More often than not – as and when I wrote about Islamic Finance – did I mention the three ways of going about it: A stand-alone Islamic bank, An Islamic window within a conventional bank and a Non-Banking Financial Corporation (NBFC). Although recommended by the RBI committees, the first two options have still not been approved by the government of India. However, an NBFC does not fall under the blanket of 1949 Banking regulations (BR) Act, and that is where we need to begin our work, in compliance with the current regulations.
One such manifestation could be of Venture Capitalists (VC) in which the VCs finance, primarily, the new promising projects, and also expansion of established business units at times, in return of the portion of equity (ownership stake) and a profit-share. This happens in India as well as across the globe. Such an arrangement is Shariah-compliant, since there is no need to charge interest. Once the investor(s) buys any chunk or half of the equity, s/he is not a lender anymore, but shares a stake in the success of the business. This is the Mudarabah instrument of the Islamic finance. Quite evidently, it comes from the wealthy individuals, investment banks etc, since the law of wealth-appreciation is to invest one’s extra-wealth in order to avoid losing value or opportunities to make more. If you do not invest money, it will not increase. Apart from being interest-free, it shares the entrepreneur’s risk, thereby again following an Islamic finance characteristic of risk-sharing, in contrary to the conventional finance’s risk-transfer. VC funding is appropriate for the new businesses since the established ones may not want to share their equity. The only dark side to the entrepreneur here is the partial loss of ownership-stake; but then it’s worth it, since their project takes off with the injection of required money. At the same time, it’s a little riskier for the investors to invest in new businesses but if the feasibility reports are properly analyzed, such a model has earned good returns for all the stakeholders, wherever it has transpired. It must be noted that there is no financial obligation on the entrepreneur.
Mudarabah is the core of Islamic finance. It is a partnership in which an investor ( the rabb-al-maal) provides capital to the project of the entrepreneur (known as Mudarib). The investor does not participate in the running of the venture, which is the forte of Mudarib who’s project it is ( with exceptions where the help is volunteered by the financier or is sought & accepted by him). There’s a business model to facilitate such a facility – for both: Investors looking to increase their wealth and the Entrepreneurs seeking requisite amount and ready to share equity as well as profit. And that is a Venture Capital company. What we lack, however, is the professional human resource with Islamic Finance qualifications.
There was a story done by the Business Today (The India Today group) as follows:
‘For almost 20 years, Haris Koyisseri invested in his business only from his own earnings. The dry fish merchant in Kerala’s Kozhikode never took any bank loan to expand his operations. Why? Bank loans are against the tenets of his faith – Islam – as they charge interest. Four years ago, however, he took on a Rs 10-lakh loan from Alternative Investments and Credits Ltd (AICL). The Kochi-based finance company adhered to the Koran’s ban on interest and instead took a share in the profit or loss of a venture it funded. Business has grown 60 per cent since for Koyisseri. “I do not have to worry about repaying the money when business is lean,” he says. “Whenever I need additional capital I will take it from a Shariah-compliant fund.”‘
The intent is to continue this column next week, In Sha Allah, while the idea being such things could be done in J&K too.