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First,
a startling fact: Though the United States is not an
"Islamic" country by conventional definition, in spirit
and in real terms, its financing institutions offer
more Shariah compliant financing and investment than
that provided by all the Islamic banks combined.
American
venture capital firms provide in excess of $25 billion
per year in equity financing to help finance the development
and growth of thousands of new startups in health care,
information technology, and other promising industries.
By contrast, Islamic banking institutions invest less
than $1 billion a year on "Musharaka" basis; Musharaka
- partnership or joint venture - is similar to venture
capital.
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A
major factor in the Islamic world's underdevelopment
is the non-availability of suitable financing for
entrepreneurs |
Indeed
there is no better example of Shariah compliant financing
than venture capital finance. Venture capital allows
entrepreneurs to build a firm without having to borrow
and pay high interest charges before they generate revenues.
It is a process of cooperation between entrepreneurs
and venture capitalists, with risk sharing an essential
element. Entrepreneurs provide the bright ideas, and
hard work, while venture capitalists furnish the money
- either their own or that of their clients - as partners,
not lenders. Simply put, if the business succeeds both
benefit and in case it fails the entrepreneur is not
obligated to repay the investment. This is the essence
and spirit of Islamic finance.
Venture
capital system has played a leading role in the industrial
development of the United States. How is industrial
innovation financed in the US? The answer is that a
smart engineer or a scientist undertakes ground breaking
research - occasionally financed by the federal government
- at a major university, starts a company with the expert
assistance and financing provided by a venture capital
firm and later they jointly take the company public
at a huge price, benefiting both parties. Scores of
Silicon Valley companies including modern day giants
such as HP, Intel, Sun Micro Systems, Apple Computer,
Netscape, Intuit, Compaq Computer and Cisco Systems
were financed by the venture capital industry in the
form of equity capital. All were created in the last
25 years from ideas grounded in science and technology.
Scientists,
engineers and entrepreneurs came up with the ideas,
research and inventions, while the venture capital industry
provided the funds on a partnership basis.
Significantly
as a result of this cooperation millions of new jobs
- 20 million during Clinton's eight year presidency
alone - have been created in the United States.
Venture
capital gives the US a creative and forward looking
dynamism that few nations can match because it is rooted
in the very foundation of the country. In this regard
America's most important advantage is a willingness
to take risks. By contrast, if a scientist or an engineer
with a new idea or invention wanted to raise financing
to develop his idea or invention into a business in
the Islamic world it would be virtually impossible for
him to find funds. He would be told by a conventional
bank or an Islamic bank to first produce some collateral.
It
was not always so. The Europeans learned from Muslims.
Muslims
made original inventions. This was made possible by
a culture and environment that encouraged learning,
research and invention. Today most technology used in
the Muslim world comes from outside the region. It seems
that native springs of invention have dried up and nothing
of mention has been invented in any of the Islamic countries
in the last two hundred years! Muslims that once led
the world in science, are dropping behind at a rapid
rate in scientific research and information technology.
Venture
capital industry largely financed those who decided
to go into business, in developing and bringing their
products to the market. This then is the crucial difference
between America and Muslim countries. If an American
team of engineers or scientists has an idea about a
new product or application, they can easily get venture
capital investment. In Muslim countries very little,
if any, risk capital is available.
I
would, therefore, advance the thesis that a major factor
in the Islamic world's underdevelopment is the non-availability
of suitable financing for entrepreneurs. If the leaders
in the Islamic world are truly interested in improving
the living standards of their people, gaining economic
independence, regaining their pride and days of glory,
they must encourage original discovery, research and
invention.
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Dr.
Muhammad Saleem, Oxbridgecapital@aol.com, is a managing
director of Oxbridge Capital, US.
Reproduced
with Permission Dr. Saleem. First appeared in Arab News,
January 2005
| Key
Learnings: |
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In
spirit and in real terms, United States
financial institutions offer more
Shariah compliant financing and investment
than that provided by all the Islamic
banks combined.
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Venture
capital is a process of cooperation
between entrepreneurs and venture
capitalists, with risk sharing an
essential element.
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Engineers
or scientists with innovative ideas
in the Muslim world have no venture
capital support. A major factor in the
Islamic world's underdevelopment is
the non-availability of such financing
for entrepreneurs |
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YOUR
FEEDBACK
What
is missing from this article is where the venture capital
firms get the money. It is primarily through standard
interest bearing loans. I am all for venture capital,
but the problem in Islamic finance is getting the money
to invest from halal sources. Paper money ultimately
is sourced from interest bearing debts, so somewhere
along the chain, it has to come from non-halal sources.
Until Muslims can sort this problem out they are stuck
in the slow lane.
Lamaan Ball
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