, Volume 117, Issue 3, pp 601-613

Halal Certification for Financial Products: A Transaction Cost Perspective

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Abstract

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.

Disclaimer

The views expressed in this article are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.