Islamic venture capital investment style – opportunities and challenges

Abstract

Purpose This study aims to explore how Islamic venture capital (IVC) structure can be established by introducing modifications in traditional venture capital (VC) structure. The motivation stems from the criticism on the existing Islamic finance products, that are said to be Shariah-compliant in form but do not fulfil objectives of Shariah whereas IVC is portrayed by existing literature as an ideal risk sharing based product. Design/methodology/approach This study uses a questionnaire method to understand IVC philosophy, structure and operational approach and asked the respondents to identify how IVC differs in respect of these traits from conventional VC. The authors collected 50 questionnaires from IVC practitioners, regulators, academicians and Islamic finance (IF) consultants in three countries, namely, Malaysia, Pakistan and Turkey. Findings IVC can be incorporated by introducing some modifications in traditional VC structure. They need to appoint a full-time Shariah scholar, to ensure compliance to Shariah principles. IVCs should refrain from dealing in impermissible business activities. They can choose any prevailing method for valuation and investment mode, provided it follows principles of Shariah. IVCs are exposed to unique risks such as Shariah non-compliance risk and equity investment risk and they need additional measures to safeguard against these risks. They can adopt any exit strategy, provided funds are procured from halal sources. Finally, IVC is found to hold the potential to achieve the desired objectives of IF. Originality/value This study fills the gap in the existing literature related to IVC investments as no study, to the best of the author’s knowledge, has evaluated the dynamics of IVC by using responses from industry, academia and regulators.