Monitoring non-compliance risks in Islamic venture capital

Abstract

Islamic venture capital firms are not in a position to pay high interest rates as in bank loans. They participate in the risk as well as the profit (the profit and loss sharing arrangements) of the new businesses they fund. The establishment of Islamic venture capital firms is based on the objective to comply with shariah principles in all aspect of business activities. A common feature of IVC firms is their unique structure of assets and liabilities and this exposed to additional types of risk, known as shariah noncompliance risk. This shariah non-compliance risk must be prudently managed to ensure the survival of these firms. Thus, good shariah governance mechanism is very important in ensuring their activities are in compliant to shariah. The paper suggests that the roles of shariah committee and shariah audit are important to observe the Islamic venture capitalists’ involvement is shariah compliant in every aspect of business transaction. The shariah committee is responsible to advise the IVCs on shariah aspect while, Shariah audit acts as a monitoring mechanism to validate the compliance with shariah. Thus, shariah committee and shariah audit are assumed to play significant roles to ensure the shariah-compliant agenda is achieved which is the backbone of the establishment of Islamic organizations be it venture capital firms or Islamic financial institutions