Bridging Institutional Gaps in Zakat Distribution for Financial Resilience: Addressing Rising Indebtedness in Islamic Financial Institutions

Indebtedness has become a growing socio-economic concern in Malaysia, exposing limitations in conventional income-based approaches to identifying financially vulnerable individuals. Within Islamic social finance, this raises an important question regarding how zakat for asnaf gharimin (genuine debtors) can respond to increasingly complex and situational forms of financial distress. This study examines how gharimin eligibility and zakat allocation are conceptualised and facilitated through institutional collaboration between zakat institutions and Islamic Financial Institutions (IFIs) in Malaysia. Using a grounded theory approach, qualitative data were collected through in-depth interviews with zakat officers, academicians, IFI practitioners, and debt agency representatives, complemented by document analysis. The findings reveal three interrelated dynamics: situational asnaf, whereby temporary financial shocks create context-dependent eligibility; institutional and governance mechanisms, where Shariah principles interact with contextual judgement in determining eligibility; and conflict-of-interest concerns within IFIs, requiring a balance between ethical governance and institutional financial roles. Integrating these findings, the study develops a Strategic Solutions Framework for Gharimin, offering a substantive theory that shifts zakat allocation from a fragmented, poverty-centred approach towards an adaptive and institutionally coordinated model. Its originality lies in integrating situational asnaf classification, Shariah-governed needs-based prioritisation, and data-driven institutional coordination within a zakat-specific framework. Theoretically, the study extends the conceptualisation of gharimin beyond static poverty classifications, while practically, it provides guidance for zakat institutions and IFIs to improve the identification, prioritisation, and support of financially distressed individuals through more responsive and ethically governed allocation mechanisms.