VC Sector within the Islamic Perspective The introduction of the venture capital industry right into a country encourages and supports entrepreneurs, creates jobs and tax revenue and allows the development of high technology. This being the case, no government may wish to oppose it and there is no reason Islamic countries should not benefit from it as almost as much ast free airline has done. Their history started using the Islamic mudarabah, a form of partnership used even before Islam by Arab traders. Later the mudarabah was formalised and embodied in the Shari’ah law through the Muslim jurists. As Islamic culture spread around the globe, the mudarabah went with it and continued to be used by Islamic businessmen before the 19th century. Within the 1970s, a type of quantum leap happened and also the concept of the current Islamic bank emerged from all of these roots. But there is another branch within this history. Within the 10th century, the Italians took up the mudarabah also it spread through Europe. But during Islam this partnership form remained undeveloped, in Europe, ever-increasing numbers of entrepreneurs were financed by them, so the organisations became larger and larger. They became, essentially, what we should now call VC companies. So Islamic banks and VC companies have these common roots and that is why they are structurally similar. The similarities are briefly discussed below. The first level can be said to become the collection of funds. In Islamic banks, the investment account holders are individuals who have fun playing the bank’s investments to be able to be part of the resulting profits under mudarabah. This is known as profit-and-losssharing (PLS) and also the profits are shared according to an agreed ratio. In Turkey, for instance, the ratio used to be 20/80, that is, the financial institution retains 20% of the net profits and 80% is shipped to the account holders. Within the VC sector, also, those who invest are taking part in a profit-sharing process. A ratio much like those of the banks is used. Around the second level, too, both Islamic banks and VC companies take part in the same role, those of mudarib or agent. Nike Air Max 90 Acting as an agent for their investors, they invest the investors’ funds in a multitude of entrepreneurial companies and pass a proportion of the profits to the investors, together with capital and gain where appropriate. The similarity between Islamic banks and VC companies is closest when they begin using these PLS partnerships (either mudarabah or musharakah) with businesses. But the Islamic banks also employ other kinds of financing such as murabaha (renting equipment on a cost-plus basis) there they vary from VC companies. In other words, the similarity between Islamic banks and VC companies lies in the fact that they’ve the same philosophy of financing, that of sharing in the profit and lack of their investments and passing the results on to their depositors. Because of this, they use exactly the same criteria in evaluating projects to purchase, namely, ale the entrepreneur and also the potential profit of his project. As against this, conventional banks make use of the criteria of past performance, balance sheets and also the credit-worthiness of the entrepreneur. In case of loss, the Islamic banks have the same attitude as VC companies for the reason that the main city loss is borne by the lender, the entrepreneur losing only to the extent that his labour is lost. Theoretical Models and Acceptable Structures The basic theoretical type of an Islamic bank, based on Iqbal and Molyneux (2005), was developed around the lines from the Two-Tier Mudarabah (TTM) model. The rate of great interest brings the asset and liability sides of conventional banking intoequilibrium, whereas mudarabah is the primary profit and loss sharing (PLS) vehicle of asset and liability creation in Islamic banking. The bank lies between surplus groups (investors/depositors) and deficit groups (borrowers/beneficiaries). The TTM is an equity-based structure. Around the liability side, the Islamic bank is assumed to experience the role of Mudarib for the suppliers of capital (Rabb al-mals), while on the asset side it serves as the equity financier (Rahb al-ma!) for entrepreneurs (Miidaribs). The bank’s return thus remains determined by a share of the profits on sides from the TTM; banks share profits using their depositors as well as using their beneficiaries. If your business venture fails, the main city provider (bank) loses its capital and labour provider (entrepreneur) loses his/her some time and efforts. Another prominent form of Islamic finance is musharakah; in this equity-based structure, several partners having a given amount of capital come together in a business venture. They share profit in a predetermined ratio (Siddiqi, 1985). Entrepreneurs are permitted to bring about the total funds requirement, but it’s only in musharakah that the partners may get in a financial loss, strictly compared to their capital contribution. Both mudarabah and musharakah are equity -based, profit sharing structures, although there are a few key differences between your two forms of funding. The main difference would be that the entrepreneur offers no capital contribution in mudarabah, and for that reason s/he isn’t liable to incur any financial loss apart from losing his/her effort (price of labour) if the venture fails. Moreover, the financial institution is not authorized to sign up in the management of a mudarabah project hence this type of financing carries a better risk. Inside a project financed by musharakah, the financial institution has right to take part in management unless it deliberately waives the authority to achieve this. The important thing real question is where the contemporary practice of VC financing fits within the PLS techniques of Islamic finance. Two alternative approaches that might be used for Islamic VC are now explored in greater depth. In an effort to overcome the issues described above, mudarabah has been combined with another financial structure, wakalah, whereby clients authorise a bank or fund manager to invest funds on their behalf, in return for a predetermined fee. This structure is popular by Islamic mutual funds (Iqbal and Molyneux, 2005) along with a combined TTM-Wakalah structure could offer a suitable model for an Islamic VC initiative. However, there’s a significant problem to become addressed in mudarabah, deals. Within the mudarabah structure, both the lender and also the recipient can agree with any covenants during the time of the disbursement from the funds. If the project does not proceed as originally planned, then covenants cannot subsequently be changed unless both parties agree. It would be difficult for investor and entrepreneur to resolve disputes on (say) product, replacing the CEO and so forth. The Islamic potential to deal with changing the the deal comes from the principle that the outcome of the entrepreneur’s efforts shouldn’t be subject to the main city provider. In rnudarabah structures, therefore, all possible outcomes and their consequences need to be agreed upfront. This arrangement could present problems for how venture capitalists structure the contracts using their investee companies. The second choice for the development of Islamic VC comes from the shiir’ka al-man financial structure (Siddiqi, 1985). Within the Ottoman State, the manufacture and tradeof fabrics, producing pillows and shoes were funded in this manner (Cizacka,1996). In shir’ka al-man, several members invest some capital andshare the benefits on the pre-agreed basis. This approach permits the main city providerto place any number of restrictive covenants on the functioning of fund managersand/or entrepreneurs (Fethi, 2000). In the VC context, shir’ka aI-inam is a genuinepartnership hence both parties are equally involved with any decision to alter thestrategy from the investee company, despite the disbursement of funds. Case study above demonstrates that a hybrid of mudarabah and shir’ka al-man will give capital providers many of the powers available to established venturecapitalists; particularly, the investors can Air Max 90 insist upon the inclusion of covenants inthe contract plus they could make post-investment adjustments/interventions to ensurethat the investee company stays on target for success. Likewise, mudarabah inconjunction with wakalah provides an alternative choice for vc’s (albeit lessflexible), because the wakeel (representative) may be allowed to carry out businessactivities within mutually agreed parameters. The critical question is whether Islamic profit-sharing contracts (musharakah or mudarabah) can offer the necessary flexibility for efficient risk management. This could be explored with regards to two fundamental size of the structuring process: contractual structuring (the covenants included in shareholders’ agreements and then any staging agreements); and, picking a financial products, namely the option between equity, debt or hybrids. In Islamic jurisprudence, parties can structure a contract to achieve their mutual economic interests, provided that basic Islamic principles aren’t violated (Ahmed, 2004). The commonly used covenants in VC shareholders’ agreements and/or the circumstances tot investment staging could he put on mudarabah and musharakah structures, so long as such instruments were used in conjunction with shir’ka al-inan or wakalah. The idea of differential or disproportionate revenue sharing between two classes of ‘equity’ investors was already approved in Islamic jurisprudence (Ahmed, 2004). This concession applies so long as the party offering finance also contributes to the control over the project. A modified form of preferred stock could create two classes of shares, with each being eligible for different percentages of profit beyond a defined threshold (Zarqa, 1992). Another financial product which meets the requirements of entrepreneurs while simultaneously limiting investment risk is ‘diminishing musharakah,’ (Bendjijali and Khan, 1985). This structure could be fully secured by utilizing company assets as collateral, thus protecting the initial capital to some degree before the project achieves profitability. From cash generated through profits, the entrepreneur can start to repurchase the equity issued to the vc’s. (This arrangement resembles the option in Cheap Air Max 90 VC deals that gives the entrepreneur the best of first refusal to ‘buyback’ equity held by outside investors.) Overall, the venture capitalists’ return varies based on the investee company’s profitability. This gain along with a gradual redemption of area of the invested capital appears Islamically acceptable.Shari’ah View of Some Key Practices in Venture Capital Financing (Ahmed, H. (2004)Conventional Venture Capital Practice Shari’ah View Limited partnership structure Acceptable Long terms contracts Acceptable Contracts can be nullified Acceptable Restrictions placed on those activities of fund managers Acceptable Equity ratchets to entrepreneurs Acceptable Investments in equity, fully convertible bonds (zero coupon) Acceptable Preferred stocks, preference shares of convertible debt Not acceptable Greater control rights through restrictive covenants Acceptable Board Seat Acceptable Staged Financing Acceptable Replacing management (CEO) Acceptable Liquidation rights Acceptable Provision of non-financial services (strategic advice, etc.) Acceptable Application of discount rate for valuation AcceptableStructuring Issues Despite the fact that investing in a venture is an acceptable financial transaction, some facets of the conventional investment capital structure are not consistent with Shari’ah rulings. These aspects mostly are related to preferred stocks and shares that behave like a debt instruments. A Shari’ah compliant structure aims to balance the risk/reward benefits to everyone concerned in a deal. As such, any financial instrument that acts like a debt security, in which the investor can get a ‘riskless’ reward is prohibited. However, when the burden of risk is placed unevenly on the investor, the investor won’t have the incentive to sign up in a high risk venture. Two factors aspects are discussed briefly below:(a) Preferred Stock In order to minimise the down-side risk to Islamic investors, workable preferred stock continues to be suggested. This ‘Islamic’ preferred stock acts just like a pure preference tell pre-determined varying profit ratios. There can be no accumulation of profits and no liquidity preference to one investor over another in case of sale or liquidation of the venture. As a result it is much more like common stock with pre-determined profit rates.(b) Valuation Since private equity finance deals are naturally risky transactions, true valuation of the deal is vital to achieve the target rate of return that is bench-marked against some risk free security, such as US Treasury bonds. Such benchmarks are performance goals against which a company’s success is measured, and does not necessarily involve the particular application of riba to some transaction. However, Islamic investors often value a company based on two important factors for Shari’ah compliance: • Returns on the project having a similar risk profile • The average return on a well diversified equity portfolio