Islamic venture capital – issues in practice

Abstract

Purpose This paper aims to explore the structure and underlying contracts of Islamic venture capital (IVC) and to evaluate its prospects. VC can be perceived as an investment vehicle possessing most of the desirable attributes of a Sharīʿah-compliant investment vehicle. There are certain issues involved in the formation, operations and exit strategies of these investments that are discussed in detail in this paper. Design/methodology/approach A detailed review of relevant literature is performed to identify how IVC investments can be made and how related issues may be resolved. Findings IVC investment has potential of incorporating Sharīʿah-compliant investment modes. Additionally, it may offer higher than average returns. These attributes can be desirable for Islamic finance industry that is currently in need of equity-based financing products. The major causes of lesser growth of IVC investments are lack of awareness among the investors and the absence of viable investment opportunities for small- and medium-scale investors. IVC may attract general public if established after extensive research aimed at introducing innovative products. Originality/value This paper provides an overview of a truly Sharīʿah-compliant investment vehicle, furnishes a synthesis of various suggestions made by industry and academia and suggests viable solutions for valuation, risk management and exit strategies.

Integration of Islamic bank specific risks and their impact on the portfolios of Islamic Banks

“…This study addresses the calls of leading researchers Abedifar et al (2013), Chattha and Alhabshi (2018); Grira et al (2018), Noor et al (2018); Anwer et al (2019), Archer and Karim (2019); Chattha et al (2020); Noor et al (2019b); and Shah et al (2020b) that Islamic banks are required to adopt Sharīʿah-compliant techniques for holistic risk management. The mechanism manages risks based on a framework that extends Islamic risk management from merely entering into contracts to finding an optimum combination of risk and return in a given environment.…”

“…These higher levels of risks when integrate with the unique risks of Islamic banks create unexplained effects on the risk-return relationship. These unexplained effects have been identified by various contemporary researchers, for example, Abedifar et al (2013), Chattha and Alhabshi (2018); Grira et al (2018), Noor et al (2018); Anwer et al (2019), Archer and Karim (2019); Noor et al (2019b); Chattha et al (2020), Grassa et al (2020); and Ibrahim (2020).…”

“…Research on risk management in Islamic banks has become popular in this decade (Chattha and Alhabshi, 2018; Grira et al , 2018; Maharani and Setiyono, 2018; Noor et al , 2018, 2019b; Wiranatakusuma, 2018; Anwer et al , 2019; Archer and Karim, 2019; Chattha et al , 2020; Grassa et al , 2020). Although identifying and measuring risks is a crucial and critical activity, confronting and managing them is even more sensitive and critical (Riaz et al , 2019).…”

“…Equity investment risk actually arises from entering into a partnership to undertake or participate in a financing or general business activity as described in the contract (Rhanoui and Belkhoutout, 2019). Equity investment risk is obvious in Mudharaba and Musharaka contracts (Anwer et al , 2019; Rhanoui and Belkhoutout, 2019). IFSB (2018) identifies various precautions against equity investment risk: The record of partners under Mudharbah or Musharakah contracts should be taken into account regarding similar projects. All statutory requirements should be carefully studied because the impact of nonadherence to statutory requirements is irreparable. Information regarding the functioning of the project should always be complete. Valuation of the project should be complete and contemporary to ensure transparency and to avoid misunderstandings. …”

Waqf, Sharia Venture Capital, and Institutional Problems: Socio-Legal Cases in Indonesia

“…Then the third format is crowdfunding by connecting investors with capital seekers through information technology tools. An example of a company implementing this format model is Beehive from the United Arab Emirates, which is the first online marketplace company for peer to peer financing in the Middle East (Anwer et al, 2019).…”