ISLAMIC VENTURE

CAPITAL
PRESENTER 1: GOBINATH MARIMOTHU (BF094891)
PRESENTER 2: VENOJINII IRULLAPPAN (BF094934)
PRESENTER 3: KESHNI DEVI A/P SIVAKUMARAN (BF096262)
Overview and History of Islamic
Venture Capital
 Historically, Venture Capital (“VC”) started from the Islamic
concept of “mudharabah”, a form of partnership used even before
Islam by Arab traders.
 Later on, this concept was formalised and embodied in Islamic law
by the Muslim jurists, which is now better known as fiqh muamalat
(Islamic transaction).
 As Islamic culture spread across the world, the mudharabah
concept also developed and continued to be used by Islamic
businessman until the 19th century.
 In Islam, money is not a commodity and cannot be traded for
profits. It is just a medium of exchange and value stored.
 Money therefore must be invested in projects and ventures for the
generation of activities for the benefits of mankind and in the
process, for profits.
Common Shariah based structures
for Islamic
 MUDHARABAH
It is basically a contract made between two parties to finance a
business venture. The parties are a rabb al-mal (investor) who solely
provides the capital and mudharib (entrepreneur) who solely
manages the project. This is akin to a conventional VC, where there
exists a relationship between the capital provider and the manager. If
the venture is profitable, the profit will be distributed based on a pre-
agreed ratio. In the event of a business loss, it should be borne solely
by the capital provider, to the extent of the capital contribution. The
key to a Mudharabah structure is the fact that the manager cannot be
placed at risk to bear losses, unless proven negligent.
 MUSHARAKAH
Musharakah is a partnership between two parties or more to finance a
business venture whereby all parties contribute capital either in the form
of cash or in kind. Profits are shared at an pre-agreed ratio while in the
event of a loss, the loss shall be shared on the basis of capital
contribution.

 WAKALAH
Wakalah is basically a contract where a party (“the Principal”)
authorises the other party or parties (“the Agent”) to act on his behalf,
based on the agreed terms and conditions. Pursuant to the Wakalah
contract, it confers the power and rights to the Agent to act on behalf of
the Principal as long as the Principal is alive.
COMPARISON BETWEEN THE
CONVENTIONAL VC AND SHARIAH
COMPLIANT VC
CONVENTIONAL VC SHARIAH VC

Equity Investment Equity Investment

Partnership – Sharing of risk & Musharakah- Sharing of risk &

rewards rewards
Return based on the Return based on the performance
performance of of the investment
the investment
Long term & value added Long term & value added
investment investment
Applicable to all industries Only in Shariah Compliant
Industries
 Function of venture capital
company
 VCC and VCMC refer to corporations that deal, or manage
investment, in securities of venture companies.
 VCC provide investment equity to new, highly potential growth
companies for the purpose of generating return through a
realization event, such as initial public offer(IPO) or trade sale of
the company.
 They usually get significant control, decision making and
significant portion of companies ownership.
 In some cases VCC appoints venture capital management
corporation(VCMC).
 VCMC is responsible for the following; raising funds , choosing
investment, monitoring transactions.
VCC VCMC VC
Non permitted Shariah activities
for VC include-
 financial services based on interest (riba);
 gaming/gambling (maisir);
 conventional insurance;
 manufacture or sale of non-halal products or related products;
 entertainment activities that are non-permissible according to
Shariah;
 manufacture of sale of tobacco-based products or related
products;
 Stockbroking or share trading in Shariah non-compliant securities;
and
 Hotels and resorts with non-Shariah compliant activities.
Shariah-Compliant Quantitative
Criteria for VCC
 The conventional debt to total asset ratio must not be higher
than 30%
 Interest income and non-halal revenue relative to the total
revenue must not exceed 5%
 Cash plus income bearing securities relative to the total
asset must not exceed 30%
 Cash, cash equivalent and account receivable relative to the
total assets must not exceed 45%.
Funding and financing stages
 Seed-stage financing
 Early-stage financing
 Formative-stage financing
 Later-stage financing
 Expansion-stage financing
 Balanced-stage financing
Return on investment
Main objective of VC is to make capital gains from the sales of
company stocks they hold.
Venture capitalists liquidate their investment through any of the
following procedures.
 Initial public offering (IPO)
 Company buyback
 Trade sale
 Write-off
 Secondary sale
Islamic VENTURE CAPITAL
COMPANIES
 BIMB Venture Capital Sdn. Bhd.
 Banyan Ventures Sdn. Bhd.
 AIMBN Holdings Sdn.Bhd
 Attacca Capital Sdn Bhd
 5M Investment Holding Ltd
 BTV Management Sdn. Bhd
 Malaysia Venture Capital Management Berhad (MAVCAP)
 conclusion
Venture capital is a lucrative industry not only for investors but also
for the overall advancement and development of economic and
innovative commercial activity. Even though some financial
instruments used in conventional venture capital structures are not
compliant with sharīah a guidelines, there are alternatives already
available and used on the conventional side that can immediately be
used by the Islamic venture capitalist. There are also new Islamic
instruments being developed to address other investor concerns. A
few Islamic financial institutions have been involved in venture capital
deals. Their approach, however, has been that of a provider of funds
rather than a lead investor. Such institutions tend to rely on the
knowledge and expertise of others and would simply “piggyback” on
the transaction. Islamic institutions are slowly realizing the potential of
this industry and are more willing to take a leading role in venture
capital deals.