An alternative model for Islamic venture capital firms

Abstract

Purpose

The purpose of this paper is to propose a financial instrument by combining two main contracts in Islamic finance with the aim to minimize risks involved in Islamic venture capital (IVC) activities.

Design/methodology/approach

A mathematical model and explanatory figures are provided to see how IVC firms can benefit from the combination of “Ijara” contract and “Diminishing Musharaka” contract to provide financing for start-up and high-tech companies.

Findings

The proposed instrument could be considered as an alternative solution for IVC firms. It represents a low level of risk with a stable income in the beginning of the project. In addition, it allows benefiting from the possible development of start-up and high-tech companies with a smooth exit from the capital of the financed company without the intervention of another investor. It is also considered as a motivational instrument for the entrepreneurs, because it allows benefiting from a grace period on the one hand and from a lower cost of financing compared to other type of funding on the other hand.

Practical implications

Some studies have concentrated on identifying and understanding the concept, the operation and the challenges of IVC industry. The study is considered among few studies that provide a practical model for IVC firms, which takes account of the different stages of venture capital process. The instrument can promote the development of IVC firms and give alternative financing opportunities to Muslim entrepreneurs.

Originality/value

The current model provides a truly revolutionary solution for young Muslim entrepreneurs who do not accept to be financed by the proposed instruments of venture capital (VC) firms such as convertible bonds and warrants. On the other side, it provides an alternative solution for IVC firms to the already offered products such as “Musharaka”, “Mudharaba” and “Wakalah” contracts. An expert in “Fiqh Al-Muamalat” (Islamic law of transaction) assessed the Sharia compliance of the model.

Citation

Gafrej, O. and Boujelbéne, M. (2022), "An alternative model for Islamic venture capital firms", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 15 No. 6, pp. 1009-1018. https://doi.org/10.1108/IMEFM-04-2021-0145