The application of venture capital strategies to musharakah financing

Abstract

Purpose This paper aims to explore the strategies used by venture capital (VC) firms in assisting entrepreneurs who have business potential but lack capital. The study also aims to investigate whether the VC strategy can be adopted by Islamic banks through musharakah financing. Design/methodology/approach Apart from content analysis, primary data were gathered from several interview sessions with the management of three VC firms and two Islamic banks. Findings Islamic banks in Malaysia have great potential to offer musharakah financing and mitigate risk by adopting the following five VC strategies: method of selection, channelling of funds, monitoring, non-capital assistance and period of investment. We propose the channelling of corporate social responsibility funds for musharakah financing as an initial step in applying VC strategy. Research limitations/implications Given the limited number of willing and eligible respondents in Malaysia, the scope of this study can be widened to a cross-country analysis where musharakah financing is widely adopted. Practical implications This study motivates regulatory bodies and Islamic banks to consider musharakah financing using the risk monitoring strategy adopted from the VC industry. Originality/value This study is the first to empirically explore the strategy adopted by VC companies and evaluate whether such a strategy is suitable for the concept of musharakah financing.