Islamic Digital Economy Mi’yar

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2. Ensuring Shariah Compliance

Table of for Venture Capital

Islamic Venture Capital Investment Structure
pg 11

pg 12

Contents
Islamic Venture Capital Fund Outline pg 13
• Shariah and Regulatory Compliance pg 13
• Islamic Venture Capital Fund Structure pg 15

Islamic Venture Capital Fund Models pg 17

• Musharakah VC Model pg 18
• Mudharabah VC Model pg 19
• Wakalah VC Model pg 20

Screening and Monitoring Islamic

Venture Capital Investments pg 21

3. Shariah Compliant Mi’yar

pg 23
for Startups

Definition of Shariah Compliant for Startups pg 25

Introduction pg 2
Converting to a Shariah Compliant Startup pg 27
• Why Islamic Digital Economy in Malaysia? pg 3

• Islamic Digital Economy Mi’yar pg 5

4. Mi’yar for Technology Products

& Services from Halal and pg 29
1. Want to be Part of the Shariah Perspective
Islamic Digital Economy? pg 7
Mi’yar for Multimedia Digital Content and Broadcast pg 31
• Compliance for Capital Providers pg 8 Materials with Islamic Elements

• Compliance for Startups pg 9 Mi’yar for Islamic Digital Platform in Islamic pg 33

Digital Economy.
• Compliance for Products & Services pg 10
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Islamic Digital Economy

Beyond a Digital Economy
The digital economy is a key contributor to
Malaysia’s GDP. Its development continues to
leverage on the country’s leadership position in
the Islamic Finance and Halal sectors. To meet the
Shariah compliant demands of a globally evolving
Islamic marketplace – which has led to our creation
of the Islamic Digital Economy.

SHARIA
H
COMPL
IANT
3

Why Islamic Digital

Economy in Malaysia?
A leader in Islamic finance based on
the Global Islamic Economy Indicator

Le
(GIEI) by Thomson Reuters.

ad
er
sh
ip
Le
ad
Ran

er
Ranked No.1 by the Islamic Finance ked

sh
No.

ip
Country Index (IFCI) developed by 1
Edbiz Consulting in 2017 for Islamic
banking and finance. Ran
ked
No.
1

d No.2
Ranke
Ranked No.2 in Islamic banking
worldwide with 33% of the USD 71
billion Shariah compliant asset fund.
d No.2 uk
Ranke
Suk

ort
st
ge

upp
r
La

nt S
Largest Sukuk (Islamic bond) market k
ku
in the world. u

me
stS
ge

ern
r
La

Gov
 4

Malaysia JAKIM Halal Certification

is one of the best Halal Certification
Standards in the world.
n da
ge
lA
ita

T
ig

AR
D

SM
a
nd

Establishing the Halal Industry

ge
lA

al Development Corporation (HDC) to

Hal
ita

art attract foreign direct investments.

Sm
ig

T
AR
D

SM LAL
HA

al
Hal
m art
S Launch of the SMART HALAL digital
Foreig
nD
Invesm irect application to assist users to verify
ents
Halal Certificate status and location of
Halal Premises.
Ha Foreig
n Direc
la In t
l c vestments
er
tif
ic
at The best Muslim travel destination
io
Ha n
la in the world based on Mastercard-
lC
er Crescent Rating Global Muslim Travel
tifi
ca Index (GMTI) 2017.
tio
n
5

Our Mi’yar
Towards Shariah
Compliance
With this Mi’yar, Regulators, Venture
Capitals (VCs), Startups and the
Supporting Ecosystem Players will find
the first comprehensive guide for
Malaysia’s Islamic Digital Economy.
Our objective is to develop an ideal Mi’yar, a set of
guides, for Shariah compliance and reliability to guide
stakeholders within the Islamic Digital Economy.
 6

Islamic Digital
Economy
Stakeholders Startups

Venture Capitals

Supporting Regulators
Ecosystem Players
7

Want to be Part of the

Islamic Digital Economy?

The core components of the Islamic Digital

Economy Mi’yar are Capital Providers,
Startups and Products & Services. Each of
these core components are governed by a
series of guides and training modules with
respect to three fundamental elements,
namely People, Process and Oversight.
The Capital Providers, Startups and
products that are to be offered need a
guide to facilitate its development in the
digital space.
 S
E
8 C
T
How Can CAPITAL PROVIDERS Comply? I
O
N

People Process Oversight

• Securities Commission
VC Guideline Approved Shariah
• Shariah VC Mi'yar Advisory Company

People (Training) Process (Guide, Guidelines &

Most financial education for
professionals are provided by local
regulators such as:
Regulatory Requirements)
A corporation which seeks to offer capital
for a startup should comply with both:

• Bank Negara Malaysia (BNM)

• Securities Commission Malaysia (SC)
• International Centre for Education
in Islamic Finance (INCIEF)
• Securities Industry Development
Corporation (SIDC)
• Islamic Banking and Finance Institute
Malaysia (IBFIM)
Other proponents of Islamic finance
education are the institutions of higher
learning with specifically tailored
programs.
• SC Guidelines
• Registration of Venture Capital and Private
Equity Corporations and Management
Corporations
Oversight (Endorsement
& Audit)
To mitigate or lessen any risks in the capital
market industry, the appointment of a
Registered Shariah Advisor is required.
9
How Can STARTUPS Comply?
People
Halal Academy to
develop Islamic
Finance module for
Halal Entrepreneur
People (Training)
The Halal Academy is an online
learning training platform
under the Halal Professional
Board, JAKIM providing training
programs for startups.
Process Oversight
Shariah
Compliant Mi’yar Approved Shariah
for Startups Advisory Company
Process (Guide, Guidelines &
Regulatory Requirements)
There are two channels whereby a startup is
considered to be Shariah compliant.
• New Shariah Compliant Startup
(as defined on page 25)
• Non Shariah Compliant Startup
(as defined on page 26)
Oversight (Endorsement
& Audit)
Periodical audit by the Registered Shariah
Advisor appointed by MDEC.
 10

How Can PRODUCTS & SERVICES Comply?

People Process Oversight

Module on digital Mi’yar on digital
products and
services from a Halal
products and JAKIM
services from
perspective Halal perspective

People (Training) Process (Guide, Guidelines &

Regulatory Requirements)
Training modules are predominantly
under the guide and standards
provided by JAKIM while the The process in obtaining product approval
development of specific digital often involves a submission to the relevant
content training module is provided regulatory body or authority figure.
by MDEC and JAKIM.

Oversight (Endorsement
& Audit)

Yearly audits on the issuer of the capital

or startup company. Regular reporting
is required to ascertain the capability of
the product issuer and provide investor
protection.
11

Ensuring
Shariah Compliance for
Venture Capital

Venture capital (VC) is a form of financing

that investors provide to new companies
and startups. The investment comes from
various financial instruments such as equity,
hybrid or debt. Typically, the VCs provide
non-financial support to the startups such
as market access, management insight and
technical expertise.
 12

Islamic VC Investment Structure

Good Things Like conventional venture capital, the 3 examples
of investment structures in an Islamic venture
Come in 3’s capital (Islamic VC) are:

S
E
Direct Investment C
to investee T
companies
I
O
N

Islamic VC
Investment
Structure

Fund of funds Investment

structure through a
(where investors have structure such as
access to a number of venture capital
funds via one
umbrella structure) fund
13

Islamic Venture Capital

Fund Outline
Shariah and Regulatory Compliance
To comply with Shariah and regulatory requirements,
Islamic VC funds are to:
Appoint a Shariah
Advisor to meet Shariah
requirements through:

1. Fund structuring and the development

of principal terms and conditions.
2. Legal documentation.
3. Disbursement of the investment funds.
4. Shariah compliance monitoring.
5. Exit strategies.

Provide structure on Investment,

Financing and Documentation:

1. To stipulate in its constitution that the funds and

activities are to be directed and conducted in a
Shariah compliant manner.

2. To clearly state that businesses and core activities

of the investee companies and its directors and
officers of the fund are Shariah compliant.
 14

Outline legal documentation

to specify:

1. Shariah Advisory appointment and line

of authority.
2. Shariah Advisors are to specify the
criteria of investment and to ensure only
Shariah compliant transactions.

3. Continuous review and audit on the VC

fund investment activities.

Outline Islamic VC principle

and profit:

1. Principle and profit are not to have

guaranteed returns.
2. Islamic VC shall express provision and clear
understanding that any profit based on
returns from the investment would be on an
agreed ratio, to the parties involved.
15

Islamic Venture Capital Fund Structure

The general methodology of operations for the

Islamic VC is as follows:

1. The Shariah Advisors shall establish the Shariah investment and

policy guidelines to conduct screening and monitoring for the
Islamic VC and target investee companies.

2. The managers of the Islamic VC Fund would raise funds for

a set period of time to invest in selected target investee
companies.

3. In conformity to the Shariah investment and policy guidelines

set by the Shariah Advisors, the management of the VC fund
shall invest in selected profitable target investee companies
and the Shariah Advisors shall endorse the investment as
Shariah compliant.

4. The Shariah Advisors and the management of the Islamic VC

fund shall ensure Shariah compliance through screening,
monitoring and periodical reporting.

5. The exit from the investee companies, Islamic VC fund and

distribution of the profits and losses with the partners and
investors would be in accordance to pre-determined ratios.
 16

Investors
(Limited Partners)

Investment Return Capital Investment

Management Shariah Policy

Managers Islamic Venture Capital Shariah

(General Partners) Advisor
Investment Return Periodical Reporting

Investee Investee Investee Other

Investment Return
Company Company Company investment
A B C

Exit at determined date

17

Islamic Venture Capital

Fund Models
There are several structures which can
be used in Islamic VC funds. Here, we
share 3 fund model structures based on
the profit and loss principle.

• Musharakah refers to a partnership between two parties or

more to finance a business venture.

• All partners must jointly contribute funding either in cash or

in kind and are actively participated in the management of
the venture.

• Any outcome (profit) derived from the venture can be shared

on an agreed ratio.

• Any losses must be shared according to the capital

contribution by each party.

• The management can be undertaken by either or both parties,

or it can be sourced to a third party.
 18
Structure #1: Musharakah VC Model

Islamic VC Fund Musharakah Investee Company

(Partner) Contract (Partner)

Capital in Cash/Kind Capital in Cash/Kind

X% Y%

Investment
Venture

X% Y%

Determined Exit Date

Profit Shared Based

On Pre-Agreed Ratio X:Y

Outcome

Loss will be shared

according to capital
contribution X:Y
 19

Structure #2: Mudharabah VC Model

• Mudharabah is a partnership
between two (2) parties,
Islamic VC Fund Mudharabah Investee Company
(Rabb Al-Mal/Investor) Contract (Mudharib)
namely Rabb Al-Mal (Investor or
Limited Partner) and Mudharib
(Entrepreneur or General Partner).
Capital Investment Technical Skill
• The Investor (Rabb Al-Mal) will
provide funding/financing, whereas
the Investee (Mudharib) will act
Investment as an Entrepreneur/Manager to
Venture contribute skills and know-how to
the venture.

X% Y% • Any outcome (profit) derived from

Determined Exit Date the venture will be shared on an
agreed ratio.

Profit Shared Based • Any losses will be borne solely by

On Pre-Agreed Ratio X:Y
the Investor.
Outcome
• The Investee as the manager has
all the control rights, whereas the
Capial Loss Borne
Totally by Investor
Investor cannot participate actively
to the management of the venture.
However, the Investee must report
the performance of the venture
to the Investor on an agreed
frequency.
 20

Structure #3: Wakalah VC Model

• Wakalah refers to a contract

whereby a party (principal)
Investor authorizes another party or parties
(Principal) (agent) to act on their behalf, based
on the agreed terms and conditions
for a fee consideration (Wakalah
Bil Ujrah) or without any fee
consideration (Wakalah Bi Ujrah).
Wakalah
Contract • A Partner may authorize and confer
Manager the power and rights to the other
(Agent)
partner or partners to act on its
behalf, managing the venture based
on agreed terms and conditions.
Manages as Agent
of investor
• In a Wakalah model, an LP can be
appointed by another LP to become
Islamic VC the GP of the fund to manage the
Fund fund based on agreed terms and
Company conditions.
21

Step By Step to
Invest and Profit
Responsibility

All Islamic VC funds must be

continuously screened and monitored
for Shariah compliance during the
life of the fund. Periodical reporting
also ensures Shariah Advisors and
managers of the fund are in line and
up to date with the latest applicable
guidelines issued by Securities
Commission Malaysia.

Stay updated on the latest Securities Commission Malaysia guidelines

@ www.sc.com.my

Reporting Semi-Annually
Step 1
Every six months, a report detailing
investment and business activities of
the company and investee companies
shall be sent to the Shariah Advisors.
Reporting Annually
Step 1
On an annual basis, an audited
financial report detailing investment
and business activities of the Islamic
VC and Investee companies shall be
sent to the Shariah Advisors.
22
Step 2
Upon reviewing the report, and
ensuring that the underlying assets
is compliant, the Shariah Advisors
would issue a Shariah compliant
certification to the Islamic VC.
Step 2
Upon reviewing the report, and
ensuring the underlying assets is
compliant, the Shariah Advisors
would issue a Shariah compliant
certification to the Islamic VC.
23

Shariah
Compliant Mi’yar
For Startups

As your startup continues to grow in the

Islamic Digital Economy, it is essential to
establish and maintain Shariah compliant
throughout the different phases of
your startup lifecycle as defined in the
accompanying chart.
 24

y c le
ifec
L
ing Financing or funding
c Seed provided for

an
research, assessment
capital and development of
n
an initial concept or

financing
Fi

prototype.
p
rtu
Sta

S
E
C
T
I
Capital expenditure or O
Early working capital to initiate
commercialisation of
N
stage technology, product
and/or services.
3
financing
Additional capital
expenditure or working
capital to increase
production capacity,
marketing or product
development. Also
known as the expansion
or growth stage.
25

Shariah Compliant
for Startups Defined
There are two instances whereby
a startup is considered to be Shariah compliant:

New Shariah Compliant Startup

Definition and requirements:

Startups that are already Shariah compliant during

the initial stage.

Complies with:

1) SC Guidelines on the Registration

of Venture Capital and Private Equity.
2) Shariah Compliant VC Mi’yar.
3) Shariah Compliant Startup Mi’yar.
 26

Non Shariah Compliant Startup

Definition and requirements:

Startups that want to convert its status to a
Shariah compliant company.

The following remedial action

is required:
Shariah
1) Appoint Shariah Advisor(s) registered
Advisor with the SC.

2) Prepare a conversion plan in phasing out

Non Shariah compliant elements.

3) Obtain an endorsed and approved conversion

plan by appointed Shariah Advisor(s).

Conversion When Shariah compliant status is obtained,

Plan the startup is required to comply with similar
guidelines as a new Shariah compliant startup.
27

Not a Shariah
Compliant Startup Yet?

Remedial Action

Appoint
Appoint Registered
registered
Shariah Advisors

Prepare
Conversion
Plan

Conversion plan
to be endorsed and
monitored by
Non Shariah Shariah Advisors

Compliant Startup
Third Party
Monitoring
 28

For companies that are interested in converting

their status from a Non Shariah compliant
company to a Shariah Compliant company, the
process is set out as below:

Process Oversight

Adhere to Component Endorsement from

for Shariah compliant Registered Shariah
for startups Advisors

Mi’yar for Technology

Products
Product && Services
Services from
from
Halal & Shariah Perspective

Shariah audit process

on a yearly basis
Capital structure in
accordance to permitted
instrument as per
Shariah Compliant
VC Mi’yar

Self Third Party

Assessment Endorsement
29

Mi’yar for
Technology Products
& Services from Halal
Perspective

The Islamic market is the biggest and

fastest growing market in the world.
In line with this growing trend, the Islamic
Digital Economy is constantly and rapidly
following world digital market trends
to ensure Shariah compliance of any
given multimedia digital content or
broadcasting material.
 30
Definition of Islamic Media Definition of Islamic Digital
& Digital Content Platform & Application

Islamic Media Islamic Digital Platform

& Digital Content & Application

Consists of broadcasting Web or Mobile

content on digital applications offering
platforms, radio and products and services
mainstream media. within Islamic industries.

Includes marketing Includes E-Commerce and

materials, cartoons, other services available
movies, music, across various industries
advertisements and in the Islamic market. S
other related content to E
the Islamic market.
C
T
I
O
N

4
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17 Things
to Consider on Multimedia
Digital Content and Broadcast Materials

To determine the status of a given multimedia

digital content or broadcasting material, several
criteria have been identified as a guide as follows:

It Does Not Contain Elements Which Violate the Sanctity

01 of Islam.

It Does Not Propagandise Deviated Aqidah, Rulings and

02 Teachings.

It Is Not Permissible for a Muslim to Play the Role of A

03 Non-Muslim.

It is Not Permissible to Act Out Specific Acts of Worship

04 Wrongly or to Ridicule Them.

It Must Not Ridicule or Question the Authenticity of the

05 Main Sources of Islamic Law, i.e. The Quran, Sunnah, Ijma’
And Qiyas.

It Must Not Contradict the Fatwas or Views of Jumhurul

06 Ulama’ (Majority of Scholars).
 32
It Must Not Propagandise Elements of Deviated Israelite Stories,
07 Superstitions and False Customs.

It Must Not Contradict Historical Facts.

08
It Must Not Propagandise the Beliefs of Other Religions Than Apart
09 from Islam.

It Must Not Introduce Any Elements or Rituals Which Contradict the

10 Belief of Ahli Sunnah wal-Jamaah.

It Must Not Use Islamic Sacred Terminologies for Religions Other Than
11 Islam.

It Must Not Involve Performing the Role or Exhibiting the Illustrations

12 of Prophets, Angels, Satan And Sam’iyyat and Ghaibiyyat.

It is Not Permissible for an Actor to Play the Role of a Woman and

13 Vice Versa.

It is Not Permissible to Swear Except by The Name of Allah The Almighty.

14
It Must Not Contain Writings of Quran Verses in Other Than Arabic.
15
It Must Not Contain Immoral Elements.
16
It Must Not Cause Doubts and Raise Alarm Among the Public.
17
33

Do’s & Don’ts

in the Islamic Digital Economy

For a company’s operation to be valid in

the Islamic Digital Economy, all transactions
must fulfil the basic requirement of Shariah
in relation to the following issues:
 34

ISLAMIC
DIGITAL
ECONOMY

Activities involving
Operation does not involve manufacture and/or sale of
Maysir (gambling). Haram (forbidden) products
such as liquor, non halal meats
and pork.

Operation does not

contain elements of Gharar
(uncertainty).
 www.mdec.my/islamicdigitaleconomy

Malaysia Digital Economy

Corporation Sdn Bhd

2360 Persiaran APEC

63000, Cyberjaya
Selangor Darul Ehsan Tel: 1-800-88-8338
(within Malaysia)

Fax: +6 03 83153115

+6 03 83153000
(international)

Email: clic@mdec.com.my