Missing Link in Islamic Finance Hubs: Islamic Venture Capital

| 27/01/2011 | Reply

By Expert Contributor, Mr. Rushdi Siddiqui
First Posted June 7, 2010 on www.dinarstandard.com

The Islamic world profiled modalities of capitalism in 8th/9th century, but today’s Muslim country Islamic finance hubs are missing two vital aspects: addressing ‘have nots’ (micro-finance), and deploying the funds of ‘haves’ into Islamic VC funds.

My focus in this article is on the latter–interplay between risk capital and innovative ideas for strategic localised benefit. The Chairman of Malaysia’s Securities Commission, Zarinah Anwar, stated in a keynote speech in 2007, ‘…how can Malaysia distinguish itself in the emerging market venture capital [VC] pool? Our belief is that Islamic VC provides that distinguishing factor.’

Yes, VC is labor intensive requiring specialized skills, entails active risk capital as part of portfolio, and a long term play, much like Sukuk in held to maturity portfolios. Islamic finance should now take a page from President Obama’s recent successful summit on Entrepreneurship for Muslim countries and ‘walk the  talk’ of venture capital beyond the present informal and infrequent ‘angel investing!’

Innovation in the Muslim WorldPatents are an indicator for innovation and knowledge based economy. A 2006 article in DinarStandard,“Intellectual Property(IP) Gaining Protection in the Muslim World,” showed the dismal state of IP relatedperfomance indicators in the Muslim world.

Table 1 (updated with 2009 data) shows Malaysia heading the list of OIC countries with 1017 patents (granted in the US) from 1996-2009. Putting it in perspective, Japan had 448,100 patents granted out of total 2,146,784 during the same time period, and OIC countries (totaling 2,013) had a meager 0.09%. What can Islamic finance do to start closing the gap?

Table 1: US Patents Granted to OIC Based Inventors

PATENTS 1996-2009
Malaysia 1017
Saudi Arabia 236
Turkey 161
Kuwait 94
Indonesia 70
Egypt 64
UAE 53
Lebanon 32
Pakistan 25
Kazakhstan 22

Source: www.uspto.gov

State of Islamic VC

Where is Islamic VC in the Muslim world? There are some Islamic VC associations (Gulf Venture CapitalAssociation or Malaysian Venture Capital and Private Equity Association (GVCA)), VC Funds (MusharakaVenture Management Sdn Bhd), and venture capital bank (VC Bank), etc. But results are under-whelming:
1. How many conferences on Islamic VC? According to GVCA website, its last event was March 2008, and even the weekly Islamic finance events have very little or no exposure dedicated to Islamic VC.

2. How many high profile funds and investments have been announced in information, technology and communication or bio-technology in the region? The latest newsletter from VCBank (Dec 2009), has more coverage on private equity plays in bank building to ease car-park congestion, hospital, etc., and less pure-play VC investments.

3. How many articles on Islamic VC on the internet? Not many; and large gap dates between articles.

4. Finally, there are more than 22 technology parks in the MENA region, either operational or at building stage, but are these just real estate plays?

Opportunity for IF to Lead

An opportunity exists for Islamic banks to deploy part of excessive proprietary risk capital to venture capital in financing some of the major concerns of the region: healthcare, desert farming with minimal water, alternative energy, carbon emissions, etc. Challenge is finding and financing tomorrow’s technology having direct implication and application today.

The western PE industry knows addresses of GCC funding sources, SWFs or HNWIs, but their VC counter-parts and early stage companies do not. Now, if a meaningful public/private initiative is established, including the Islamic Development Bank (IDB) and Awkafs, and it size is $3-5 Billion Islamic VC Fund, managed professionally for the above sectors, it should awaken VC stakeholders run to the region.

India & Islamic Finance

India, a country with 150 Million Muslims, but encountering many political challenges in adopting retail Islamic finance, may be the ripest country in MENASA (MiddleEast-North Africa-South Asia) for Islamic VC! It has the right mixture of higher educational institutions, technology parks/culture, entrepreneurism, mature capital markets, regulations, etc. As Islamic finance looks for new markets and ideas, i.e, diversification, in the post credit crisis environment, Bangalore may be a better opportunity than Sandhill Road in Silicon Valley.

Beyond Depositors & Shareholders

To address the criticism of exporting capital and importing returns, the Islamic VC must have enabling preconditions to access the funds, including:
•    establishing operations locally (incubating capital hungry companies),
•    linking with the local [technical] universities for research, teaching, jobs and internships,
•    accessing local ‘parts’ (where available),
•    government encouraging trials (with all the safety precautions), and
•    the preferred exit should be a local stock exchange listing, hence, adding breadth and depth to equity capital markets.

Thus, a strategic infrastructure plan aligned with availability of funds. As Islamic finance moves beyond the pre-dominant risk averse Murabaha, it must think about financing ventures beyond simple returns to depositors and shareholders, to include important local healthcare and the stewardship of the environment.

Yes, some ventures will fail, but its marginal capital loss, unlike today’s provisioning to real estate exposure. Others will be successful, and the upside is multiplier effect of knowledge, ‘currency of the 21st century,’ and its attribution to Islamic finance. In this manner, Islamic finance can actually lead conventional finance in the region for invention and innovation.

Category: Finance & Investment, Opinion

Leave a Reply