Turalay Kenc

Professor, INCEIF University, Malaysia

The Verification Problem in Modern Halal Markets

In classical Islamic jurisprudence, the halal status of goods was, in principle, directly assessable: localised production, transparent supply chains, and communal knowledge allowed consumers to evaluate compliance through direct inspection and the counsel of trusted scholars. Contemporary market conditions have rendered this direct verification practically impossible. Industrial food processing, global multi-tier supply chains, synthetic financial instruments, and pervasive information asymmetries have dissolved the link between observable product characteristics and underlying conformity with Islamic law (U. Hayat and Malik 2014). Halal status is paradigmatically a credence attribute: a consumer cannot determine by inspection, taste, or post-consumption experience whether a product conforms to Islamic dietary or financial law. This creates a structural verification gap that third-party certification has emerged to fill (Tieman 2011).

Standards as Institutional Constructions

The emergence of certification institutions does not, however, translate Islamic law into operational rules in a transparent or neutral fashion. Certification necessarily involves constructed boundaries—interpretive choices regarding thresholds, categories, and procedures that are made by human institutions rather than derived unambiguously from sacred texts.

Consider the range of such choices in Islamic finance: the acceptable debt-to-equity ratio for Shariah-compliant equity screening, the revenue threshold for permissible activities, or the treatment of derivative instruments (Derigs and Marzban 2008). These parameters vary substantially across certification bodies and jurisdictions, reflecting genuine scholarly disagreement and institutional divergence rather than convergence on a single objective standard.

This interpretive plurality has been extensively documented in the literature. Derigs and Marzban (2008) demonstrate that Shariah-compliant equity screening practices differ markedly across institutions, with material consequences for portfolio composition and the investment universe.

U. Hayat and Malik (2014) show that screening criteria shape market equilibria in ways that are far from neutral, affecting financial characteristics including risk profiles, diversification, and performance. The implication is that halal status, as operationalised in contemporary certification systems, is institutionally produced rather than discovered: it reflects the accumulated interpretive choices of certification bodies, Shariah boards, and regulatory frameworks as much as the underlying principles of Islamic jurisprudence (Wilson and Liu 2010).

Certifiability Over Substance

A more fundamental concern arises from the incentive structure of certification itself. When certification bodies derive revenue from the entities whose products they certify, institutional incentives may favour market expansion over doctrinal rigour. The result is a dynamic in which product development follows a reverse-engineering logic: conventional financial structures are reconfigured to satisfy certification criteria on paper, rather than designed from first principles to embody the substantive objectives of Islamic law (El-Gamal 2006; Laldin and Furqani 2013). This dynamic—which the broader certification literature identifies as a structural consequence of certifier-pay arrangements (Coffee 2011)—directs innovation toward maximising Certifiability rather than Islamic economic substance. The formal analogue is precise: the system selects contracts that optimise for institutional approval rather than for genuine conformity with the intrinsically permissible set as defined by Islamic jurisprudence.

The Certification Gap

The divergence between ontological and institutionally certified halal can be expressed formally. Let  denote the set of goods and contracts that are intrinsically permissible under Islamic law—the ontological permissible set—and let  denote the set that receives institutional certification. In an ideal certification system, . In practice, informational frictions, institutional heterogeneity, and incentive misalignments generate a systematic wedge, representing formally compliant but substantively ambiguous outcomes.

This wedge is not merely a theoretical artefact. Hoepner, Rammal, and Rezec (2011) provide empirical evidence that Shariah-compliant portfolios differ systematically from conventional benchmarks in both composition and performance, confirming that certification actively shapes economic outcomes in ways that reflect institutional choices as much as the principles of Islamic jurisprudence.

From an institutional economics perspective, this reflects a transition from a rule-based system with low verification costs to a verification-intensive system with endogenous standards (North 1990; Pistor 2019). Pistor (2019) argues, in a broader context, that legal and institutional frameworks do not simply enforce pre-existing economic rules but actively encode and construct them—a thesis with direct application to halal certification, where the institutional infrastructure effectively defines the operational boundaries of the permissible domain.

Consequences for Cost, Legitimacy, and Convergence

The institutional production of halal status carries several important consequences for Islamic finance and consumer welfare.

Transaction costs and market access. Certification imposes fixed compliance costs that fall disproportionately on smaller enterprises (R. Hayat, den Butter, and Kock 2013). Fragmentation across jurisdictions compounds these costs: producers must obtain separate certifications from market-specific bodies to access different export destinations, incurring duplicative compliance expenditures and facing the risk that procedural differences result in rejection in some markets despite certification in others. This fragmentation constitutes a barrier to entry that is particularly burdensome for small and medium enterprises and contributes to the substantial halal food trade deficit recorded among OIC member states (Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) 2026).

Institutional legitimacy. Suchman (1995) identifies moral legitimacy—conformity with socially held norms—as a primary basis of institutional authority for organisations whose function is normative rather than merely commercial. For halal certification bodies, whose social authority derives from their perceived faithfulness to Islamic law, commercial conflicts of interest directly threaten moral legitimacy.

When certification is perceived as detached from substantive compliance, the credibility of the halal label erodes, undermining the institutional function that certification is designed to perform. This concern is compounded by the stakeholder obligations—obligations of trusteeship (amana) toward Muslim consumers—that Islamic ethics places on those who administer shared religious institutions (Beekun and Badawi 2005).

Convergence toward conventional structures. The form-over-substance dynamic documented by El-Gamal (2006) raises the possibility that Islamic finance may converge toward conventional financial arrangements in economic substance, retaining only the institutional apparatus of Shariah compliance. This would represent a failure not merely of efficiency but of the foundational objectives of Islamic law—the maqasid al-Shariah—which require that institutions preserve not only formal compliance but the substantive ethical character of Islamic economic life (Dusuki and Bouheraoua 2011; Laldin and Furqani 2013).

Governance Reform: Toward Independent, Substance-Oriented Certification

The foregoing analysis implies that reform of halal certification must address the structural conditions that generate incentive misalignment, rather than merely improving procedural compliance. Three governance principles follow from the analysis.

Institutional independence. Certification bodies must be structurally insulated from the commercial incentives of fee-paying clients. Non-profit organisational forms, governance boards dominated by independent scholars and consumer representatives, and mandatory disclosure of certification criteria and procedures are necessary conditions for reducing the wedge between certified and authentically permissible sets. The governance reforms implemented in auditing and credit rating following widely documented conflicts of interest provide a directly applicable institutional template (Coffee 2011).

Substance-oriented metrics. Certification criteria must be anchored in the foundational objectives of Islamic law—the maqasid al-Shariah—rather than in formal procedural compliance alone (Dusuki and Bouheraoua 2011). This requires criteria that assess the real economic substance of financial products: genuine risk-sharing, connection to productive economic activity, and alignment with the preservation of wealth, religion, and informed agency as foundational Islamic objectives.

Cross-jurisdictional harmonisation. Fragmentation across certification regimes sustains the systematic exclusion of intrinsically permissible goods from global trade, imposing welfare losses that scale with the global Muslim consumer base, which exceeded 2.1 billion in 2024 and is projected to approach 3 billion by 2060 (Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) 2026). Ongoing harmonisation efforts—exemplified by AAOIFI standard-setting processes—provide an institutional foundation, though their effectiveness depends on substantive adoption by national regulatory frameworks rather than merely formal endorsement.

Conclusion

Contemporary halal certification represents a fundamental institutional transformation: the shift from an ontological framework in which permissibility is assessed directly against Islamic law to an epistemic-institutional regime in which halal status is constituted through institutional verification. This transformation is a necessary response to the informational conditions of modern economies, but it introduces structural risks—certifier-pay conflicts, interpretive fragmentation, and form-over-substance compliance—that the current institutional framework inadequately addresses.

The central challenge for Islamic finance is therefore not simply to expand certification capacity but to re-anchor certification in its ontological foundations, ensuring that scalability does not come at the expense of substantive authenticity (El-Gamal 2006; Laldin and Furqani 2013). Under a well-governed certification regime, institutional verification becomes a disciplined approximation of ontological permissibility—a bridge between classical Islamic jurisprudence and the informational realities of contemporary global markets—rather than a substitute for it. These tensions highlight the need for independent, non-profit certification frameworks with strong governance to better align epistemic verification with the foundational logic of Islamic economics.

References

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