Shariah Compliant Venture Capital Funding?
Question:
Assalamu Alaykum. is it permissible for the Mudarib to take part of the Mal to run some of its expenses for the execution of the Mudharabah? How to make a conventional VC Fund Islamic for Islamic start ups?
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
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Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
We apologize for the belated response.
- In principle, the mudarib/sweat equity partner serves as the Wakeel and Waly on behalf of the Mudarabah partners including the financier or Rabbul Mal. The mudarib is issued with a mandate to conduct the business of the Mudarabah partnership. This mandate also includes the establishment of the business based on mutual agreement and hence the mudarib is permitted to use a portion of the capital for working capital (opex) and capital expenditure (capex) based on the agreed mandate with the Mudarabah partners. The funds invested as the capital contribution by the financier belongs to the financier in a single mudarabah without any co-mingling (Khultah) and is an Amaanat/trust in the hands of the Mudarib/sweat equity partner and hence proper authorization in terms of the dispensation and mandate thereof is required. However the mudarib cannot charge a fixed independent fee for his services per se as that would violate the corporeal structure of the mudarabah itself. The Mudarib may charge travel expenses incurred in conducting the business of the mudarabah partnership.
- A venture capital fund refers to a form of a private equity fund to provide funding to start up opportunities and small to medium enterprises with potential huge economic and financial growth. Venture capital funds procured funding of almost 150 Billion United States Dollars in the year 2021 according to data released by Pitchbook. Venture capital funds invest in growth opportunity companies and start ups. The general financial structure used is that of a limited liability partnership or en- commandite partnership structure in which the limited partners (LP’s) are the investors and the general partner (GP) serves as the management agent of the partnership. There are other structures such as structured agreements for future equity, convertible notes, convertible bonds, etc. We would need to review the specific structure you refer to in order to advise on the specific shariah ruling accordingly. Nevertheless there are a number of Islamic concepts and financial structures that could be used such as Mudarabah, Wakalah, musharakah and Sukuk for convertible notes and Islamic SAFE Notes using Wa’d Mulzim/unilateral promissory arrangement for future equity. Moreover there remains many challenges for Islamic venture capital including regulatory challenges for tax parity and legal enforceability of contractual positions by the legal jurisdiction of recourse. Moreover proper disclosure in terms of reporting should also be conducted as per the mandate with the fund promoters.
And Allah Ta’āla Knows Best
(Mufti) Ismail Desai
Chairman of Shariah Board and Fatwa Committee,
Darul Iftaa, Durban, South Africa
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and Allah Ta'ala Knows Best
Mufti Ismail Desai
Darul Iftaa
Durban, South Africa
Disclaimer The views and opinions expressed in this answer belong only to the author and do not in any way represent or reflect the views of any organizations to which he may be affiliated with. The opinions and educational information proffered in this communication are based on the jurisprudential understanding and available knowledge of the author. Given that contemporary issues and interpretations of contemporary issues are subjective in nature, another scholar may reach different juristic inferences and conclusions to those as expressed by the author. Whilst every effort has been taken to ensure total academic integrity and honesty, the author is open to corrective measures based on sound academics and juristic inferences. The Shari’ah ruling given herein is based specifically on the specific scenario in question. The author bears no responsibility towards any party that acts or does not act on this answer and is exempted from any and all forms of loss or damage. This answer may not be used as evidence in any court of law without prior written consent from the author. Any or all links provided in our emails, answers and articles are restricted to the specific material being cited. Such referencing should not be taken as an endorsement of other contents of that website.
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