Startups and Sukuk — are they compatible?
A Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia
Having taken part in many of the COVID19-induced Zoom conferences last year, I learned that many of my colleagues do not consider Sukuk as viable funding option for Islamic startups. I am going to illustrate a different view since the startup universe does not consist only of garage-based entities with a few guys and an idea written on the whiteboard.
Our conventional finance peers would not hesitate twice in offering venture debt to entrepreneurs. If a company is no longer “pre-revenue” then the venture debt may often be preferrable — due to less equity dilution, no valuation requirement, no board seat assignment for those pesky lenders, and a relatively “benign” due diligence.
Sukuk as a financial tool is generally underappreciated. We are used to think that Sukuk is and should be offered by governments and large corporations with substantial assets and transparent cash flows. And this brings us to the age-old adage — “No risk — no reward” — and as the result, the Islamic finance market ends up lacking high yield Shariah compliant instruments for both retail and institutional investors.
The conventional finance is basking in the glory of SPACs — Special Purpose Acquisition Vehicles (only in the US 294 SPACs have raised over US$95 billion this year so far), while the classical Islamic instrument for VC and PE fund setup — the Sukuk Mudarabah remains unclaimed. Under this scheme the Originator of Sukuk contributes expertise, labor, and perhaps some funds, serves as Mudarib and manages the capital raised by an SPV through the issue of certificates.
Some startups are confident enough to go to markets to issue their own Sukuk. Thus, Shuaa Capital just raised US$50 million for UAE agriculture technology start-up Pure Harvest Smart Farms to fund construction of two “high-tech hybrid greenhouses” in the UAE to produce tomatoes and to expand to Saudi Arabia. The US$50 million three-year Sukuk issue has a coupon of 8%, with 7% payment-in-kind at maturity (it means that 7% will be paid in Sukuk certificates, rather than in cash).
Alif Moliya, a Shariah compliant consumer finance company from Uzbekistan is about to issue high-yield Islamic notes for US$10 million with the assistance of Dubai-based Alfa Strategies. The company is a tech startup that finances online purchases of smartphones and household goods. The margins that the company makes in Tashkent enable it to offer this rare high yield opportunity to Islamic investors.
There are startups, there are investors, and in Al-Waseelah, Wethaq and Blossom Finance we have Sukuk infrastructure providers. Let’s just stop ignoring this under-utilized
