A new study uses system dynamics to show how technology, regulation, R&D, and Islamic finance interact to shape halal value chain performance — and finds that improvement takes time, with technology leading the way
The Backbone of Indonesia’s Halal Economy
Indonesia is home to the world’s largest Muslim population. It is also home to millions of micro, small, and medium enterprises (MSMEs) that form the backbone of its economy. These enterprises contribute 61.9% to national GDP and employ 97% of the workforce. In the food and beverage sector alone, 1.69 million micro and small producers sustain millions of livelihoods.
Yet a paradox exists. Despite Law No. 33 of 2014 mandating halal certification for all products, only 10% of food and beverage MSMEs have complied. Limited technical knowledge and low awareness of halal standards hinder full participation in the halal economy.
A 2026 study by Budi Harsanto and colleagues from Universitas Padjadjaran examines this challenge. The research develops a dynamic model of the Halal Value Chain (HVC) using system dynamics. It simulates how technology adoption, regulation, research and development (R&D), and Islamic financing interact over 12 months.
The findings offer both caution and hope. Improvement does not happen overnight. But with sustained effort, significant gains are possible.
What Is a Halal Value Chain?
The study distinguishes between a halal supply chain and a halal value chain. A halal supply chain focuses on the physical flow of goods — from procurement to distribution — emphasizing traceability, regulatory compliance, and integrity at every stage.
A halal value chain encompasses broader strategic activities. It includes halal entrepreneurship, industry development, and export promotion. It is not merely an operational system but a framework for enhancing the competitiveness and value of halal industries.
The term halal means “permissible” in Arabic. Its opposite, haram, denotes what is forbidden. For Muslims, halal extends beyond dietary laws to all facets of life. It is a religious obligation rather than a discretionary practice.
In business, the halal value chain integrates Islamic ethics into every activity that adds value. From input sourcing to production, distribution, and final consumption, Islamic principles govern the entire system. Supplier integration, traceability, logistics, warehousing, risk management, and financing must all comply with Sharia law.
Direct Weights of Factors Affecting HVC Performance
| Factor | Path Coefficient | Normalized Weight |
|---|---|---|
| Use of Technology | 0.441 | 0.328 |
| Regulation | 0.296 | 0.240 |
| Islamic Financing | 0.190 | 0.141 |
| Halal Value Chain Performance | 0.526 | 0.391 |
| Research & Development | -0.109 | -0.081 |
12-Month Simulation Results
| Time (Month) | HVC Performance | Use of Technology | Regulation | Islamic Financing | R&D |
|---|---|---|---|---|---|
| 0 | 0.1 | 0.3 | 0.2 | 0.1 | -0.081 |
| 4 | 3.0 | 2.4 | 2.5 | 3.0 | 2.3 |
| 8 | 9.0 | 9.0 | 7.8 | 9.0 | 7.7 |
| 12 | 43.3 | 48.7 | 41.4 | 43.3 | 39.4 |
The Method: System Dynamics
The study uses system dynamics, a computer-based mathematical modeling approach for understanding complex systems. This methodology helps researchers structure, comprehend, and deliberate complex matters and challenges.
Data was collected through questionnaires distributed to 277 food and beverage MSMEs in five major Indonesian cities: Bandung, Jakarta, Yogyakarta, Surabaya, and Medan. The questionnaire used a five-point Likert scale with 26 indicators affecting halal value chain performance.
The model development followed seven stages. First, researchers identified key variables. Second, they analysed relationships between variables using Structural Equation Modeling. Third, they created a causal loop diagram to illustrate reciprocal relationships. Fourth, they developed a stock and flow diagram using Vensim software. Fifth, they conducted validity tests. Sixth, they ran simulations. Finally, they drew conclusions.
The causal loop diagram reveals two interrelated sub-systems. The first highlights dynamics between HVC performance, R&D, and technology adoption. The second examines interplay among HVC performance, regulatory enforcement, technology use, and Islamic financing.
Technology: The Strongest Driver
The simulation shows that technology adoption contributes most to HVC performance. At month 12, its contribution value reached 48.7 — the highest among all factors.
This finding aligns with existing research. Blockchain-based halal traceability systems enhance transparency by recording transactions in tamper-proof ledgers. IoT-based systems improve operational efficiency and reduce contamination risks. Digital platforms strengthen branding, logistics, and slaughtering processes.
Concrete applications illustrate these benefits. One Indonesian farm innovation integrates QR barcode scans and EPICS codes, allowing consumers to verify halal product authenticity directly. Such systems reduce contamination risks and enhance certification credibility.
However, adoption remains uneven. Smaller enterprises often lack the resources or technical capacity to implement advanced solutions. Addressing these barriers requires coordinated government and industry support, including financial incentives, training, and standardized practices.
The simulation suggests that technology is a leverage point for MSMEs. But it also warns that integration requires careful strategic implementation tailored to each business context.
Regulation: Compliance as a Driver
Regulation has the second-highest contribution to HVC performance. At month 12, its value reached 41.4.
This finding positions regulation not only as a tool for compliance but also as a driver of innovation, tracking, and market access. Clear regulatory frameworks in halal supply chain management effectively maintain product integrity from production to consumption.
Malaysia offers a model. The country has enacted laws regulating raw material sourcing, production processes, and certification procedures. This has fostered consumer confidence and positioned Malaysia as a global halal hub.
Indonesia has introduced reforms. The self-declaration mechanism under PP 39/2021 allows MSMEs to register with the Halal Product Guarantee Agency (BPJPH) through a simplified process. This accelerates certification for smaller firms while larger companies face more complex requirements.
The simulation suggests that appropriate regulations explain how MSME actors should act at each value chain stage. Including regulations for suppliers, producers, wholesalers, retailers, and end-users — covering logistics, purchasing, and management information — may improve performance.
R&D: A Delayed Positive Effect
Research and development shows a more complex pattern. At the beginning of the simulation (month 0), R&D had a negative impact on HVC performance (-0.081).
This finding appears to contradict the assumption that R&D always improves performance. But the literature shows the impact is contextual.
Unlike large firms with robust innovation ecosystems, MSMEs often operate under severe resource constraints. R&D investments can be financially burdensome and operationally disruptive. The relationship between R&D intensity and firm performance is not linear. Excessive R&D expenditure can erode profits due to rising costs and delayed returns.
In Indonesia’s halal sector, where access to affordable capital remains limited, such dynamics are especially salient. The absence of complementary capabilities — technical expertise, digital infrastructure, regulatory support — further constrains R&D effectiveness.
However, the simulation shows R&D turns positive after the initial period. By month 4, its value reaches 2.3. By month 8, it reaches 7.7. By month 12, it reaches 39.4.
This pattern underscores the need for policy interventions. Targeted subsidies, collaborative research programs, and Sharia-compliant financing schemes could create an environment where R&D delivers tangible value for MSMEs.
Islamic Finance: Capital with Compliance
Islamic financing contributes moderately to HVC performance. At month 12, its value reached 43.3.
The findings support the argument that integrating Sharia finance with the halal ecosystem is a prerequisite for sustainability. Companies can consider the Islamic capital market. Sharia insurance (takaful) can provide risk management solutions that protect businesses while ensuring compliance.
Recent case studies reinforce these insights. Cash Waqf Linked Sukuk (CWLS) financing for halal food court development ensures compliance with halal standards throughout the value chain. Professionally managed waqf funds can serve as a stable and inclusive financing source for halal agriculture, food processing, and logistics.
These cases demonstrate that Islamic financial instruments — from sukuk to waqf — are not merely financial tools. They are strategic enablers that enhance efficiency, innovation, and standardisation in the halal industry.
Policymakers should prioritize integrating Islamic finance with halal value chain strategies. This includes expanding access to Islamic capital markets, promoting takaful for risk management, and leveraging innovative instruments like CWLS.
The 8-Month Turning Point
The simulation reveals a critical finding: improvement is not instantaneous.
Initial obstacles arise from the direct burden of R&D. Gradual increases occur in months 4 to 6. Significant changes emerge in month 8.
By month 8, HVC performance reaches 9.0 — exceeding the theoretical maximum value of 5.095 by over 100%. By month 12, it reaches 43.3.
This pattern aligns with the delay in adaptation by MSMEs. Learning processes, process adjustments, and financing cycles all take time. The findings confirm that the integration of technology, regulation, R&D, and Islamic financing is a leverage point to improve competitiveness.
The simulation identifies temporal pathways — including initially negative but later positive effects of R&D — that previous studies have not identified. This systemic approach allows for more realistic and applicable solutions.
What This Means for MSMEs
The study offers practical implications for halal industry players.
MSMEs must have higher involvement in the halal value chain. They should adopt digital technology, invest in R&D, comply with regulations, and access Sharia financing.
Technology such as blockchain and traceability solutions can make halal certification more transparent and trusted. They can promote efficiency and product validity.
Regular investment in R&D is needed for process and product innovation. This improves market competitiveness for halal-certified products.
Existing regulations should be met. But pushing for easier halal certification is also required to help overcome issues MSMEs experience when entering the market.
Sharia financing enables MSMEs to do business and acquire capital without affecting the halal nature of their products.
What This Means for Policymakers
The study offers specific, actionable recommendations.
First, the government through the Ministry of Communication and Information Technology, in collaboration with BPJPH, should initiate targeted digital literacy programs for MSMEs. These should focus on blockchain-based traceability and halal compliance technologies. They can be piloted in major urban centres such as Jakarta and Bandung.
Second, the Ministry of Research and Technology should offer competitive research grants specifically aimed at halal product innovation. These should be developed in partnership with universities and research institutions, with clear evaluation metrics and commercialization pathways.
Third, BPJPH, supported by the Ministry of Religious Affairs, should streamline the halal certification process. This includes simplifying administrative steps, offering digital self-assessment tools, and deploying mobile certification services for MSMEs in remote areas.
Fourth, the Financial Services Authority (OJK) and Islamic financial institutions must design inclusive financial products. These could include qardhul hasan or mudharabah tailored for MSMEs, potentially linked to government guarantee schemes to reduce financial risk.
Fifth, a national halal value chain task force should be established under the Coordinating Ministry for Economic Affairs. This interagency body would coordinate stakeholders, monitor progress, and evaluate policy effectiveness.
By implementing these recommendations, Indonesia can strengthen its halal value chain ecosystem and move closer to its goal of becoming a global halal hub.
Why This Matters for Ordinary People
Why should this study matter beyond academic circles?
Because it speaks to how economies can grow inclusively. Indonesia’s MSMEs are the backbone of its economy. They employ millions. They sustain communities. When they thrive, everyone benefits.
The halal value chain offers a pathway to growth. It is not just about religious compliance. It is about quality, trust, and competitiveness. Halal products appeal to Muslim consumers worldwide. They also appeal to non-Muslim consumers who value ethical sourcing and safety.
The study shows that improvement takes time. There are no shortcuts. Technology, regulation, R&D, and Islamic finance must work together. Each alone is insufficient. Integration is key.
For MSME owners, the message is clear: invest in technology. Comply with regulations. Consider Islamic financing. Engage in R&D, even if the benefits are not immediate. Adaptation takes time, but the rewards are substantial.
For policymakers, the message is equally clear: support MSMEs. Streamline certification. Provide training. Expand access to finance. Coordinate across agencies. The halal value chain is not just an industry — it is a national opportunity.
The study offers a roadmap. The destination is a thriving halal ecosystem. The journey requires patience, investment, and collaboration. But the simulation shows it is achievable.
