GI on IFD, utilizing zakat as the primary proxy. Specifically, it investigates the roles of these variables in strengthening the Islamic financial sector particularly its social dimension.

Design/Methodology/Approach

This research employs a quantitative approach using panel data analysis to test the hypothesis.

Findings

The empirical results demonstrate that IQ has a positive and significant impact on IFD, confirming that robust institutions are essential prerequisites for optimizing the management and distribution of zakat funds. Conversely, GI  was found to have an insignificant effect on IFD in the observed countries.

Research limitations/implications

The finding of GI's insignificance implies a theoretical and practical gap, suggesting that the integration of environmental sustainability aspects within the current Islamic finance ecosystem is not yet mature and requires further strengthening to become a driver of growth.

Practical implications

Regulators and policymakers are urged to prioritize institutional governance reforms to bolster public trust in zakat institutions, while simultaneously designing strategic incentives to effectively integrate environmental sustainability principles into disbursement mechanisms.

Social implications

Enhancing institutional quality and integrating environmental concerns into zakat management will foster public confidence among muzaki, ensuring that Islamic social funds serve not merely as short-term economic safety nets, but also contribute to ecosystem preservation for the sustainable well-being of future generations.

 Originality/value

This study is uniquely positioning zakat as a proxy for Islamic Financial Development, distinct from the banking-centric view. Additionally, it offers how Green Innovation interacts with the Islamic social finance sector.