Instruments for investment protection when structuring Islamic venture capital

Purpose - This paper aims to explore how Sharīʿah-compliant instruments can be used to protect investments and attract investors to Islamic venture capital (IVC). Equity investments in Islamic finance are trailing behind their potential value. This is partly due to the limited instruments available to protect investors, as most of the tools used in conventional venture capital (VC) are deemed Sharīʿah non-compliant. Design/methodology/approach - The research amends and usesWright Robbie’s (1998)VC structure and how it can be used to finance small and medium-sized enterprises (SMEs). The study uses secondary data reported in the literature and the expertise of the Sharīʿah scholarship. Findings - There are Sharīʿah-compliant instruments available for IVC that can be used to protect investments and incentivize potential investors to promote investments in SMEs. At the various stages of the IVC process, preference shares, perpetualmudharabah, diminishingmusharakah,musharakahwithmurabahah,musharakahwithqard, negligence clauses, liquidation preference, warrants and supermajority clauses can all be used with appropriate conditions to protect investors and offer incentives for them to invest in IVC. Practical implications - The research provides a method for screening and evaluating potential deals for SMEs using an amended VC called an IVC scheme with a focus on Sharīʿah-compliant investment protection instruments. The method can promote SMEs and entrepreneurship and financial inclusion for Sharīʿah-compliant investors. Originality/value - This study contributes new ideas to how IVC can be structured, taking into consideration Sharīʿah constraints. The paper addresses investors’ protection and incentives to attract Sharīʿah-compliant investors, which have been lacking in the literature.