SHARIA CAPITAL VENTURE
Sharia Venture Capital is a financing in the participation of capital in a business partner company that wants to develop its business for a certain period (temporary).
Venture capital is a form of capital investment from a finance company to companies that need funds for a certain period. Companies that are given capital are often referred to as investees, while finance companies that provide funds are called venture capitalists or investors.
Venture capital income is the same as ordinary stock income, namely from dividends (if shared) and from appreciation of the value of shares held (capital gains). From this understanding, it can be concluded that Sharia Venture Capital, namely investment made by Sharia financial institutions for a certain period, and after that the financial institution divests or sells part of its shares to shareholders of the company.
The purpose of venture capital is to add value so that venture capitalists can sell their participation with a positive return
Injazat (based in the UAE) is the first venture capital to operate in accordance with Islamic principles, with an initial capital of US $ 50 million. Injazat Founded jointly by the Islamic Corporation for the Development of the Private Sector (ICD), an affiliate of the Islamic Development Bank (IDB), with Gulf Finance House, Dubai Islamic Bank, the Saudi Economic and Development Company and the Iran Foreign Investment Corporation . Focus on investee financing in the telecommunications, media and information technology sectors, but only investees are in principle permissible (for example not on investees with a DER of more than 30%). Active investors, with added value to the assistance of the development of corporate strategy (including GCG). The exit strategy with the investee was agreed at the beginning.
Venture Capital in Sharia Perspective
In sharia perspective, venture capital has the following conditions:
1. Sharia academics generally agree that venture capital financing at the early stage of life of an investee is a classic form of musharaka or mudaraba financing.
2. From a sharia perspective, the use of equity financing in the form of shares or limited participation with profit sharing is a form of mudharabah, musyarakah ‘inan or musyarakah‘ inan al-mutanaqisha applications.
3. A close relationship between fund providers and users of funds, ranging from the establishment of clauses regarding the use of funds to adding value, monitoring and sharing of results and risks in accordance with the spirit of musharaka.
4. Even though venture capital investment is in principle in accordance with sharia, there are still several aspects related to the structure of funding and investment that are not in accordance with sharia.
5. These aspects can be easily modified without too much change.
Syariah Venture Capital Company Concept
The concept of Islamic venture capital companies are as follows:
1. The financing mechanism in Venture Capital is carried out in the form of equity participation.
2. The method of taking profits in Venture Capital is carried out through profit sharing for the profits obtained by the financed business activities.
3. Venture Capital financing products are issued by non-bank financial institutions, namely venture capital financing companies.
4. Guarantee in financing Venture Capital is not needed, because the nature of the financing is more inclined to a form of investment.
5. Sources of funds for financing Venture Capital can come from Venture Capital companies themselves and also from other parties.
6. Settlement efforts in the event of default in the financing of Venture Capital, whether undertaken by a Venture Capital company or a business partner company, the resolution of which can be done through: peaceful efforts, district courts, and arbitration institutions.
Sharia Venture Capital Company Activities
Activities that can be entered by venture capital companies include:
1. Companies that operate in a market that is growing and innovative and have the potential to develop in the future.
2. Companies that want to expand their business but due to some limitations have not been able to raise funds or make loans to banks.
3. Companies that want to restructure their debts and their position have seriously disrupted the soundness of the shares.
Sharia Venture Capital Operations
In the establishment of venture capital there are two important aspects of the intent and purpose. First venture capital is capital provided as risk having an idea without guarantee of return on capital or success in the future. There is only a profit sharing system in the form of dividends. So that the courage aspect of the capital owner becomes important in the procurement decision.
That is why the main basis of the spirit of venture capital lies in confidence in its business partners. Secondly, in accordance with the basic principles contained in the soul of venture capital, around the world a kind of agreement was made that capital investment must be temporary. The time period is between 5-10 years, until the business partner is able to stand alone before the shares are resold.
Steps in venture capital investment include: (a) Preliminary assessment (b) Confirmation of external parties (c) Negotiations and offers (d) Legal documentation (e) Monitor investment (f) Divestment.
Islamic Venture Capital Opportunities
Venture Capital (VC) is the most similar form of financing to Islamic financing. The modification needed to inline with sharia is very easy without having to abandon its main principles. Adjustment of VC to mudharabah or musyarakah house does not change the legal form of VC at all.
Sharia modification in VC does not mean that VC moves from one market segment to another. But enlarge the size of the segment. The addition of the size comes from VC investors and prospective investees who only want to participate if the VC has been online with sharia. Sharia KMK VC operational guidelines are de facto ready. Just waiting for endorsement is waiting until there is a request.
Sharia pattern is a pattern that is of concern to the government in channeling Micro Credit funds. International Islamic financial institutions such as ICD, IDB and Islamic banks in the Middle East have a great interest in becoming investors of mudharabah-based financing institutions including VC.
Fund Rising on Sharia Venture Capital
Islamic venture capital funding comes from Islamic financial institutions (Islamic banks, Islamic insurance, Islamic mutual funds) and other institutions that want their funds to be used according to Islamic principles. Instruments that can be used include:
1. Common stock;
2. Promisory note (PN) mudharabah muqayyada at other Islamic financial institutions (LKS);
3. Mudharabah sharia bonds;
4. MTN Syariah Mudharaba. Funding is arranged through synergy with several Islamic financial institutions. Funding from outside is possible to be obtained from global Islamic financial institutions such as ICD, IDB, International Islamic Bank who are quite interested in this scheme
Investment Provisions in Sharia Venture Capital
There are several provisions on Islamic venture capital investment, namely:
1. In this cycle, aspects that must be modified mainly revolve around the types of financing, covenants (collateral) and valuation techniques.
2. Ordinary shares can be accepted in sharia.
3. Preferred shares may not be used. Modified with alternative stock preferences with different profit-sharing ratios than ordinary shares and determined in advance.
4. Conventional covertible bonds cannot be used. Can be modified with ordinary mudharabah bonds coupled with a waad contract (promise) from the investee to sell their shares to MV at maturity.
5. Sub-ordinated debt with interest, the exact profit sharing, maximum and minimum profit sharing cannot be used. The alternative is financing syirkah ‘inan al-mutanaqishah with pure profit sharing.
6. Collateral can be included in a financing transaction using a wakalah agreement.
7. Business is the most important guarantee of financing.
8. Valuations that use interest rates as discount rates must be replaced. The alternative is to use the required return of investments with similar risk characters or other sharia investment benchmarks.
Issuance of Promisory Note (PN) Mudharabah Muqayyadah
The Promisory Note (PN) Mudharabah Muqayyadah issuance scheme is as follows: (1) Venture Capital (MV) finances the investee with musyarakah / mudharabah; (2) Guarantees are submitted by the investee to the MV; (3) Investees provide services (for example) to oil / mining companies; (4) Oil / mining companies provide compensation to investees (with standing instructions to MV); (5) Investee provides compensation services from oil / mining companies for payment of principal + profit sharing to MV; (6) MV securitizes investments in investees (categorized as current) in the form of PN Syariah; (7) Other Financial Institutions (LK) provide funds to MV worth PN nominal; (8) MV administers and shares the profit sharing of the investee to other FIs for the margin it receives with a predetermined proportion and the principal amount at maturity.
Sharia Venture Capital Profit Sharing Pattern
Provisions for the implementation of financing with profit sharing patterns:
1. Business partner companies and venture capital companies include capital, both in the form of cash and assets that are relevant to the activities of a business to be carried out.
2. Business partner companies and venture capital companies will jointly enjoy every profit and bear the losses incurred for the business carried out in accordance with mutually agreed agreements.
3. Reflections obtained by venture capital companies for this financing are: a. Profit sharing from operating profits; b. Returned capital included;
4. The percentage of profit sharing received by venture capital companies is based on mutual agreement between the business partner company and the venture capital company. Percentage of profit sharing received by venture capital companies with the provisions that: a. The percentage of profit sharing does not exceed 50% of operating profit. b. The percentage of profit sharing will be corrected annually or at the end of the financing.
5. The term of financing is in accordance with the Minister of Finance Decree, No. 125 / KMK.013 / 1988 Jo.SK No. 468 / KMK.017 / 1995, which is a maximum of 5 years.
Adding Value & Monitoring & Exit Strategy to Islamic Venture Capital
Adding Value & Monitoring & Exit Strategy are as follows: (1) The principle of adding value, monitoring and exiting the VC strategy is generally inline with sharia principles. (2) Adding value, especially regarding the application of GCG (good corporate governance). (3) GCG is important because it can be a guarantee of trust given by the VC to the investee. Trust is the essence of mudharabah and musyarakah transactions
Problem Solving in Islamic Venture Capital
Venture capital company solutions in dealing with existing problems include: 1. Identifying needs. 2. Assist capital 3. Provide professional counterparts from venture capital companies. 4. Provide training in accordance with business needs. 5. Form partnerships among entrepreneurs. 6. Forming networks (NetWorking) among entrepreneurs. 7. Providing appropriate technology