Praise be to Allah.
The co-ops in which the members of a tribe or family come together is something that Islamically acceptable in principle, and it is hoped that there is much goodness in them so long as they are free of things that are forbidden in Islam.
Allaah has commanded us to co-operate in righteousness and piety, as He says (interpretation of the meaning):
“Help you one another in Al‑Birr and At‑Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression”
The Prophet (peace and blessings of Allaah be upon him) praised the Ash’aris – who were a tribe from Yemen – who, if their food was little, whether they were travelling or not, each one of them would bring what he had, then they would share it out amongst themselves.
It was narrated that Abu Moosa (may Allaah be pleased with him) said: The Prophet (peace and blessings of Allaah be upon him) said: “When the food of the Ash’aris ran short during military campaigns or if their food supplies ran low in Madeenah, they would gather what they had in a single cloth, then share it out equally amongst themselves by measuring it with a bowl; they are of me and I am of them.” Narrated by al-Bukhaari, 2384; Muslim, 2500.
This hadeeth points to the virtue of the Ash’aris and the virtue of selflessness and helping one another, and the virtue of combining provisions when travelling, and the virtue of collecting them in something when they are few when not travelling, then sharing them out. End quote.
Sharh Muslim, 16/62
The co-operative funds which are established by tribes and families, which are collected from their members, then spent on the needy according to the conditions that have been stipulated, are something that is prescribed in Islam and it is similar to what the Ash’aris did, but this is an arrangement made before calamity happens, so that they may co-operate to solve he problem and reduce the hardship of or the one who has been afflicted.
Those who participate in it should have the intention of co-operating, not of benefiting and making a profit. Shaykh Ibn ‘Uthaymeen was asked about one of these schemes and he replied:
I have studied the clauses of the scheme and I did not see anything to suggest that it should not be set up, if the intention of the participant is to co-operate and not to receive compensation or benefits from the funds, because it is based on co-operation which is a kind of ihsaan, whereas if it is based on receiving compensation and benefits it is a kind of gambling.
Majmoo’ Fataawa Ibn ‘Uthaymeen (18/183).
Among the haraam things which the members of these co-ops may fall into is the jaahili feelings of tribal attachment to their lineage or language, and there may be haraam things in their gatherings such as smoking or listening to music, for example, or they may help someone who is sinning in committing that sin, or they may support a wrongdoer merely because he is related to them. Similarly the money that is collected should not be invested in haraam projects or in banks. As for supporting one who has been wronged or one who is in need or who has been harmed as the result of an accident or sickness, or helping to pay diyah in the case of mistaken killing or manslaughter, or helping single people to get married and other such good deeds, this is something for which they deserve to be commended and applauded.
With regard to making food for funerals, what is prescribed is for the relatives and neighbours of the deceased person’s family to make food for the family of the deceased, because there has come to them something that will distract them from preparing food for themselves.
It was narrated that ‘Abd-Allaah ibn Ja’far (may Allaah be pleased with him) said: When news of the death of Ja’far came, the Prophet (peace and blessings of Allaah be upon him) said: “Make food for the family of Ja’far, for there has come to them that which is keeping them busy.” Narrated by Abu Dawood, 3132; al-Tirmidhi, 998; Ibn Maajah, 1610; classed as hasan by al-Albaani in Saheeh Abi Dawood.
What this means is there has come to them grief which will keep them from preparing food for themselves, because they are too distressed to think about food. Al-Teebi said: This indicates that it is mustahabb for relatives and neighbours to prepare food for the family of the deceased. End quote. Ibn al-‘Arabi said in al-‘Aaridah: this hadeeth sets out the guidelines with regard to co-oepration at times of need. End quote.
Tuhfat al-Ahwadhi, 4/67.
What is forbidden is for the family of the deceased to make food for those who come to offer condolences, because Jareer ibn ‘Abd-Allaah al-Bajali (may Allaah be pleased with him) said: “We used to regard gathering with the family of the deceased and making food after the burial as a kind of wailing for the dead.” Narrated by Ahmad, 6866; classed as saheeh by al-Albaani in Ahkaam al-Janaa’iz.
But if there is a need for that, such as if some people have come from far away to offer condolences, then there is nothing wrong with making food for them, so long as that is done only as much as is necessary, and there is no exaggeration or excess involved, and it is done only for the travellers, and not everyone who comes to the funeral is invited, as some people do.
Ibn Qudaamah said in al-Mughni (3/496):
With regard to the family of the deceased making food for the people, this is makrooh, because it is adding to their hardship, and it is akin to what the people of the Jaahiliyyah did.
But if there is a need for that, it is permissible. Some people may have come to attend the funeral from distant towns, and they stay with them, in which they have no choice but to show them hospitality.
Shaykh Ibn Baaz said:
The family of the deceased do not have to make food for people, but if they make food for themselves or for guests who are staying with them, there is nothing wrong with that. End quote.
Majmoo’ Fataawa Ibn Baaz, 13/392.
You said in your question that zakaah is paid on the money that has been collected to the needy family members. But no zakaah is due on this money. Shaykh Muhammad ibn ‘Uthaymeen was asked about a similar scheme and paying zakaah on its funds, and he replied:
No zakaah is due on these funds, because they are not owned by the participants, so there is no specific owner, and there is no zakaah on anything that does not have a specific owner. End quote.
Majmoo’ Fataawa Ibn ‘Uthaymeen, 18/184
The people of knowledge and righteousness have to take part in these co-ops so that they can advise people and warn them against falling into sin, and help them in righteousness and piety.
And Allaah knows best.