FAILURE is a mark of success in venture capital.
Today, Islamic venture capital is a feel good theory presented at conferences about the lofty goals of this niche market with the focus on the formalism of structuring and screening. Its impact investing, yet we see it as a cost (at best) and a write-off (at worst).
The chairman of Malaysia’s Securities Commission, Zarinah Anwar, stated in a keynote speech in 2007, “… how can Malaysia distinguish itself in the emerging market VC (venture capital) pool? Our belief is that Islamic VC provides that distinguishing factor.” Obviously, the industry needs to catch-up to the vision of the chairman.
To date, Islamic finance has missed two important opportunities: Addressing the “have nots” (micro-finance) and deploying the funds of the “haves” into Islamic VC funds. Yes, VC is labour intensive requiring specialised skills, entails active risk capital as part of portfolio and a long-term play, much like Sukuk, in hold to maturity portfolio or lock up periods in real estate and private equity.
Walk the talk
However, it is time for Islamic finance to “walk the talk” of venture capital. Others have written more eloquently on the syariah modes of contract of Islamic VC, preferred share issues, etc, my interest is macro (industrial policy like) and multiplier impact (knowledge-based economy) of Islamic VC in Muslim countries.
It’s an asset class whose time needs to arrive. It’s the authenticity that Islamic finance needs as it’s the pre-condition foundation for innovation.
Young technology (Muslim) graduates in OIC countries (Organisation of Islamic Cooperation) have typically opted for working in multi-national corporations and government jobs, and rarely do we hear about friends/colleagues considering “garage souk” start-ups.
Islamic VC is not about sending Muslim (country) money to western market VC-based funds as passive investors in selected sectors and (hoped for return) profits are remitted to the Muslim country funds. Yes, VC does not exist in Muslim countries, but this “cycle of portfolio only returns” has to stop somewhere and sometime.
OIC tech parks
Islamic VC in Muslim countries is not about setting up technology parks with names linked to “Silicon Valley” without a supportive infrastructure. Hence, becoming a real estate tenant occupation play.
Furthermore, with the focus on crowded ICT and the “hot” social media, it becomes another offering into the sea of offering, hence, it does not stand out.
For example, Google’s recent announcement in Egypt, called Ebda2, is supported with seed money and mentoring to take advantage of the entrepreneurial energy and opportunity fanning across Egypt, if not the Maghreb. The dynamics of the Muslim world entails the need to look beyond and addition to the next Twitter, Facebook, Youtube and so on.
Yes, ICT/social media is needed, but are they vital for gross domestic product (GDP) diversification and growth and pursuit of knowledge-based economies?
If the leading Muslim countries, like Malaysia, Turkey, the UAE, etc, are to increase the per capita income by 30-50 per cent by 2020, diversify their economies from commodities, contribute to capital market development, reduce and reverse capital and brain drain, move away from pep talks and motivational speeches, and so on, then outside the box thinking is the need of the hour, as the hour of the day is continually passing us by.
A VC eco-system needs to be the collective mantra of the leaders and the led. The Muslim world cannot build a “silicon valley” by simply calling it — silicon valley, alley or oasis. We must acknowledge the risk (less than some of the white elephants projects), return (knowledge-based economy) and reward (first Islamic VC hub).
Indicator of innovation
Patents are an indicator for innovation and knowledge-based economy. A 2006 article in Dinarstandards, Intellectual Property Gaining Protection in the Muslim World, shows how Malaysia heads the list of OIC countries (Table 1) with 547 patents (granted in the US) during the 27-year period.
Putting it in prospective, Japan had 547,865 patents granted out of total 3,101,719 during the same time period and OIC countries (totalling 1,542) had a meager 0.05 per cent.
State of Islamic VC
But, where is Islamic venture capital in the Muslim world? There are Islamic VC associations (Gulf Venture Capital Association or Malaysian Venture Capital and Private Equity Association (GVCA), VC Funds (Musharaka Venture Management Sdn Bhd) and venture capital bank (VC Bank), etc. But, results are under-whelming as very few Islamic VC conferences, announcements of investing and exits or coverage in the media.
To address the criticism of the present Islamic investing business model, exporting capital and importing returns, Islamic VC needs to be linked with public-private partnership to establish a framework for a knowledge-based OIC country economy.
At the KL International Venture Capital Symposium, I have been asked to present on the Islamic VC eco-system in Muslim countries. The approach is to link Islamic VC to investing in companies or technology transfer to address some of the major illnesses in OIC countries as part of medical tourism and housed in technology parks while working with research universities.
Yesterday’s AIDs awareness is today’s non-communicable diseases (NCD), obesity and diabetes (Type 2) contributing to heart disease and stroke.
For example, the sedentary lifestyle and nutritional transition has made the Gulf region the fastest “NCD hub” in the world, and there are massive costs for cash-strapped governments, therefore, interesting opportunities (in the billions) for Malaysia.
Thus, Islamic finance must think about financing the health of mankind, whilst contributing to a knowledge-based economy.
The writer is global head of Islamic finance for Thomson Reuters based in New York