It is generally well accepted that the principles on which venture capital is built are Islamic in nature — they are based on risk-sharing and the lack of a guaranteed financial result.
The world of Islamic finance is no longer isolated enough to sustain independent development. The calamities of the global financial system caused by the Russia–Ukraine military conflict, a global economic slowdown and raising interest rates affect structuring and performance requirements for Islamic finance instruments.
And so, the lines between Islamic and conventional investments are getting blurred — we now have Shariah compliant funds investing in conventional start-ups and private companies, as well as conventional funds investing in Islamic start-ups. And moreover, there is an emergence of Shariah compliant debt funds.
Review of 2022
It was an eventful year. Some of the most interesting venture capital deals were:
• The ABHI of Pakistan which offers Shariah compliant digital financial services raised US$17 million in Series A funding
• Fasset Exchange secured US$22 million in Series A funding led by Liberty City Ventures, Fatima Gobi Ventures, Some Capital and MyAsiaVC, and
• Gulf Islamic Investments from the UAE bought a majority stake in OFFA, the UK’s first Shariah compliant bridge financing provider for the real estate market.
By the way, I still wonder, whatever happened to Ethos’s GBP1 billion (US$1.22 billion) Shariah compliant fund — remember last year’s ‘Project of the Year’? Hmm…
Some interesting novel funds were launched in 2022 as follows. They provide Shariah compliant debt — a unique feature for young companies that would allow them to grow without diluting their shareholdings:
• The US$250 million SHUAA Venture Partners fund is set to provide Shariah compliant debt opportunities to GCC companies, and
• Gulf Islamic Investments, a Shariah compliant global alternative investment company, launched the US$100 million GII Debt Fund — also for GCC-based investees.
The signatory event of the year is, of course, the launching of EthisX, a US$20 million Islamic seed fund by ethical investment platform operator Ethis Group in collaboration with Asian venture capital firm Gobi Partners. The latter is well known for its involvement with Islamic investments via its involvement in TaqwaTech and collaboration with MAVCAP and FIKRA Islamic Fintech Accelerator Program.
Some of the widely publicized investments into leading Islamic fintech companies were effected by conventional funds. Indonesia’s Alami Sharia, a famous P2P SME lender that features a 0% default rate, scored its 6th round of funding from conventional sources such as East Ventures, AC Ventures, Quona Capital and FEBE Ventures.
Wahed Invest received US$50 million in investments from Wa’ed Ventures, the venture capital arm of Saudi Aramco, as well as Paul Pogba — not strictly Shariah compliant investors.
There are also examples of per se conventional funds that structure their funding activities in a Shariah compliant manner. Exactly such a modus operandi was declared by Abu Dhabi-based Shorooq Partners’s Nahda Fund I that widely uses Murabahah and Ijarah arrangements but does not have a Shariah board. Malaysia’s Shariah compliant venture capital firm Ficus Capital predominately invests in conventional start-ups.
Preview of 2023
Saudi Arabia is going to be the bright spot in the Islamic venture capital universe. There are two very simple reasons for this assumption:
• the state coffers are overflowing with hydrocarbon cash, and
• the implementation of Saudi Vision 2030 — a strategic framework to reduce Saudi Arabia’s dependence on oil and diversify its economy. The Saudi leaders have spoken: “Tech is the future”.
The renewable energy projects, from wind and solar to hydrogen and geothermal, are not likely to displace Islamic fintech as the top recipient of venture funds but will definitely come a close second.
The key factors that will affect the performance of the Islamic venture capital industry in 2023 are the following:
• Excessive liquidity in the GCC countries
• Greater investor participation due to the growth of co-investment platforms led by Ethis, Qardus and IFG
• Exceptional growth in renewable energy projects, primarily in the GCC countries, Malaysia and Indonesia
• Emergence of high-yield single asset investment vehicles — business aircraft, marine vessels, and
• Introduction and acceptance of the ‘new economy’ Shariah compliant actively managed certificates, including Orestes Hydrogen Shariah, developed by Yassar and Al Waseelah.
Conclusion
As capital tends to always flow ‘from liquidity to opportunity’, the relative domination of conventional funders in the Islamic business will continue … for now. The great Deng Xiaoping once said: “No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat.”
Islamic banks will not enter the venture capital market in 2023. Again, the active Islamic fintechs are reinventing Islamic finance services through technology-enabled disruptions. Most Islamic banks view fintechs as competitors seeking to seize their market share.
So what? The lines are getting blurred, but capital flows.
Dr Vladimir Malenko is the director of Fair Finance. He can be contacted at [email protected].