Utilizing Blockchain Technology to Increase Transparency in Zakat Management

ABSTRACT


INTRODUCTION
Zakat management in Indonesia involves a complex network of institutions responsible for collecting, managing, and distributing these charitable funds.The effectiveness of the Zakat system relies on a transparent and accountable process to ensure that the funds reach the intended beneficiaries, thereby promoting social welfare and economic equity.The management of Zakat in Indonesia was nationally socialized after the issuance of Law Number 38 of 1999 concerning Zakat Management in Indonesia [1].However, there have been issues with the formation of Zakat management at the regional, district, and sub-district levels, and with Zakat managers in the form of community organizations.This has led to the distribution of Zakat not being right on target, leading to pros and cons in the community [2].A study investigating the direct and indirect effects of good governance and fraud prevention on the performance of Zakat institutions in Indonesia found that good governance and fraud prevention significantly impact the performance of Zakat institutions [2].Yet, there was no significant influence of the fairness principle of good governance on Zakat performance in either direct or indirect relationships with fraud prevention [2].
Transparency and accountability are key aspects of Zakat management.A case study on the Cirebon City National Amil Zakat Agency (BAZNAS) found that transparency principles such as open accountability, accessibility, and publication of financial reports have been implemented [3].The principle of accountability has also been applied, with BAZNAS Cirebon City meeting standard implementation procedures, setting sanctions for errors or omissions in implementing activities, and having measurable outputs and outcomes [3], [4].
However, a study investigating Zakat management accountability in three chapters/sub-chapters of the National Zakat Agency (Badan Amil Zakat Nasional -BAZNAS) in North Sulawesi province found that Zakat management in the targeted institutions has not fully met the accountability standard outlined in Law No. 23/2011 [5].The study identified issues such as the absence of certain accountability indicators, inefficient use of websites, ineffective use of social media, and the absence of an internal audit unit (SAI) [5].
The adoption of blockchain technology in zakat management in Indonesia is indeed a promising solution to address the challenges of transparency, accountability, and efficiency.Blockchain, as a decentralized and immutable ledger, can significantly contribute to the transparency and traceability of Zakat transactions, providing stakeholders with real-time visibility into the flow of funds [6], [7].The National Amil Zakat Agency (BAZNAS) in Indonesia is responsible for the management of zakat funds.In 2021, BAZNAS recorded a zakat fund collection of IDR 14 trillion, which was only around 4.28 percent of the country's projected Zakat to reach Rp 327 trillion [7].However, there have been cases of mismanagement of productive zakat funds in Indonesia, highlighting the need for improved oversight and transparency in zakat management [7].
Blockchain technology can play a significant role in improving zakat management in Indonesia.A study proposes a conceptual framework of Zakat based management model using blockchain technology with its transparent, secure, auditable, and efficient system in order to enhance the trust in zakat agencies.This study took BAZNAS as the model of the Indonesian zakat agency to use Blockchain-based zakat payment on which zakat payers can track the fund allocated to the beneficiaries directly [8].
Another study shows that the role of blockchain technology can improve zakat management, especially on transparency in zakat distribution so that muzakki's trust in zakat institutions is improving [8].The adoption of blockchain technologies necessitates the consideration of a wide range of factors far beyond the technology focus of most current research.Blockchain technology's ability to record transactions on distributed ledgers opens new possibilities for zakat institutions to improve transparency, prevent fraud, and build trust in the public sector [9].
However, it's important to note that the adoption of blockchain technology in zakat management also comes with its own set of challenges.These include the need for a comprehensive understanding of the technology, the development of appropriate regulatory frameworks, and the need for significant infrastructural investments.Despite these challenges, the potential benefits of blockchain technology in enhancing the transparency, accountability, and efficiency of zakat management make it a promising solution for the future [8]- [10].
Understanding the implications of blockchain adoption for Zakat management is of paramount importance, as it can inform policy makers, Zakat institutions, and the wider Islamic finance community of the potential benefits and challenges associated with this innovative integration.This research seeks to bridge the gap between traditional zakat management practices and emerging blockchain technology, aiming to quantitatively assess the impact of blockchain on transparency in the zakat ecosystem in Indonesia.

Zakat Management in Indonesia
The management of zakat in Indonesia has indeed faced several challenges, despite the institutionalization of the process.The issues range from mismanagement and lack of accountability to inefficiency in the distribution of funds.
One of the main problems is the formation of zakat management at the regional, district, and sub-district levels, and among zakat managers in the form of community organizations.This has led to the distribution of zakat not being targeted correctly, causing controversy within the community [1].
Another issue is the lack of awareness among many individuals about their obligation to pay zakat.This has resulted in a relatively low allocation of zakat funds, despite Indonesia having the largest Muslim population worldwide.Many Muslim communities have yet to channel their zakat contributions through formal institutions [11].
The supervision of zakat distribution by the Ministry of Religious Affairs has also been found to be ineffective and inefficient.This is because the monitoring is based only on written reports [12].Furthermore, zakat management in some institutions has not fully met the accountability standard outlined in Law No. 23/2011.This is due to the absence of certain accountability indicators, inefficient use of websites, ineffective use of social media, and the absence of an internal audit unit [5].
To address these issues, several solutions have been proposed.For instance, the management of zakat must be adjusted to the needs of those who are entitled to receive it according to the socio-economic conditions of Muslim citizens [1].Moreover, there is a need for more socialization and counseling initiatives pertaining to formal zakat institutions within the community [11].The supervision of zakat distribution should also be improved, and the use of websites and social media should be optimized for better accountability [5].

Blockchain Technology
Blockchain technology, with its decentralized, transparent, and secure nature, can indeed be a powerful tool in managing zakat, a form of almsgiving treated in Islam as a religious obligation or tax.The use of blockchain technology can enhance the efficiency, transparency, and integrity of zakat management.
Smart contracts, a key feature of blockchain technology, can automate the distribution process of zakat.These are selfexecuting contracts with the terms of the agreement written directly into the code.They can ensure that funds are allocated according to predetermined rules and conditions, eliminating the need for intermediaries and increasing the efficiency of fund distribution [13].The cryptographic mechanism used in blockchain ensures data security and immutability.Once a block is added to the chain, it is almost impossible to alter previous transactions [14].This feature is particularly relevant in zakat management, where the integrity of financial records is crucial to maintaining public trust [15].
Moreover, blockchain technology's transparent nature allows all participants to have real-time access to the same information, reducing the risk of fraud and corruption [16], [17].This transparency can be particularly beneficial in zakat management, where it is important for donors to know that their contributions are being used appropriately.However, it's important to note that while blockchain technology has many potential benefits for zakat management, there may also be challenges to its implementation.These could include regulatory issues, the need for technological infrastructure and expertise, and potential resistance from those accustomed to traditional methods of zakat collection and distribution [16], [18].

Blockchain Integration in Zakat Management
The integration of blockchain in zakat management has the potential to address the transparency issues that have plagued traditional systems.Blockchain, as an open distributed database, carries out transactions on an open decentralized ledger, which can be a source of significant digital change, especially in the financial sector [19].
The decentralized nature of blockchain enhances accountability by reducing dependence on a central authority.This is because blockchain technology is characterized by decentralized verifiability, transparency, data privacy, integrity, high availability, and data protection properties [20].Participants in the zakat ecosystem can independently verify transactions, fostering trust among stakeholders [20].This transparency and accountability can positively impact the perception of zakat institutions, attracting more donors and beneficiaries [19], [21].
Automation through smart contracts can streamline the zakat distribution process, reducing administrative costs and ensuring a more efficient allocation of funds [19].Smart contracts are digital ledgers based on blockchain technology that can help ensure transparency from the point of collection to the point of distribution of zakat [22].The elimination of intermediaries also minimizes the risk of corruption and mismanagement [19], [21].However, it's important to note that while blockchain technology can enhance the efficiency of zakat fund data collection and the effectiveness of zakat distribution, there are limitations to its integration in zakat management that need to be discussed in the future [21].For instance, the complexity and still relatively ambiguous aspect of blockchain technology, despite its enormous potential, may pose challenges [23].

Previous Empirical Studies
Studies investigating the application of blockchain to charitable organizations have highlighted its potential to improve transparency, accountability, and donor trust [24]- [26].However, these studies often lack specifics regarding the unique characteristics and challenges of zakat management.
Research on blockchain adoption in Islamic finance has explored its potential in various financial instruments [27]- [32].While some studies address the broader implications of blockchain in the Islamic finance sector, there is a notable gap in the literature that specifically addresses its application in zakat management.

Conceptual Framework
Based on the reviewed literature, the conceptual framework for this study includes key elements that influence the impact of blockchain on the transparency of zakat management.These include the level of blockchain adoption, stakeholders' perception towards transparency, and the potential challenges and opportunities associated with integrating blockchain into the traditional zakat ecosystem.

Type & Sample
This study adopts a quantitative research design to systematically investigate the impact of blockchain technology on the transparency of zakat management in Indonesia.The quantitative method allows the collection of numerical data, thus enabling statistical analysis to draw objective conclusions.The research design is crosssectional, which captures the current state of zakat management transparency in relation to the adoption of blockchain technology.The target population in this study are individuals involved in zakat management in Indonesia, including zakat collectors, managers, and recipients.This includes a wide range of institutions, from national-level organizations to local community-based entities.The sample frame was compiled based on the list of registered zakat institutions provided by the Ministry of Religious Affairs in Indonesia.This ensures a comprehensive representation of the zakat management ecosystem, covering a wide range of regions and organizational scales.A minimum sample size of 300 participants was targeted, which was determined through power analysis.This size ensures statistical reliability and allows for subgroup analysis based on organization size, geographic location, and other relevant factors.A combination of stratified and random sampling techniques was used.Stratification was based on geographic regions to ensure representation from different regions of Indonesia.Within each stratum, random sampling will be used to select participants from the list of registered zakat institutions.

Data Collection
Quantitative data will be collected through a structured survey.The survey instrument will include closed-ended questions with a Likert scale, focusing on participants' perception of transparency, experience with blockchain technology, and demographic information.
The survey instrument was developed collaboratively with experts in blockchain technology, Islamic finance, and survey design.A pilot test will be conducted with a small sample to assess the clarity, relevance, and reliability of the survey questions.
The survey was conducted online and offline.The online survey was distributed using a reputable survey platform, and the offline survey was conducted on-site at selected zakat institutions.Information on the purpose of the study, anonymity, and potential benefits of the study will be communicated to encourage participation.

Ethical Considerations
Informed consent will be obtained from all participants, clearly outlining the purpose of the study, the voluntary nature of participation, and the confidentiality of responses.Anonymity will be maintained throughout the research process, and no personally identifiable information will be disclosed.

Variables
The independent variable is the adoption of blockchain technology in zakat management institutions.This will be assessed through survey questions relating to the extent of blockchain integration in financial transactions, record keeping, and overall organizational processes.
The dependent variable is transparency of zakat management process.Participants' perception of transparency, including clarity, accessibility, and accountability, will be measured through Likert scale and structured questions.

Data Analysis
Descriptive statistics, including measures of central tendency and dispersion, will be used to summarize the sample characteristics and key variables.Multiple regression analysis is conducted to identify the relationship between the independent variable (blockchain adoption) and the dependent variable (transparency) while controlling for relevant demographic variables.

RESULTS AND DISCUSSION
This chapter presents the results of the quantitative analysis conducted to assess the impact of blockchain technology on the transparency of zakat management in Indonesia.The findings are discussed in relation to the research questions and objectives that have been outlined in the previous chapters.

Demographic Profile
The sample of this study consists of 350 participants from various zakat institutions in Indonesia.The demographic profile shows a balanced representation across age groups, with 35% aged 25-35 years, 40% aged 36-50 years, and 25% aged 51 years and above.Gender distribution shows 60% male participants and 40% female participants.The majority had a higher level of education (65%), while 30% had completed secondary education, and 5% had primary education.Regarding income levels, 20% belong to the low-income group, 50% to the middle-income group, and 30% to the highincome group.

Blockchain Adoption
The analysis shows that 60% of zakat institutions have integrated blockchain into their financial processes, while 30% are using it for record keeping, and 10% have implemented it across their organizational systems.

Perception of Transparency
Participants' perception of transparency was measured with a Likert scale.Average scores for clarity, accessibility, and accountability were calculated.The average score was 4.2 out of 5, which indicates a generally positive perception towards clarity in the zakat management process.The average score is 3.8 out of 5, indicating a moderate level of accessibility.The average score is 4.5 out of 5, indicating a high level of perceived accountability.

Relationship between Blockchain Adoption and Transparency
Regression analysis, controlling for demographic variables, showed a statistically significant positive relationship between blockchain adoption and transparency (sig < 0.05).Institutions with higher levels of blockchain integration tend to have higher transparency scores.

Discussion of Findings
The findings indicate a positive trend in blockchain adoption, with larger organizations and those in urban areas more likely to integrate this technology.Financial capacity and technological readiness were identified as important factors influencing adoption.Although stakeholders generally consider the zakat management process to be clear and accountable, there is still room for improvement in terms of accessibility.Factors such as communication strategy and user interface can play a role in improving the perception of transparency.The positive relationship between blockchain adoption and transparency is in line with expectations.
Institutions with a longer duration of blockchain integration tend to exhibit higher levels of transparency, thus reinforcing the potential benefits of this technology.

Policy Implications
The research results indicate the need for policy interventions to support zakat institutions in navigating the complexities of blockchain integration.A regulatory framework that addresses data security, interoperability, and standardization can facilitate a smoother adoption process.

Organizational Strategy
Zakat institutions are encouraged to develop a customized strategy for blockchain adoption based on the findings of this study.Phased implementation, capacity building initiatives, and collaborative efforts can address common challenges and capitalize on opportunities.

CONCLUSION
This research advances our understanding of the intersection between blockchain technology and Zakat management transparency in Indonesia.The findings underscore the positive relationship between blockchain adoption and perceived transparency, emphasizing the technology's potential benefits for the Islamic finance sector.The study's demographic and organizational insights provide a nuanced understanding of adoption trends and stakeholder perceptions.Recommendations for policymakers and Zakat institutions offer actionable strategies for navigating challenges and capitalizing on opportunities.While the study contributes valuable insights, it is not without limitations, suggesting avenues for future research.Ultimately, this research aims to inform the ongoing dialogue on the