Circular Islamic Finance and Economy - 2 Venture Waqf

Abstract

Purpose

This paper aims to enhance the impact of incorporated waqf institutions by blending their resources to promote responsible small businesses that are inclusive of human development, service to society and preservation of the ecological environment and other species. This is expected to shift the paradigm of businesses from the current waste-oriented linear economy to ideally a zero-waste circular economy.

Design/methodology/approach

This is an analytical study building on the experience of European Venture Philanthropy Organizations (VPOs) that work with the primary objective of making impactful businesses successful, with capital protection and return on investment being of secondary concern. This paper suggests an incorporated institutional design that blends resources for promoting responsible businesses using a new hybrid financial mechanism, namely, equity-at-default (EaD) to replace collateral and foreclosure requirements with responsibility and compassion.

Findings

The research calls for changing the business paradigm from linear to circular, an incorporated institutional framework for venture waqf, purpose of the waqf to make impactful small businesses successful and designing a financial contract to loan in favor of responsible businesses that convert to equity stake for the waqf in case of default (EaD) replacing collateral and foreclosure requirements.

Research limitations/implications

This is a theoretical study motivated by the success of VPOs but assigns a new role to waqf institutions. Furthermore, the incorporated nature of waqf is a new idea and EaD is a new mechanism. Being new, these ideas have the risk of not being implemented. However, the broader message that waqf shall promote businesses that are inclusive of ecological concerns is generally applicable.

Practical implications

The paper has a significant practical implication to transform the responsibility and consciousness of businesses. Waqf is fundamentally a compassionate institution, and it must enhance the responsibility of businesses to become more inclusive of the environment and other species. It should also become more compassionate toward businesses that are in distress and default. In this sense, the paper tries to internalize compassion in financial contracting that can potentially change the architecture of lending.

Social implications

Altering businesses’ mindset from a waste-driven extractive linear economy to an inclusive circular economy has a tremendous transformative role. This will have implications for enhancing business consciousness and responsibility. As poverty is a phenomenon of state of mind, changing the society’s state of thought in Muslim communities is expected to have basic positive implications. Entrepreneurs with a new mindset can have far-reaching positive impacts on society.

Originality/value

The paper offers potentially innovative perspectives in four key areas and blends the different resources in an incorporated waqf that makes responsible entrepreneurs assume a partnership role in times of distress through EaD. Furthermore, the integration of compassion in financial contracting could have better implications for return on investment as well. The ideal state of an economy is where waste is turned into wealth and well-being is something that all policymakers must keep on the top of their agendas.

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Conclusions

Venture waqf opens a potential new direction in the transformative role that waqf can play for internalizing compassion in financial contracting and in developing an Islamic vision of entrepreneurship for achieving a waste-free ?alāl market economy. Blending compassion with the profit motive are inherent ideals of Islamic economics and finance; but under the influence of the dominant waste-driven economic and financial system, it has been pushed to the side. VW and EaD could potentially reform the financial architecture in a significant way. Lending on the one end and collaterals and foreclosures on the other end are the two pillars of the current financial architecture. EaD blends compassion with responsible profit motives and offers prospects to reform both pillars of the architecture.

There is a significant potential for lending to be based on philanthropic compassion. To offer affordable finance to micro, small, and medium enterprises with an objective of building the equity of such enterprises, compassion-based interest-free lending offers significant prospects. Potentially such lending could be done through VWs as well as through banks with proper regulatory oversight.

If the objective of extending finance is to build equity in a responsible recipient enterprise for its success and sustainability, then EaD offers better prospects as compared to costly collaterals and disturbing foreclosures.

We gave a number of examples where the potential benefits of EaD types of contracts are significant, and the limitations could also be challenging. The area is worth exploring both from financial innovation and policy perspectives, as part of the general academic pursuit.

To summarize, in this paper we suggested to:

• replace the current waste-driven linear economy paradigm with a new zero-waste ?alāl circular economy paradigm consistent with the Islamic vision of entrepreneurship;
• establish a new form of waqf as a corporate entity, looking at the experience of the European VPO;
• assign a new purpose to waqf as a venture waqf with a predetermined exit strategy, to make impactful (zero waste ?alāl) small businesses successful; and
• use a new baseline compassionate financial contract – an interest-free loan with a built-in condition that in the case of default, the defaulted amount will become the equity of the VW on a declining partnership basis. This is to replace collateral and foreclosure requirements of the existing interest-based lending instruments.

We understand that the paper opens a new area of further research and could potentially help policymakers to transition to a more responsible and compassionate zero-waste, free-market economy. At this stage, the subject matter could remain of academic interest for further discussion and research.