Dubai: The Islamic world profiled modalities of capitalism in the 8th and 9th centuries, but today's Muslim countries' Islamic financial hubs are missing something vital — addressing ‘have nots' (micro-finance), and deploying the funds of ‘haves' into Islamic venture capital (VC) funds.
Our focus is on the latter: interplay between risk capital and innovative ideas for strategic localised benefit. 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 venture capital pool? Our belief is that Islamic VC provides that distinguishing factor.'
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 held-to-maturity portfolio.
Islamic finance should now take a page from US President Barack Obama's recent successful summit on entrepreneurship for Muslim countries and ‘walk the talk' of venture capital beyond the present informal and infrequent ‘angel investing!'
Innovation
Patents are an indicator for innovation and knowledge-based economy. A 2006 article in DinarStandard titled "Intellectual Property Gaining Protection in the Muslim World" shows how Malaysia heads the list of Organisation of Islamic Conference (OIC) countries with 547 patents (granted in the US) during the 27 year period.
Putting it in perspective, Japan had 547,865 patents granted out of a total of 3,101,719 during the same period.
What can Islamic finance do to start closing the gap?
Where is Islamic VC in the Muslim world? There are some Islamic VC associations, but they have not really achieved much.
According to the Gulf Venture Capital Association website, its last event was held in March 2008, and even the weekly Islamic finance events have very little or no exposure dedicated to Islamic VC.
How many high profile funds and investments have been announced in information, technology and communication or bio-technology in the region?
The latest newsletter from VCBank (December, 2009), has more coverage on private equity in bank building to ease car-park congestion, hospital, etc., and less pure-play VC investments.
How many articles on Islamic VC on the internet?
Not many. Finally, there are more than 22 technology parks in the Middle East and North Africa (MENA) region, either operational or at building stage, but just real estate plays?
An opportunity exists for Islamic banks to deploy part of excessive proprietary risk capital to venture capital in financing some of the major concerns of the region: health care, desert farming with minimal water, alternative energy, carbon emissions, etc.
The challenge is finding and financing tomorrow's technology which will have direct implication and application today.
The Western PE industry knows addresses of Gulf Cooperation Council (GCC) funding sources, sovereign wealth funds or high net worth individuals, but their venture captial counter-parts and early stage companies do not.
Now, if a meaningful public/private initiative is established, including the Islamic Development Bank (IDB) and Awqafs, and its size is $3-$5 billion Islamic venture capital fund, managed professionally for the above sectors, it should awaken VC stakeholders' run to the region.
India Islamic finance
India, a country with 150 million Muslims, but encountering many political challenges in adopting retail Islamic finance, may be the ripest country in Middle East-North Africa-South Asia for Islamic venture capital.
It has the right mixture of higher educational institutions, technology parks/culture, entrepreneurship, mature capital markets, regulations, etc. As Islamic finance looks for new markets and ideas, i.e, diversification, in the post credit crisis environment, Bengaluru may be a better opportunity than Sandhill Road in Silicon Valley.
To address the criticism of exporting capital and importing returns, the Islamic VC must have enabling preconditions to access the funds, including establishing operations locally, linking with local universities for research, government encouraging trials and the preferred exit should be a local stock exchange listing. Thus, a strategic infrastructure plan aligned with availability of funds.
As Islamic finance moves beyond the predominantly risk averse Murabaha, it must think about financing ventures beyond simple returns to depositors and shareholders.
In this manner, Islamic finance can actually lead conventional finance in the region for invention and innovation.
The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer and cannot be attributed to his organisation.
