Skip to main content

Halal Certification for Financial Products: A Transaction Cost Perspective


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.

This is a preview of subscription content, access via your institution.

Fig. 1


  1. For a more detailed introduction to Islamic finance we refer to e.g. Askari et al. (2012), Visser (2009) and Shanmugam and Zahari (2009). Furthermore, the Arabic terms we use in this article are based on classical Arabic, which is conventional in research on Islamic finance.

  2. Islam can (arguably) be divided in two main groups, Sunni and Shia. Here, we describe the law schools of Sunni Islam, to which the largest part (about 85 %) of Muslims belong to and which are most widely followed. Shia Muslims mainly follow the Jafari school of thought (Visser 2009).

  3. Hadith are categorized as strong or weak based on their authenticity, which is determined by their chain of narrators. The most authorative collection of hadith are those by the Islamic scholars Muhammad ibn Ismail al-Bukhari (816–870) and Abul Husain Muslim bin al-Hajjaj al-Nisaburi (824–883), commonly known as Bukhari and Muslim.

  4. This is a contract in which the buyer makes a down payment for an asset to be bought in the future for a pre specified price. However, the buyer has the right to cancel the contract, in which case the seller keeps the down payment. Otherwise, the buyer pays the remainder of the price for the asset and gains ownership.

  5. Data taken from:

  6. Taken from:

  7. Our search suggests that their number is limited though.

  8. Phenomena characterized by Pareto distributions are those in which approximately 80 % of the phenomenon is caused by 20 % of the cause. Mizuno et al. (2008) for example find that 80 % of revenues of a Japanese convenience store chain are attributable to only 20 % of its customers.

  9. Panel A is based on the top 20 scholars. Data is also available for the top 100 scholars but we omit it since it is very similar to the top 20.


  11. We sent the same email (available on request) to all the companies. In this email we described some very basic characteristics of the fund, namely that it has an approximate size of EUR 200 million, invests in listed equities, is targeted mostly for institutional investors and has a geographical focus. For confidentiality reasons, we do not report the company names.

  12. There is no consensus on what the threshold value for the screens should be. One of the screens is a liquidity ratio with current assets in the nominator and either total assets or market capitalization in the denominator. The eligibility threshold for this ratio ranges from 33 to 80 % (Derigs and Marzban 2008).

  13. El Gamal (2006) mentions another problem with Islamic mutual funds, namely that the Islamic jurists that declared mutual fund investing halal characterized ownership in the fund as being the same as ownership of the underlying stocks. This is usually not the case for these funds.

  14. The ranges are based on overall minima and maxima. They cannot be interpreted to say that the cheapest certification is USD 32.000 (6.000 + 25.000). The cheapest overall costs for certification we found were USD 85.000.

  15. Calculated as the product of the total costs per certification (USD 185.000) and the total number of board positions of the top three scholars (241), divided by the average size per board (3.3.) and the sample size (3). This should be seen as a gross income figure, i.e. without taking into account other (fixed) costs of the Sharia advisory firm. However, we assume these to be relatively small compared to the total costs.

  16. Some typical examples of credence goods are education and medical treatment.

  17. More specifically, Islamic financial products often make use of Special Purpose Vehicles (SPVs) as an intermediate trading party to make Islamic financial products halal. See El Gamal (2006) for some detailed examples.

  18. Sellers have an extra incentive to shop around for certification when the application process is not transparent because they do not fear that prior rejections of certification become widely known.


  • Askari, H., Iqbal, Z., Krichene, N., & Mirakhor, A. (2012). Risk sharing in finance: The Islamic finance alternative. Singapore: Wiley.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Beekun, R., & Badawi, J. (2005). Balancing ethical responsibility among multiple organization stakeholders: The Islamic perspective. Journal of Business Ethics, 60, 131–145.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.

    Article  Google Scholar 

  • 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.

    Book  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • El Gamal, M. A. (2006). Islamic finance: Law, economics and practice. New York: Cambridge University Press.

    Book  Google Scholar 

  • 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,

  • 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.

  • 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.

    Article  Google Scholar 

  • 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.

    Google Scholar 

  • Hong, H., & Kubik, J. D. (2003). Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts. Journal of Finance, 58(1), 313–351.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Khan, F. (2010). How Islamic is Islamic Banking? Journal of Economic Behavior & Organization, 76(3), 805–820.

    Article  Google Scholar 

  • Kuran, T. (2004). Islam & mammon: The economic predicaments of Islamism. Princeton: Princeton University Press.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Ménard, C., & Shirley, M. M. (2005). Handbook of new institutional economics. Berlin: Springer.

    Book  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Google Scholar 

  • 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.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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,

  • 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.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press.

    Google Scholar 

  • Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.

    Google Scholar 

Download references


We thank the Netherlands Organisation for Scientific Research (NWO) for funding and two anonymous reviewers for helpful comments and suggestions.

Author information

Authors and Affiliations


Corresponding author

Correspondence to Raphie Hayat.

Additional information


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.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Hayat, R., Den Butter, F. & Kock, U. Halal Certification for Financial Products: A Transaction Cost Perspective. J Bus Ethics 117, 601–613 (2013).

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


  • Islamic finance
  • Certification
  • Transaction costs

JEL Classification

  • L14
  • L15
  • D23
  • D82