KUALA LUMPUR: Between wealth management and microfinance, Islamic banking has left unserved a vast swathe of small Muslim entrepreneurs who urgently need funds to develop their businesses.
It is a sector that Chicago-based Nur Advisors aims to help with the creation of Venture Philanthropy Funds, which intends to direct investment initially to up-and-coming businesses in Pakistan and Egypt, Kavilash Chawla, a principal at the firm, told Dow Jones Newswires in a recent interview.
Ultimately, it hopes to expand the fund to aid entrepreneurs in the likes of Muslim-dominated southern Thailand, Indonesia and Malaysia.
Hefty oil reserves have made some Muslim nations, particularly some of the Gulf states, very wealthy. But many of the world’s 1.5bn Muslims are still very poor, often for want of capital to help themselves.
Venture capital, however, hasn’t been common in Muslim communities in the past because of the low level of entrepreneurship, particularly in the Middle East, and because the few would-be business leaders typically approached their social networks for funds. Both those trends are now changing.
Islam’s stress on social equity requires Muslims to make charitable contributions when they can, and many wealthy non-Muslims are also increasingly keen to provide socially responsible support to impoverished communities.
“The only way you are really going to effectively battle poverty is through job creation and profit at the end of the day. It has got to be sustainable and profit-generating or it’s not going to work,” Chawla said. “I think most people want to help, they want to do good but it’s got to be (in a way that is) viable and sustainable.”
The fund – which Chawla believes is the first of its kind – will take equity stakes in existing or planned small businesses where the recipients have a proven record of entrepreneurship.
“It’s micro venture capital but with exit strategies that, as they (the entrepreneurs) become more successful, they slowly buy back the equity from the fund which then, again, allows the fund to invest in other businesses,” he said.
Structured according to Islamic law, the process would be structured as a diminishing musharakah, or diminishing partnership. The firm will seek a formal approval for the fund as Shariah-compliant once the details have been ironed out.
The initial fund contributors won’t reap any profit from the product, which Nur Advisors hopes will be investing or be close to investing cash in Pakistan and Egypt by January 1, 2008. It will start to assess the prospects for developing the fund in other countries in late August or early September.
Nur Advisors, which advises energy firms and financial investors on both Islamic and non-Islamic funding and risk mitigation, is initially looking to create two funds of $500,000-$1mn each.
The company will place about $200,000-$300,000 into the Pakistan fund and has also received expressions of interest from around 15 Muslim and non-Muslim high net worth individuals in the US to contribute.
“I think the appeal for the non-Muslims is (that) it’s a socially responsible avenue for them,” he said. “And I think that especially after September 11 (2001 terror attacks on the US), there is a realisation that there are ramifications for the US in what happens elsewhere. What happens in northwest Pakistan affects northwest Iowa,” he said.
Nur Advisors is currently assessing where in Pakistan would be best suited as initial targets for the fund. Infrastructure constraints and the importance of social networks mean investments will be targeted at communities rather than sprinkled widely.
Nur Advisors won’t contribute to the Egyptian fund, which is being set up by an Egyptian financial institution and several local wealthy families and which will target businesses in Cairo.
“We are hoping once we have got a small model up and running and have some success with a few identified communities in Pakistan, then we can look to expand it across different communities and then raise some funds from some high net worth individuals within the Gulf Co-operation Council,” he said.
The idea for the fund was born out of observations the firm made when the US firm raised funds to help the victims of the October 2005 earthquake in Kashmir.
“Relief was not what they needed, and rehabilitation would not have been the most effective mechanism of utilising funds towards helping people in the region,” he said.
Although there were many viable businesses in the region, the loss of collateral and other assets in the earthquake made it difficult for owners to approach regular banks to fund the rebuilding of their firms. Microfinance loans were often too small to be of help, and grants and aid were often not targeted specifically enough, Chawla said. – Dow Jones Newswires. |
