This is a straightforward question that does not have a straightforward answer. Let’s analyze this issue from two different played out roles — the one of an investor, and the one of an investee.
The investee (the target company) needs money to grow, mature and deliver value to its shareholders. The source of funds is of secondary importance. Presumably, it we accept that at least the fiat currencies are Shariah compliant, than most funds are compatible with Shariah. As was proven by Indonesia’s Alami Sharia during its numerous funding rounds, the company does not become less Islamic when it receives infusions of conventional money.
This week Wahed Invest received US$50 million in investments from Wa’ed Ventures, the venture capital arm of Saudi Aramco, as well as several family offices and the soccer great Paul Pogba. The investors are not strictly Shariah compliant but they still drove the value of this Islamic startup to US$300 million.
So, it is clear that Islamic venture funds are not essential to the Islamic economy. As great Deng Xiaoping once said: “Buguan hei mao bai mao, zhuo dao laoshu jiu shi hao mao — No matter, if it is a white cat or a black cat; as long as it can catch mice, it is a good cat.”
Now, let’s turn to the Shariah compliant investors. Most of them are rather conservative and prefer to keep their money in sovereign Sukuk and real estate projects. But the Islamic investment landscape is changing — the new generations of ethical investors are getting interested in private equity, venture capital and crypto assets. By definition such investors cannot participate in conventional funds as the latters’ investment strategies are not regulated by Shariah. So, Islamic funds must exist to cater to these investors. Such funds may invest in conventional projects, as long as they do not contradict the Islamic law. Malaysia’s Shariah compliant venture capital firm Ficus Capital does just that — it invested last year in Eclimo, an EV manufacturer.
So, it is clear that Islamic venture funds are essential to the Islamic economy.
To make sure that we cover the entire investment universe that caters to Islamic startups, I should point out to the existence of formally conventional funds that structure their funding activities in a Shariah compliant manner. Exactly such modus operandi was declared by Abu Dhabi-based Shorooq Partners’ Nahda Fund I that widely uses Murabahah and Ijarah arrangements but does not have a Shariah board.
Some final thoughts. The Islamic economy is witnessing a strong “new economy pull effect” — it is going to be driven not by massive Sukuk issuances but by plethora of Islamic startups. Their insatiable thirst for growth funds will provide the necessary push to the development of Islamic venture capital industry.