Halal Certification for Financial Products: A Transaction Cost Perspective

Tinbergen Institute Discussion Paper No. 2011-171/3

20 Pages Posted: 29 Nov 2011

See all articles by Raphie Hayat

Raphie Hayat

Utrecht University

Frank A. G. den Butter

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Udo Kock

International Monetary Fund (IMF)

Date Written: November 29, 2011

Abstract

Halal certification of financials product may reduce transaction costs for its buyers when it provides a trusted standard for investors that seek to comply with Islamic law. However, we show that in practice it takes considerable amounts of time (20 days) and money (USD 122,000) to obtain a halal certification. Mainly, this is because the market is very concentrated and forms a closed circuit. About 20 Sharia scholars control more than half the market, of which the top 3 earn an estimated USD 4.5 mln in fees per year. Moreover this market seems plagued by a number of problems, most notably a strong incentive to be excessively lenient in certification, sub-standard governance practices, lack of consensus regarding certification standards and limited knowledge of finance. Therefore it is questionable whether the reduction in transaction costs through halal certification outweighs the costs of certification. Consolidation of the numerous ways halal certification can be obtained and moving halal certification more into the public goods sphere, where a neutral non-profit government induced party should assume the current role of the halal certifies, may enhance the reputation of certifies and reduce the transaction costs associated with halal certification.

Keywords: Islamic finance, quality certification, certifier behaviour, transaction costs, information asymmetries, credence goods

JEL Classification: L14, L15, D23, D82

Suggested Citation

Hayat, Raphie and den Butter, Frank A.G. and Kock, Udo, Halal Certification for Financial Products: A Transaction Cost Perspective (November 29, 2011). Tinbergen Institute Discussion Paper No. 2011-171/3, Available at SSRN: https://ssrn.com/abstract=1966013 or http://dx.doi.org/10.2139/ssrn.1966013

Raphie Hayat (Contact Author)

Utrecht University ( email )

Kriekenpitplein 21-22
Utrecht, 3584 EC
Netherlands

Frank A.G. Den Butter

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Udo Kock

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6299 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
175
Abstract Views
961
rank
207,910
PlumX Metrics