Halal Certification for Financial Products: A Transaction Cost Perspective
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
We argue that although halal certification could potentially reduce the high transaction costs related to buying Islamic financial products, in practice these costs are just replaced by transaction costs relating to the certification itself. It takes considerable time (2–3 months) and money (USD 122.000) to obtain a halal certification. Partially, this is because the market is highly concentrated and non-contestable. About 20 individual Sharia scholars control more than half the market, with the top 3 earning an estimated USD 4.5 million in fees per year. Moreover, this market seems plagued with problems, most notably a strong incentive for excessively lenient certification, lack of consensus on what is considered halal and sub-standard governance practices. We discuss solutions to these problems and conclude that a neutral non-profit government entity should assume the role of halal certifiers.
- Askari, H., Iqbal, Z., Krichene, N., & Mirakhor, A. (2012). Risk sharing in finance: The Islamic finance alternative. Singapore: Wiley.
- Baele, L., Farooq, M., & Ongena, S. (2012). Of religion and redemption: Evidence from default on Islamic loans. Center Discussion Paper Series No. 2012-014.
- Becker, B., & Milbourn, T. (2011). How did increased competition affect credit ratings? Journal of Financial Economics, 101(3), 493–514. CrossRef
- Beekun, R., & Badawi, J. (2005). Balancing ethical responsibility among multiple organization stakeholders: The Islamic perspective. Journal of Business Ethics, 60, 131–145. CrossRef
- Benaissa, N.-E., Jopart, X., & Tanrikulu, O. (2007). Rethinking regulation for Islamic banking. The McKinsey Quarterly (March 2007 Special Edition: Reappraising the Gulf States).
- Bolton, P., Freixas, X., & Shapiro, J. (2009). The credit ratings game. National Bureau of Economic Research (NBER) Working Paper No 14712.
- Cain, D. M., Loewenstein, G., & Moore, D. A. (2005). The dirt on coming clean: Perverse effects of disclosing conflicts of interest. Journal of Legal Studies, 34(1), 1–25. CrossRef
- Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405. CrossRef
- Coase, R. H. (2005). The institutional structure of production. In C. Ménard & M. M. Shirley (Eds.), Handbook of new institutional economics (Chap. 2, pp. 31–39). Berlin: Springer.
- Den Butter, F. A. G. (2012). Managing transaction costs in the era of globalization. Cheltenham: Edward Elgar. CrossRef
- Den Butter, F. A. G., & Mosch, R. H. J. (2003). Trade, trust and transaction costs. Tinbergen Institute Discussion Paper TI 2003-082/3.
- Derigs, U., & Marzban, S. (2008). Review and analysis of current Shariah-compliant equity screening practices. International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 285–303. CrossRef
- Devi, S. (2008). Scholars and harmony in short supply. Financial Times, 17 June.
- Dranove, D., & Jin, G. Z. (2010). Quality disclosure and certification: Theory and practice. Journal of Economic Literature, 48(4), 935–936. CrossRef
- Elfenbein, D. W., & McManus, B. (2010). A greater price for a greater good? Evidence that consumers pay more for charity-linked products. American Economic Journal: Economic Policy, 2(2), 28–60. CrossRef
- El Gamal, M. A. (2006). Islamic finance: Law, economics and practice. New York: Cambridge University Press. CrossRef
- El Gamal, M. A. (2008). Contemporary Islamic law and finance: The trade-off between brand name distinctiveness and convergence. Berkeley Journal of Middle Eastern and Islamic Law 1(1).
- Farhi, E., Lerner, J., & Tirole, J. (2008). Fear of rejection? Tiered certification and transparency. National Bureau of Economic Research (NBER) Working Paper No 14457.
- Faux, Z. (2011). S&P, Moody’s boosting rating fees faster than inflation. Bloomberg News, 15 November 2011, http://www.bloomberg.com/news/2011-11-15/credit-rating-fees-rise-faster-than-inflation-as-governments-fret-expenses.html.
- General Council for Islamic Banks and Financial Institutions (GCIBAFI). (2009). Islamic Finance in the world 2009. Report published by the Information and Financial Analysis Center of GCIBAFI. http://www.cibafi.org/Images/Attaches/2010102444426421.pdf.
- Grais, W., & Pellegrini, M. (2006). Corporate governance in institutions offering Islamic financial services. World Bank Policy Research Working Paper 4054.
- Grais, W., & Pellegrini, M. (2007). Corporate governance in institutions offering Islamic financial services: Issues and options. Journal of Islamic Economics, Banking and Finance, 3(1).
- Hayat, R., & Kraeussl, R. (2011). Risk and Return Characteristics of Islamic Equity Funds. Emerging Markets Review, 12(2), 189–203. CrossRef
- Hoepner, A. G. F., Rammal, H. G., & Rezec, M. (2011). Islamic Mutual Funds’ Financial Performance and International Investment Style: Evidence From 20 Countries. The European Journal of Finance. doi:10.1080/1351847X.2010.538521.
- Hong, H., & Kubik, J. D. (2003). Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts. Journal of Finance, 58(1), 313–351. CrossRef
- Jobst, A., Kunzel, P., Mills, P., & Sy, A. (2008). Islamic Bond Issuance: What Sovereign Debt Managers Need to Know. International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 330–344. CrossRef
- Khan, F. (2010). How Islamic is Islamic Banking? Journal of Economic Behavior & Organization, 76(3), 805–820. CrossRef
- Kuran, T. (2004). Islam & mammon: The economic predicaments of Islamism. Princeton: Princeton University Press.
- Mathis, J., McAndrews, J., & Rochet, J.-C. (2009). Rating the Raters: Are Reputation Concerns Powerful Enough to Discipline Rating Agencies? Journal of Monetary Economics, 56(5), 657–674. CrossRef
- Ménard, C., & Shirley, M. M. (2005). Handbook of new institutional economics. Berlin: Springer. CrossRef
- Mizuno, T., Toriyama, M., Terano, T., & Takayasu, M. (2008). Pareto Law of the Expenditure of a Person in Convenience Stores. Physica A, 387, 3931–3935. CrossRef
- Morais, R. C. (2007). Don’t call it interest, Forbes, 122–132.
- Nunn, N. (2007). Relationship-Specificity. Incomplete Contracts, and the Pattern of Trade, Quarterly Journal of Economics, 122(2), 569–600.
- Rehman, S. S., & Askari, H. (2010). How Islamic are Islamic countries? Global Economy Journal, 10(2).
- Schilling, M. A. (2002). Technology Success and Failure in Winner-Take-All Markets: The Impact of Learning Orientation. Timing and Network Externalities, Academy of Management Journal, 45(2), 387–398.
- Shanmugam, B., & Zahari, Z. R. (2009). A primer on Islamic finance, research foundation Charlottesville. Publications of CFA Institute.
- Skreta, V., & Veldkamp, L. (2009). Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation. Journal of Monetary Economics, 56(5), 678–695. CrossRef
- The Allen Consulting Group. (2004). Debt and equity raising transaction costs. Report to The Australian Competition and Consumer Commission. December, 2004.
- Ünal, M. (2011). The small world of Islamic finance—Shariah scholars and governance—a network analytic perspective. Report taken from Funds@Work website, www.funds-at-work.com/uploads/media/Sharia-Network_by_Funds_at_Work_AG.pdf.
- Van Waarden, F., & Van Dalen, R. (2011). Hallmarking halal. The market for halal certificates: Competitive private regulation. Jerusalem Papers in Regulation & Governance Working Paper no 33. Hebrew University, Jerusalem.
- Visser, H. (2009). Islamic finance. Northampton: Edward Elgar Publishing.
- Williams, G., & Zinkin, J. (2010). Islam and CSR: A study of the Compatibility Between the Tenets of Islam and the UN Global Compact. Journal of Business Ethics, 91(4), 519–533. CrossRef
- Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press.
- Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.
- Halal Certification for Financial Products: A Transaction Cost Perspective
Journal of Business Ethics
Volume 117, Issue 3 , pp 601-613
- Cover Date
- Print ISSN
- Online ISSN
- Springer Netherlands
- Additional Links
- Islamic finance
- Transaction costs
- Industry Sectors