One of the most impressive economic developments of the past 40 years has been the emergence of Silicon Valley. By tapping into global talent, driven by the zeal of innovation and fueled by risk capital, Silicon Valley has come to represent the pinnacle of the modern economy. The technology sector in the US, largely driven by Silicon Valley, has been a tremendous engine of both US and global growth over the past few decades, and it continues to serve as a hub for global progress. In turning to the intersection of SME and entrepreneurship with Islamic finance, 2015 saw the initial stages of a Silicon Valley-like cluster emerging, and KAVILASH CHAWLA believes 2016 promises to be a more disruptive year in driving change.
Review of 2015
Looking back over the past 12 months, one phrase comes to mind when we examine the SME and entrepreneurship landscape – identify driven innovation. First and foremost, 2015 saw the recognition and acceptance that a unique set of needs and preferences exists among the Ummah and the Muslim consumer. Moreover, and especially relevant to the Islamic finance community, 2015 saw the initial development and preliminary adoption of business models that seek to monetize the Islamic value proposition. From a business model perspective, this not only means the delivery of commercial and financial returns, but, for many SMEs and start-ups, it also means delivering on social impact and ethical imperatives as required by Islam.
Some notable milestones within 2015 include the acceptance of a Pakistan-based social enterprise into the prestigious Y-Combinator incubator. At the Islamic Society of North America’s annual meeting in Chicago this year, entrepreneurs were strongly represented and supported through a start-up marketplace, where start-ups could sell and pitch their goods and services to consumers and investors alike. In 2015, we also witnessed the development of technology-enabled platforms for delivering goods, services, and funding within the finance and Halal fast-moving consumer goods space. 2015 was a good year when it comes to the supply of start-ups and SMEs.
2015 was also a good year when it comes to the funding side of the equation. In many of the GCC countries, we saw national governments announce plans to seed or establish investment funds to provide angel investment, venture capital, and growth funding to entrepreneurs and SMEs, with Kuwait committing roughly US$2 billion in support. In the private markets, we saw US-based angel investors and venture capital deliberately fund business models that focus on delivering value to the Muslim consumer through market-based solutions that generate commercial rates of return and social impact. And in the OIC countries, we saw high-net-worth-individuals warm to the possibility of deploying some capital to SMEs and high-growth start-ups. Overall, 2015 was a positive year of developing the foundation of a vibrant SME and entrepreneurship space.
Preview of 2016
Whereas 2015 was about investing in a strong foundation, 2016 is going to be about execution. On the funding side, national governments, private investors, and incubators and accelerators are going to have to prove that they can not only find enough deal flow, but that they can diligence deals and deploy capital productively. For the Islamic finance industry, this means an opportunity to partner with large national funds as well as private investors to help them source, assess, diligence, and execute deals. That means either investing in developing in-house capabilities and capacity to work with early-stage investors and early-stage companies, or partnering with organizations and advisors who have the experience and expertise to operate within the start-up and SME spaces.
It also creates a need for financial innovation within the Islamic finance space, especially in the development of angel and VC funds to help create streamlined, cost-effective mechanisms to raise and deploy capital, and to diligence, execute, and manage deals. On the entrepreneurship and SME side, the drive toward the formalization of the funding landscape within 2016 highlights an opportunity but also a need for SMEs and entrepreneurs to equally professionalize. Due diligence is a detailed and rigorous process not well suited to the faint of heart.
In addition to professionalization, 2016 also represents disruption. Technology-based funding and marketplace platforms will continue to come online throughout 2016, and will challenge Islamic finance and other financial services providers for market share within both the funding and also the banking space. For the Islamic finance industry, this represents a threat that will require adaptation. Fintech in the conventional space has played a critical role in not only funding SMEs and start-ups, but in helping financial services providers develop new streams of revenue and access new markets and consumers. Fintech within the Islamic finance space is where 2016 is going to create significant opportunities, but the first-mover advantage is going to be limited, and many institutions may already find themselves lagging well behind the leaders.
Conclusion
SMEs and entrepreneurship are the engines of economic growth. While traditional wholesale banking, capital markets, and retail finance will continue to dominate the Islamic finance landscape in 2016, the SME and start-up space represents exciting opportunities for 2016. Technology is the catalyst for 2016; those who accept and adapt will find the SME and start-up space in 2016 to be a very attractive proposition. Silicon Valley is a global phenomenon, and is coming to Islamic finance in 2016.
Kavilash Chawla is a partner at Baton Global. He can be contacted at [email protected].