ISLAMIC VENTURE CAPITAL IN PAKISTAN
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Date
2015
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Publisher
UMT,Lahore
Abstract
One very important type of medium to long term financing is Venture Capital Financing
that primarily involves long term equity financing for setting up new and high growth business
ventures. Given the ever increasing unemployment numbers, the need for encouragement of
entrepreneurs having excellent business ideas and skills, and investment in new business
ventures cannot be over emphasised for sustainable economic growth. While the traditional
Venture Capital Finance practiced worldwide has inherent similarities to Islamic Finance
principles which are sharing the risks and rewards of businesses rather than financing on fixed
interest, it also has oppressive and un-Islamic capitalistic hostility in it. Islamic Banking is
evolving at a fast pace and a hot topic in today’s financial industry. However, it is subject to the
criticism that Islamic Financial Institutions do not have out of box products to offer their
customers. It is perceived that Islamic Financial Institutions will not only eradicate Fixed Interest
(Riba) rather invest on profit and loss sharing basis. To understand why this practice is adopted
by Islamic Banks on limited scale, it is also very important to study the brief reasons or risks due
to which Islamic Financial Intermediaries are reluctant in long term equity financing and
therefore, assuming business risks of the ventures to which they provide finance. To enable
investment in long term equity modes of Islamic finance (e.g. Islamic Venture Capital) there is a
need to critically analyse the short and long term needs of Islamic Financial Intermediaries and
its investors. Moreover, at the same to boost investment on the basis of P&L sharing there has to
be strict rules ensuring transparency in the conduct of businesses which seek long term finance
by practicing high level of integrity and following best operating practices and timely reporting.
This research study discusses the above issues by examining the importance of venture capital
financing, un-Islamic practices of prevalent conventional venture capital financing, augmenting
that investment based on profit and loss is preferred Islamic equity mode of financing, capital
structure, investment cycle and risks faced by Islamic Banks. To conduct this survey based
research and to get results for different variables, a comprehensive questionnaire has been
prepared and circulated to concerned circles to get feedback which duly supports the matters
emphasised in this research work. This research emphasizes the immediate need of equity based
Islamic finance for new business ventures and will lead to development and growth of Islamic
venture capital funds or dedicated Islamic venture capital windows in all Islamic Banks.